Could Napster clone end up Offshore?
Excessive taxes and regulations are forcing marketers to seek new jurisdictions

How would you like to have a partner that grabs the lion's share of your profits, contributes little to the operation of your business, and hinders progress by burdening employees with redundant rules and paperwork? Most business owners already have just such a partner: government.

Despite the fact that the taxes and regulations that Canadian businesses are subject to, have been drifting downward, it is not happening nearly fast enough.

Offshore tax havens, many of which are setting up "server farms," where companies can host Internet sites so operations are be domiciled in another country, are creating new opportunities for marketers, and headaches for tax and intellectual property lawyers.

For example Matt Goyer, a 21-year old computer science student, at the University of Waterloo, generated considerable attention, when he told the Globe and Mail reporter Steven Chase that he intends to set up an offshore Napster clone on the offshore haven of the Principality of Sealand.

"The technology and the programs to set up a file exchange service exist already," said Goyer in a telephone interview. "With Napster caving in the major record labels, there is going to be a huge demand for a new option."

According to Goyer, it would cost about U.S. $15,000 in rental fees to set up the site, an amount he hopes to collect from contributions from music fans. Goyer already has experience running a collective enterprise. His site solicits voluntary contributions from Napster users, to compensate artists for the use of their music. With Napster's traffic down a reported 60 per cent since it started inserting filters to restrict access to copyright protected music there is a clear demand, for an easy to use option.

Sealand is located on a 6,000 square foot abandoned anti-aircraft platform located in the North Sea just off the English coast. In 1967 the structure was occupied by Roy Bates, a British war veteran who declared it an independent country. At the time, the platform was located just outside British territorial waters (the boundary has since been extended) and Bates was benignly neglected by some, and called a crank by others.

But that all changed when "Prince Roy" as he likes to call himself, signed off rights to the platform to a company called HavenCo., which began setting up computer servers on the structure, and laying cable under the North Sea to connect those servers to the Internet.

According to Ryan Lackey, a HavenCo. spokesman, the company subcontracts space on the servers to enterprises wanting to avoid international tax and intellectual property legislation. This has the potential to create a morass of legal and jurisdictional headaches for governments.

But it sets up a wealth of opportunities for marketers, since it widens the range of products that they can sell. And since they are exempt from tax, those locating on Sealand, or similar tax havens can potentially reduce the price of their wares.

For example, if Stephen King sold a book on the Internet from a server located in the U.S., the revenue would be taxed under American law. However, if the book was sold from a server in a tax-free jurisdiction like Sealand, the tax implications are less clear. King could likely defer tax, or maybe even avoid it altogether, since HavenCo. guaranties secrecy of its customers' databases.

Tax havens tend to be treated with benign neglect by the powerful, who, regardless of their political stripes, like to keep their options open. Reliable data is hard to get, but the OECD estimates that its member countries invest more than US $200 billion each year in tax havens.

But if a Napster clone were to set up operations on Sealand, it could open a huge can of worms for a lot of people. For one, it would likely be a huge success. Many Napster alternatives have big liabilities. Gnutella, the highly-touted front runner, is hard to use. And any option that is inaccessible to the masses is unlikely to gain widespread acceptance., a Napster clone operating in Israel, is unlikely to be much more successful in fighting the U.S. courts than Napster itself.

But HavenCo. was set up specifically to protect companies such as offshore banks, and gaming operations from a variety of legal challenges. If the company allows a Napster clone to set up operations there, we'll find out soon enough whether that anti-aircraft platform is set up on solid ground.


Photo caption: The offshore haven of Sealand is set up on an abandoned anti-aircraft platform in the North Sea.

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