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A time honored means of increasing business profits is to do business in such a way as to eliminate unnecessary taxes. US corporations incorporate in states that do not have state corporate taxes. Those willing to set up their business offshore can do business where the jurisdiction itself does not impose taxes on profits made outside of its boundaries. An international re-invoicing strategy used by an offshore company in a country such as Belize or Panama can fulfill a legitimate and profitable business function without the burden of paying unnecessary taxes.
International Business Corporation
There are many jurisdictions where a company can be incorporated and do business throughout the world without paying taxes, so long as the company does not buy or sell in the host jurisdiction. In order to set up an international business corporation (IBC) the company only needs to consult with an advisor in the jurisdiction in question in order to gain licensure and insure compliance with local laws. Such a company will typically open an offshore bank account which may, or may not, be in the same jurisdiction. An IBC can be owned by an individual, by individuals, by another company, or by another offshore legal entity such as a Panama Private Interest Corporation or a New Zealand Trust. The degree to which the principals will opt for such an extended offshore solution will typically have to do with their concerns for asset protection and privacy. The various facets of a business enterprise relating to an IBC need not be in the same offshore jurisdiction. Oftentimes it is better, in fact, that they are separated.
Doing Business Internationally
Outsourcing of manufacturing has been going on for decades and is largely responsible for the rapid rise of Chinese industry. Companies from Japan to the USA to Germany have outsourced selected parts of their business and manufacturing operations in order to reduce costs and, therefore, improve their bottom line. There is no reason that a company in Belize, Panama, or any offshore jurisdiction cannot also outsource manufacturing to Asia while selling to the wealthy markets of North America, the UK, and Continental Europe. The differences between a company in Kansas City importing into the USA and a company in Panama City, Panama doing so are several. The Panama based IBC will typically have a lower cost of operations based upon a lower wage scale. In this case the company is “outsourced” and not just the back office! Many offshore jurisdictions are decidedly business friendly which will commonly mean less red tape and, therefore lower costs of operation. Many offshore jurisdictions fit the loose definition of a tax haven. Basically this means that they may offer a number of incentives for new businesses including tax forgiveness for local operations and tax write-offs for employing local workers.
An International Re-invoicing Strategy
The point of an international re-invoicing strategy is to set up a business in a low tax jurisdiction. This company needs to be clearly and legally separate from its producers in Asia as well as its clients in North America or Europe. A corporation can be set up, for example, whose business is purchasing clothing manufactured in China. The corporation will then manage a supply chain the end points of which are North America and Europe. By operating offshore the corporation’s profits on sales in these two markets will not be taxable in its home jurisdiction.
A simple example might be that a Chinese manufacturer of high quality men’s shirts will sell to a Panamanian company for $10 a shirt. The cost of shipping and distribution to the target market will be $10 and the Panamanian company will charge $70 a shirt to its North American or European clients. Sales will cost $5 a shirt and the retailer will sell the shirts for $100 each. In this example the profit to the offshore company comes to ($70 – $10 – $10) = $50 a shirt. This will be clear profit deposited in the company’s offshore bank account.
An American customer of the offshore company will buy shirts for $70 each and absorb a $5 a shirt cost in overhead. Its profit will be $100 – $75 = $25. The sad fact for the American company is that any retained profits or profits paid out as dividends will be taxed at 50% first so profit comes down to $12.50 a shirt.
Prices will be negotiated between the IBC and its customers. Each will seek the most advantageous route to profits. The obvious choice for the offshore company will be to assume a sufficient portion of total operations to allow it to assume the lion’s share of profits, always keeping in mind that the offshore entity needs to be totally and completely separate from any onshore suppliers or customers.
The Wider Aspects of an Offshore Operation
We mentioned above that an international business corporation can be solely owned, owned by another company, or be an asset of a foundation or trust. The later two offer unique possibilities as regards asset privacy and protection. A Panama Private Interest Foundation does not have an owner. It has beneficiaries. Likewise a trust is set up to provide for its beneficiaries. Depending upon the needs and wishes of those setting up an offshore asset protection and privacy solution it may be wise to set up an IBC and its international re-invoicing strategy within another legal vehicle. This sort of decision is best made up front along with decisions as to which jurisdictions in which to set up banking, the IBC itself, and a trust or foundation.
To obtain the best long term results it is important to deal at the beginning with counsel that works across international borders. The best solutions for any given individual may not be all located in one jurisdiction. Working with someone with whom communication is not an issue and someone with broad experience in offshore business, banking, and asset protection vehicles will pay dividends for years to come.