Re-invoicing is the using the lowest or no tax company to behave as an intermediary from a business established in a single jurisdiction, typically an increased tax jurisdiction, and it is customers outside its home jurisdiction. The domestic business sells its products, having a small profit, on the non-or low taxed company which intern marks the product or service up towards the original price tag, and sells the item for the customers not in the onshore company’s jurisdiction. Profits of the intermediary accumulate at zero or low tax rate while the small profits with the onshore business are taxed at its jurisdictional rates.
International re-invoicing strategy, for example
An onshore business sells $1,000,000 of products annually to some company established beyond your jurisdiction where the onshore company is established, as a British company sells to a Spanish company. Assuming that operating expenses and the price of products are $500,000, the British company earns $500,000 on its sales before taxes. Taxes average say 45% or $225,000 thus reducing net profits to $275,000.
To utilize a worldwide re-invoicing strategy the British company would utilize a non taxed company, like a company established in Belize, Panama, or other tax haven location, to serve just as one intermediary involving the British company and its particular Spanish customers. The British company sells its goods to the Belize company on credit for $600,000. The Belize company, therefore, sells the products for the Spanish customer for $1,000.000. The Belize company thus earns $400,000 in profits. Since there are no taxes in Belize on international transactions, the $400,000 of profits doesn’t have any taxes imposed on it.
The British company shows a tiny profit of $100,000; an income of $600,000 less than the cost of goods sold of $500,000. Assuming a 45% tax, the British company would pay $45,000 in taxes, while making a $55,000 profit. This strategy allows the British business to show a fiscal rational to its taxing authority due to the business practices.
Is this legal?
The attack on employing this strategy consists primarily of attempts by various taxing agencies to “prove” the onshore company and the non-taxed company have been one out of a similar, claiming how the entire technique is just a sham make an effort to create the legal fiction of separateness where it does not exist. Attacks likewise incorporate the report that there’s no business purpose for the non-taxed company besides avoidance of taxes.
The primary defense of the approach is that this non-taxed company must operate with sound business purpose at every level. Thus the strategies must be implemented in substance as opposed to just written form. It is important how the non-taxed company conducts business and is not a “shell” company. It must have a financial rational and must perform a fiscal function independently of the onshore company. Documentation is surely an absolute requirement with everything written down to substantiate business transactions.
In addition to the non-taxed company having a financial rationale, the onshore company should also have a very viable economic rational. Since the primary economic principle for just about any clients is creating a profit, the onshore company should make money and pay taxes for this profit to its home taxing authority. The size of the profit can be flexible but a profit non-the-less needs to be made.
These points are the bases of legality with the strategy no short cuts might be taken. Therefore, inside the end, all entities should use a good economic rationale for existence and both substance and form are import to the effective utilization of a global re-invoicing strategy.