RE-INVOICING AND TRANSFER PRICING
Offshore re-invoicing and transfer pricing is a tried and test tax reduction strategy. We get quite a few calls from people who open by saying “I'd like your help in forming an offshore company which will receive income that I am earning abroad. I want to keep most of the income outside the country where I live and presumably the company can then pay me a small percentage so that I don’t have to pay income taxes on the full amount.” Of course this is everyone’s dream, to be able to avoid paying income tax, while allowing the money to grow tax free in a secure offshore location. Depending on how this is done it can amount to either avoidance which is legal, or evasion which is not.
How it works.
A businessman (whom we will call ‘client’) creates an International Business Company (IBC) in a tax free location to which the proceeds of the businesses sales are diverted. The intermediary company then marks-up the price during the transfer (hence, ‘transfer pricing’) and ‘reinvoices’ the client’s local company at the higher price. This means the profit in the high tax location is greatly reduced and with it the tax liability.
What is re-invoicing?
Re-invoicing is the use of a tax haven corporation to act as an intermediary between an onshore business and it’s customers. The profits of this intermediary corporation and the onshore business allow the accumulation of some or all profits on transactions to be accrued to the offshore corporation. It should be noted that a similar structure can be utilized by an importer or a consultant.
What would be an example of re-invoicing?
An onshore corporation sells $1,000,000 of goods or services to Norway each year. Assuming the cost of the goods and services sold including operating expenses are $600,000 and the onshore corporation therefore earns $400,000 on its sales before taxes. Taxes will average, for example, $160,000 - although this will depend on which country you reside in - thus reducing net profits to $240,000.
If the onshore corporation establishes an offshore corporation to act as intermediary with an offshore representative who can speak to accountants, lawyers, clients and suppliers if needed. The onshore corporation then sells its goods and services to the tax haven corporation on paper, for example for $600,000. The tax haven corporation in turn sells the goods and services to the Spanish client for $1,000,000. The tax haven corporation thus earns $400,000. Since there are no taxes, $400,000 is the net income after taxes. The exporting corporation shows no profit. ($1,000,000 gross sales less $600,000 cost of goods sold)
The $400,000 in tax free income is then deposited in a bank account or other investment instrument in Zurich, Cyprus or the BVI according to the wishes of the onshore corporation. The account is under the control of the onshore corporation.
The basic process of re-invoicing in this example saved the onshore corporation $160,000 in taxes!
Why are the tax haven corporation’s profits free of taxes?
The intermediary corporation is formed in a country that has no taxes on import and export transactions, for example, Belize, the British Virgin Islands, the Seychelles and Panama have no income taxes on reinvoicing transactions.
How is the offshore company structured?
To provide anonymity, nominees, front men or representatives can be provided by the agent who manages the company. The actual decision as to what type of structuring is needed will depend on the individual circumstances. If you go down the nominee route the shares will be issued and delivered to you as proof of ownership. Having said that in many cases a pair of offshore representatives will suffice because in the main locations we recommend the directors do not appear on public record making a wide variety of options possible.
Will the offshore company’s bank account have to be located offshore?
Ideally it should be in a separate jurisdiction from the onshore company and often in a different location from the offshore company as well.
What about confidentiality?
It is the policy of ORCA that information is never released without consent. All records etc are always kept in different countries to those in which our clients are based. For example if you deal with the office in Zurich and are based in the UK the records will be kept solely in Zurich.
What happens to the offshore tax free profits that are earned?
You can invest them as you see fit or simply place them on deposit.
If the offshore company is managed from xxx, does it follow that the merchandise has to be sent there or the services performed there?
No, the merchandise can be sent directly to the exporter’s client. Services can be performed in any offshore location, a common enough process in the new economy. The only functions performed, in xxx, are the preparation and dispatch of the new invoice and the management of the banking operations.
What happens if the owner should become incapacitated and the offshore company at that time has in its name substantial assets such as cash?
Assuming you ensure that your beneficiaries have access to the company records, then if such a case should occur, they would simply produce the will or legal documents such as power of attorney to the management company together with some sort of evidence of your incapacitation and all control of assets will be transferred to whoever you nominate. There would be no transfer taxes, estate duties or other forms of taxation levied on the assets.
What other functions will ORCA provide?
Once the offshore company has been established ORCA will arrange for any additional items you may need for example, a web based offshore inoffshore invoicing system, address, secure email, telephone and fax services, in fact anything you might require to maximise the benefit of your offshore company.
What are the fees for reinvoicing? How do I determine whether such an operation is to my financial advantage?
If you arrange your own re-invoicing there are no fees. If we appoint a firm to manage the accounts and set up an online invoicing system which both you and they can access the set up costs are generally less than you might expect. There would generally be a 3% charge on all reinvoicing operations. This fee includes use of the accounting firm’s voicemail, fax and email system as well as management and initial set up of the online invoicing system.
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