What is an international rebilling 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 their home jurisdiction. The domestic company sells its products, at a small profit, to the tax-free or low-tax company which, as an intern, brands the product up to the original selling price and sells the product to customers outside the jurisdiction of the company in Earth. Broker profits accrue at low or no tax rate, while small onshore business profits are taxed at 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 British 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 tax. The average tax says 45% or $ 225,000, thus reducing the net profit to $ 275,000.
To use an international rebilling strategy, the British company would use a duty-free company, such as a company established in Belize, Panama or any other tax haven location, to act as an intermediary between the British company and its Spanish clients. The British company sells its products to the Belize company on credit 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 profits. Since there is no tax in Belize on international transactions, the $ 400,000 of earnings 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 British company would pay $ 45,000 in taxes, while making a profit of $ 55,000. This strategy allows the British company to show economic rationality to its tax authority for its business practices.
Is this legal?
The attack on the use of this strategy consists mainly of attempts by various tax agencies to “prove” that the company in the country and the tax-free company are in fact the same thing, claiming that the whole strategy is nothing more than a false attempt. to create the legal fiction of separateness where it does not exist. The attacks also include the claim that the non-taxable company has no business purpose other than tax evasion.
The main defense of the strategy is that the tax-free business must operate with a strong business purpose at all levels. Therefore, the strategy must be implemented in a substantial way and not just in written form. It is vitally important that the tax-free company conducts business and is not a “shell” company. It must have an economic rationale and must perform an independent economic function from the onshore company. Documentation is an absolute requirement with written records to substantiate business transactions.
In addition to the duty-free business having an economic rationale, the onshore business must also have a viable economic rationale. Since the main economic principle for any business is to make a profit, the onshore company must make a profit and pay taxes on these profits to the local tax authority. The size of the gain can be flexible, but a gain must nevertheless be made.
These points are the basis of the legality of the strategy and no shortcuts can be taken. Therefore, in the final analysis, all entities must have a good economic rationale for existence and both substance and form are important for the effective use of an international rebilling strategy.