What is an international billing strategy?

Rebilling is the use of a low- or no-tax company to act as an intermediary between a company established in a jurisdiction, usually a high-tax jurisdiction, and its customers outside its home jurisdiction. The domestic company sells its products, at a small profit, to the no-tax or low-tax company that internally marks the product up to the original selling price and sells the product to customers outside the onshore company’s jurisdiction. Profits from the middleman accumulate at a zero or low tax rate, while small profits from the onshore business are taxed at their jurisdictional rates.
 
International rebilling strategy, example
 
An onshore business sells $1,000,000 of goods annually to a company established outside the jurisdiction where the onshore business is established, for example, a UK company sells to a Spanish company. Assuming operating expenses and cost of goods are $500,000, the British company earns $500,000 on its sales before taxes. Taxes average 45% or $225,000, bringing net profit down to $275,000.
 
To use an international re-invoicing strategy, the UK company would use an untaxed company, such as a company established in Belize, Panama or any other tax haven, to serve as an intermediary between the UK company and its Spanish clients. The British company sells its products on credit to the Belizean company for $600,000. The Belize company, in turn, sells the merchandise to the Spanish customer for $1,000,000. The Belize company thus obtains $400,000 in profit. Since there is no tax in Belize on international transactions, the $400,000 of winnings is tax free.

The British company shows a small profit of $100,000; gross sales of $600,000 less cost of goods sold of $500,000. Assuming a 45% tax, the UK company would pay $45,000 in tax and make a profit of $55,000. This strategy allows the British company to show an economic rationale to its tax authority for its business practices.
 
Is this legit?
 
The attack on the use of this strategy consists mainly of the attempts by various tax agencies to “prove” that the onshore company and the untaxed company are in fact the same, claiming that the entire strategy is nothing more than a false attempt to create the legal fiction of separativity where it does not exist. The attacks also include the claim that the untaxed company has no business purpose other than tax evasion.

The main defense of the strategy is that the unencumbered company must operate with a sound business purpose at all levels. Therefore, the strategy must be implemented in substance and not just in written form. It is vitally important that the company that does not pay taxes actually does business and is not a “shell” company. It must have an economic rationale and must perform an economic function independent of the onshore company. Documentation is an absolute requirement with written records to substantiate business transactions.
 
In addition to the untaxed company having an economic rationale, the onshore company must also have a viable economic rationale. Since the main economic principle of any business is to make a profit, the onshore company must make a profit and pay taxes on these profits to its local tax authority. The size of the profit can be flexible, but a profit must be made nonetheless.
 
These points are the legal bases of the strategy and shortcuts cannot be taken. Therefore, in the final analysis, all entities must have a good economic reason for existing, and both substance and form are important to the effective use of an international billing strategy.

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