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Grow Offshore Business Profits with an International Re-invoicing Strategy

There are profitable ways to do business offshore and there are smart, very profitable ways to do business offshore. One of the later involves the use of an International Re-invoicing strategy. An international business corporation set up in a tax advantaged jurisdiction such as Belize or Panama will pay no taxes on business done internationally. This is a key factor in a successful international re-invoicing strategy.

Where you buy from, where you sell to, and from where you operate all matter in setting up an international re-invoicing strategy. Let’s say that your supplier is a toy maker in South China. The eventual market for the toys made in China will be in the USA. Although there will need to be a company to distribute or sell the toys in the USA the story does not need to end there. An offshore business managing the supply chain can be set up in a country like Panama. This totally separate and distinct legal entity will be able to take orders from the USA, place orders with the Chinese manufacturer, manage the supply chain from factory floor to the customer and profit handsomely in a non-taxed jurisdiction.

The point of setting up an international re-invoicing strategy is to do business and retain profits in the most tax advantaged jurisdiction. We will use two examples to highlight how an international re-invoicing strategy can be profitable.

The first example goes like this. A company in the USA wants to sell a new super action hero toy. We are rounding the numbers to make the example more clear. The toy is made in China and shipped to the USA where it is distributed to various locations. The toy costs $3 each to make, $1 each to ship to the USA, and $1 each to distribute in the USA where the cost so far is $5. A US corporation sells the toy for $30 of which $5 is the cost of getting the toy into the stores and $5 is the overhead cost allotted to the toy. The company’s profit on that toy is $20 each. Since corporate profits are taxed at 50% the profit to shareholders is $10 per toy for any money that comes through as dividends which are then taxed. Just looking at dividends from selling the toy a shareholder is typically getting dividend checks on $10 per toy and then paying taxes.

An alternative example might go like this. The new super action hero toy will cost a Panama company $3 each to make, $1 each to ship to the USA, and $1 each to distribute in the USA. The total cost to the offshore company is $5 and it sells the toy to a US company for $20. The US Company allots $5 a toy to overhead, marks the toy up to $30 and makes a $5 profit of which $2.50 goes to corporate taxes and whatever goes out in dividends is taxed again. But, what about the offshore company in Panama where income not gained in the country is not taxed in the country?

The Panama company has sold the toy for a profit of $15 each. The money goes into the bank and is not subject to taxes. The US company is making a lesser profit but it is also not managing the supply chain. The Panama Company is making $15 out of the $20 that the US Company makes in the other example but is keeping $15 a toy. Although we rounded off the numbers to make the math easier to see without a spreadsheet the example is clear. Using an international re-invoicing strategy can be more profitable than simply importing goods into a high tax jurisdiction such as the USA.

How do I set up an International Re-invoicing strategy? It is important in setting up an international re-invoicing strategy that both the offshore company and any of its onshore customers and clients be clearly separate entities. The offshore company needs to be set up with the sound expert of someone in the jurisdiction in question. In fact, it is important to wisely choose the offshore jurisdiction. Democratic and stable offshore jurisdictions such as Panama and Belize are better choices than some less stable countries. Just being offshore does not make a jurisdiction useful or profitable. Changes in laws and politics are always a worry. Having sound counsel going in and choosing the most advantageous jurisdiction will pay long term benefits.

When setting up an offshore company the principals will want to look into offshore banking, setting up an international business corporation in the right jurisdiction, and taking advantage of offshore asset protection vehicles like a New Zealand trust or Panama Private Interest Foundation. Not all asset protection vehicles are the same and not all need to be one jurisdiction. The principals will need to assure themselves that the business structure of the offshore company both needs their legitimate business needs and will in fact be a separate business entity. This later fact has to do with legal challenges from the taxing authority in the high tax jurisdiction such as the USA, the UK, or any number of European nations. The typical legal challenge is that companies are not really separate and that one just serves the purpose of reducing taxes for the other. This is not an issue for the taxing authority in the offshore jurisdiction such as Panama or Belize as that country will not tax profits made elsewhere. ( i.e. Toys made in China, shipped, and sold in the USA, Canada, or in Europe.) To the degree that the taxing authority in the jurisdiction of the one company challenges the international re-invoicing strategy arrangement the best defense is having properly set up the offshore company in the first place.

We have really just talked about tax savings with our discussion of international re-invoicing strategy. However, the business of the world does not stop as one passes out of the UK, Europe, or the USA. Setting up a business entity in a tax advantaged offshore jurisdiction gives the principals access to broader markets and many advantages of asset protection and privacy as well as reduced taxes when these principals avail themselves of competent and trusted counsel