TAGS: #panama
In today's fast paced international world there are profits to be made in many corners of the globe. However, not all individuals and companies have heard on to the most effective means of making and retaining profits with an international offshore business. One means we discussed here is the use of an international re-invoicing strategy. What is an international re-invoicing strategy? Let's get a little perspective first.
How High Taxes Negate the Effects of Hard Work and Planning
Many companies outsource back office jobs such as accounting and help desks offshore to reduce costs. Many companies in North America, Europe, and even Japan and Taiwan have outsourced basic and even complicated manufacturing jobs to China where they can combine imported high tech and imported Japanese management principles with inexpensive Chinese labor to produce their products at a lower cost. Our discussion of the international re-invoicing strategy starts with the phenomenon of outsourcing production overseas and then importing back to the company's market by shipping to ports like Oakland and Long Beach or through the Panama Canal to Antwerp or Newark.
The state of things is this. Companies have developed extremely efficient supply chains in order to maintain and increase profits in an increasingly competitive world. They outsource their production and ship "back home." Supply chains are managed from the first product design on a CAD station in places like Denver, Kansas City, or Chicago. Every aspect of quality control and cost are analyzed in real time from the factory floor in South China to the point of sale in the USA, the UK, or continental Europe. This is done to optimize the company's return on investment. However, the same companies, working in high tax environments in North America, for example, lose a substantial portion of their profits with corporate profits of 50% (USA) not to mention the fact that disputes on the remaining fifty percent are also taxed. The real bottom line and return on investment is largely degraded continuously huge and commonly successful efforts to design and maintain extremely efficient supply chains that span the globe.
International Re-invoicing is an Attractive Solution to Optimizing Offshore Profits
Where you set up a business can often be as important as where you have your products manufactured and which countries you sell to. An international re-invoicing strategy simply adds a more effective ingredient to the overall solution of outsourcing and selling "back home" into a high tax jurisdiction. In an international re-invoicing strategy a company is set up in a tax advantaged jurisdiction such as Belize or Panama. In these jurisdictions an offshore business corporation can engage in business throughout the world and bring profits home to bank in an offshore jurisdiction such as Belize, Panama, or even New Zealand without having those profits taxed. In most offshore jurisdictions and in Panama and Belize specifically profits of an offshore company are only subject to taxes if those products or services are sold in the host nation.
A simple example using round numbers may be that a company makes a unique replacement part for a machine used in manufacturing. It pays $ 15 to have the part made in China and $ 10 for shipping to distribution centers in the USA. It costs another $ 5 per part for storage and sales. The company sells the part for $ 90 and makes a $ 60 profit. However, corporate taxes are 50% so the true profit passed on to the shareholder as a dividend is $ 30 a part and that $ 30 per part is taxed too.
An alternative example is that a company is set up in a low tax jurisdiction. This company in Belize or Panama will purchase the parts from China and ship to distribution centers in the USA. Its cost per part will be the same $ 15 for production + $ 10 for shipping that the company in the USA pays. The Panamanian company will sell the part to its American client for $ 75 and have a $ 50 profit while the company in the USA will still sell the part for $ 90 and still have a $ 5 a part overhead giving it a $ 10 profit. This will be taxed as before and so will dividends to shareholders. However, the $ 50 profit that the Panamanian company makes will not be taxed as no profits are derived from production or sales in Panama.
These examples demonstrate the point of using an international re-invoicing strategy. A totally separate business in a low tax jurisdiction with its own distinct set of business functions can purchase offshore products, manage all or parts of the supply chain, and sell to clients in high tax jurisdictions. It merly takes a bit of time and a spreadsheet to plug in actual products, production costs, shipping costs, and the costs of distribution and sales. Then taxes need to be added to the spreadsheet. When that is done it will typically become clear that with an international re-invoicing strategy a company set up in a low tax environment will gather substantively more bottom line profits after taxes. What is necessary for this to work, however, is that the offshore company in question will set up as a business entity that is clearly separate from its US, UK, or European customer.
Separate Entities in an International Re-invoicing Strategy
In a successful international re-invoicing strategy the offshore company will have its own clearly defined functions separate and distinct from those of the company in the high tax jurisdiction. Part of this is simply to avoid costly duplication of effort. However, to avoid a challenge from the taxing authority in the high tax jurisprudence the issue of separateness is important. The offshore company should not be a "shell" company but a functioning entity that manages real business functions. How much of design, purchasing, shipping, or sales the offshore company does will typically be based on actual business needs and hence potential profitability. So long as the offshore company is distinctly separate from the high tax jurisdiction company this is perfectly legal and typically very profitable offshore business strategy.