Several Latin American countries who decided to grow the outsourcing and global service market defined a special solution trying to attract foreign Service Providers or companies divisions which allows low taxed business even if the country itself is not considered as tax haven at all.
By building special office spaces and declaring them “Service Free Trade Zones” with special tax and customs regimes for services what are delivered abroad, a new way of attracting foreign investors was found. The idea of Free Trade Zones for physical goods trade is not new and has been operating around the globe in multiple logistics hub locations. But adding the “service side” to them is an ingenious way of participating in Globalization and moving from an emerging country to an important player of the Global Services.
A “Service Free Trade Zone” is usually located in a nicer environment, where employees are attracted to work and stay. They provide general services to employees like cafeterias, access to broad public transportation, recreational areas in a secured environment. And for company needs they also act as technology parks, with all connectivity, electricity, air conditioning, access controls and other requirements already solved.
But the most important factor is the reduction of taxes. In some cases countries provide tax exemption for a certain amount of time and require companies to operate within demarcations of the Service Free Trade Zone. In other cases, they reduce the Corporate Tax structure to lower rates (i.e. 15%). Some countries go an extra mile and remove all taxes as long as the company has a valid contract with the Free Trade Zone operator. On top of Corporate Tax savings, these regimes often offer exemptions of Value Added Tax, Import Duty Tax and allow employment of foreigners at a discounted Social Security rate.
A Global Procurement Office is usually taxed based on the transfer prices between the group’s legal entities. The used transfer pricing methodologies and the prices themselves can differ from country to country. By moving to selected Service Free Trade Zones and establishing a cleverly devised transfer pricing system considerable tax savings can be realized. In addition foreign exchange risk can be reduced and cash flow improved.
Besides moving procurement departments to more profitable locations, procurement outsourcing is showing a growing trend. It is forecasted that procurement BPO will grow 12% during 2012 compared to last year. And many of these outsourcers are establishing themselves in Service Free Trade Zones.
In any case an analysis of the different locations and approaches and a detailed business case calculation is prerequisite to find the right solution for the special requirements of a company.
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