Re-invoicing refers to the use of low-tax or non-tax companies as intermediaries between companies established in a jurisdiction [usually high-tax jurisdictions] and customers outside their country. Domestic companies sell their products to non-tax or low-tax companies with low profits. The company marks the products as the original sales price and sells the products to customers outside the jurisdiction of the domestic company. The profit of the middleman is accumulated at zero or low tax rate, while the small profit of the onshore business is taxed at its jurisdictional rate.
For example, the international re-invoicing strategy
The onshore business sells $1,000,000 worth of goods annually to companies established outside the jurisdiction where the domestic operations are located, such as a British company selling to a Spanish company. Assuming operating expenses and commodity costs of $500,000, the UK company's pre-tax sales revenue is $500,000. Taxes averaged 45% or $225,000, reducing net profit to $275,000.
In order to take advantage of the international re-invoicing strategy, UK companies will use non-taxable companies, such as companies established in Belize, Panama, or any other tax haven as a middleman between a British company and its Spanish customers. The British company sold its goods to Belize for $600,000. The Belize company in turn sold the goods to Spanish customers for $1,000,000. As a result, Belize has a profit of $400,000. Since the Belize international transaction has no taxes, the $400,000 profit is not taxed.
The British company's profit is $100,000; total sales are reduced by $600,000, minus $500,000 in sales costs. Assuming a 45% tax, the British company will pay $45,000 in taxes and earn a profit of $55,000. This strategy allows UK companies to demonstrate economic rationality to their tax authorities for their business practices.
Is this legal?
Attacks using this strategy mainly include various tax agencies trying to "prove" that onshore companies and non-tax companies are actually the same, claiming that the entire strategy is nothing more than a false creation attempt to separate in the absence of Legal fiction. The attack also included claims that there was no commercial purpose for non-tax companies other than tax avoidance.
The main defense of the strategy is that non-tax companies must operate well at all levels of business. Therefore, the strategy must be substantive and not just written. It is very important that non-tax companies actually do business rather than "shell" companies. It must be economically rational and must perform economic functions independently of the onshore company. Documentation is an absolute requirement with written records to confirm commercial transactions.
In addition to economically rational non-tax companies, onshore companies must also have viable economic rationality. Since the main economic principle of any company is profitable, the onshore company should make a profit to the tax authority in which it is located and pay taxes on the profit. The size of the profit can be flexible, but it should be profitable.
These points are the basis of strategic legitimacy and cannot be taken as a shortcut. Therefore, in the final analysis, all entities should have good economic rationality, both in substance and in form, which contribute to the effective use of the international reinvoice strategy.
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