Recognition of Offshore Invoices

The acceptance of invoices issued from offshore jurisdictions is a problem in different countries. Many of the tax authorities do not get much affected on the matter of which country the invoice is issued if the details provided are valid. In this case, the inspection or a tax audit takes place, something that does not exist in the majority of countries, or is only done when revenue exceeds a million Euros.

The countries like the United Kingdom and the United States are relatively open-minded. Consequently, these countries do not face problems like accepting invoices issued by companies in Panama, Hong Kong or Seychelles, till their invoices make sense.

Nonetheless, it is different in Continental Europe. Particularly in Germany, there are very serious rules regarding this, like during an audit, an invoice from one of the typical offshore countries is found, then you will have to face some very serious problems.

If in case you are not able to prove, the Treasury in these countries will not recognise the expense and in result to this, you will not able to deduct the tax from the invoice. There are chances of losing the majority of your customers if you are working with European companies or your clients cannot deduct your invoices.

Why only some commercial clients are problematic?

Knowing the fact that Spanish companies always take interest in dealing the business tasks with other limited companies for reliability and recognition reasons (and due to the reason of lack of knowledge of what to do when dealing with foreign companies), here the most important factors is the risk of not being able to deduct the invoice or of having to withhold money from the supplier. 

Despite the fact, a shell company works smoothly with many business models, its use brings problems at the time of invoicing the companies (B2B). It also occurs with the revenue from licence or commissions to the third parties. For this, there is an agreement which clearly states the conditions under which the revenue is distributed. Generally, there is no problem in proving where the commission came from even if the company receiving the money is an offshore Jurisdiction.

It is essential to elaborate on this example because there is still the belief that the acceptance of these invoices depends solely on the country in which the company issuing the invoice is located. If we talk directly about this, then whether you can deduct the invoice primarily depends on how plausible the concept is, like if it can be proven that the service or product was really received.

Why an invoice’s credibility is fundamental?

Basically, the significant factor is not the invoice’s country of origin but its plausibility. And this where the typical offshore companies based in tax havens usually hesitates, and sometimes authorities often doubt their credibility. As discussed before, the fiscal transparency system and the effective management rule are always attached to it. The companies that do not have offices or real premises are not treated as a national company for following the tax procedures and entering into the fiscal transparency system.

This means that from high tax countries like Australia,  France, Canada, Portugal,  Germany, Italy, Spain you cannot legally stockpile pre-tax funds in an offshore company. Doing this will be illegal until you take the trouble to set-up proper office or premises for the offshore company with registered offices, a director and employees. But after also you will need to be alert from the linked transactions like those that occur between related companies.

The prices need to be at normal market rates and you must have the ability to prove that the services have been provided, it is also helpful in product sales. By following these rules, the parent company could bill the subsidiary company for certain administrative activities. The BEPS initiative and the automatic exchange of information or any other local law does not contain any solution for tax evasion and ultimately, the least informed are those that end up being caught.

After analysing all this we can say that the laws adopted in recent years is quite annoying and require adjustments in the working strategy, they are also failed in stopping those with great knowledge from using shell companies enormously.

So at this time, the global mechanisms needed to identify financial beneficiaries at every level by companies.

Major legal loopholes have been found in the EU’s transparency register and the bilateral agreements for the exchange of information, either they are harmless if taken correctly but are loopholes so the necessary action is required to be taken.

As the reasons mentioned the recognition of invoices issued from tax havens amplifies big problems for tax authorities, and there is a risk associated with it, that those wanting to avoid taxes have falsified invoices or issued them without providing them with any kind of service.

As a result, many tax authorities have made their choices of not recognising their invoices from the offshore companies which rely on lack of transparency. They have decided to implement reversed charge and make domestic companies retain an amount at source to ensure that they pay taxes if they prefer not to claim the withheld money. To make us believe that an activity is carried out, the tax evader would probably have to reveal their identity, which they regret to do, shows their illegality of actions.

In this process, the domestic tax authorities manage to control at least part of the global tax evasion. This is not enough to stop evasion through business models transferred entirely to shell companies.

Cases in which invoices from companies in tax havens are identified

It is quite easier for a  software developer to invoice her income in Hong Kong while living in Panama, this invoice also gets accepted by the treasury in any country like Australia, Italy, UK, Spain, Germany. However, it has been noticed that the company hiring software developer will reject the invoice because they must hold the fear of having trouble with the tax authorities.

In case, a person working for a company is not hidden and has registered all their documents in order, with this he contains a clear occupation and gets easily verified, the acceptance of these invoices should not be a problem. The software developer has to provide the Panamanian residency certificate and the company registration certificate, to the inspection officer at the time of the inspection of the company.

By this inspection process, it will become easier to find that there is not a shell company but a real company with offices and employees.

It is also necessary to clear the concept of the invoice, and the foreign company is holding a physical location from where they conduct the activity and that there is some type of social security number. The main word here relies on transparency. To investigate the addresses appeared in the invoice is the main target of financial officials, if they found any case in a doubtful condition and the legitimacy of an invoice, the first thing they do is to check if the company’s address is unique or if it is shared by different companies.

This is not a big task for them they can simply find this by doing a simple internet search, they can also find this by doing a phone call to know that the premises are not fake and has someone there or if it only redirects calls.
If the financial officers are in doubt about the legitimacy of the business premises, the Treasury is free to send their inspectors on holiday to the place and finding a chance they can visit the alleged office.

Before this tact, they also signify social media and sometimes Google Street View to find the truth about the business premises.

Criteria for the acceptance of the invoice

It is mandatory for the companies to hold real premises from where they can run their business, for this many EU countries apply the “substance over means” principle to avoid any type of serious problem.

In many EU countries, it is necessary for you to have business premises to be able to request a European tax identification number. To become a reputable and aware company you must need intra-European identification number, this number also indicates that your firm has submitted and verified from all types of obligations and rules.

A social security number indicates that the invoice of your company is reviewed by the tax authorities, it is known as the second deciding factor of your invoice by the financial officers.  After all this investigation, it is also needed to check that the office premises consist of employees who pay income tax and social security contributions. If the company does not have any employee than a managing partner who is contributing to social security with his wages is also considered to approve the invoice. As discussed, If all these clauses found in any in doubt the necessary investigation steps are required.

Why the criteria for the acceptance of invoices is unrealistic in the modern world

It is important to consider that the above criteria for doing a business established and social security number still contains in some meaning with thousands of profitable online business models managed by digital nomads who travel all over with the help of a laptop or PC. To keep office premises in the starting stage of business is difficult because it is like putting inconvenient financial effort, it is more crucial when you are starting your business as a freelancer, at this stage the expenses usually exceed the profits. 

Your business needs a financial identity in the form of premises just like you need housing to open a bank account your business also needs an office for any further proceeding of the company. This law will not change in the future because in general terms we can say that there is no existing rental contracts or property, there is no type of control.

Generally, western governments countries with high taxation, fear more than the lack of control over flexible entrepreneurs without physical ties who are willing to leave the country they are in if they are not being treated well.

With all these, it never forces you to start a business even when you do not have enough money to make founding a company in current conditions worthwhile you have to stay in your country of origin for your invoices to be recognised.

What small businesses can do?

There are several regulations in small countries which accept small invoices.

These micro-invoices does not need much documentation and thus they do not include the tax identification number (NIF).

Alternatives so that your invoices are recognised

For saving your time and money from invoicing issues you have two solutions one is to start your own collection subsidiary or as a second option, you can hire an agency to invoice in your place.

Collection Subsidiary

The first suggestion relies on creating a company in addition to your offshore company. This company will stand as a subsidiary company of the original and become responsible for billing. For not getting into any trouble with this offshore parent company in future you must need to sign a profit transfer agreement which will help you in transferring your money easily.

This way of opening a subsidiary company is more common in Cypriot or English companies because it is legal there to transfer a good part of the profit before taxes. In these countries, there will be no issue if the invoices are coming from shell companies until there is at least a small part of the profit to tax and also the cash needs to be justified by the agreement. The main element is the company should have to make profits.with all these it will become easier to hire the services of a billing agency especially when the turnover is not so high.

In this case, the agency must need a good reputation in a country in which it is resisting, for example, Ireland. It needs offices and employees with social security, an intra-community tax identification number and a local company bank account.  This agency is responsible for invoicing the necessary companies and the transfer of money to the contractor company, with a very small fee.

Offshore Re-invoicing services

Re-invoicing is generally known as the use of a tax haven corporation to act as an intermediary between an offshore business and his customers outside his home country. The profits of this corporation and the other onshore business allow the accumulation of some or all profits on transactions for accruing to the offshore corporation.

What would be an example of re-invoicing?

Almost every year the onshore corporation sells US$1000000 of goods and services to France. After deducting all the cost of goods and services the onshore corporation earns US$400000 on its sales before taxes. So reducing net profits to US$240000 the taxes on an average are charged as US$160000.

A tax haven corporation is something on which the onshore corporation is established thus, the onshore corporation sells its goods and services to the tax haven corporation on paper for US$600000. The tax haven corporation, in turn, sells the goods and services to the French client for US$1000000 and they earn US$400000. The exporting corporation no profits.

The US$4000000 in tax-free income is then deposited in a bank account or another investment instrument according to the wishes of the onshore corporation. The bank account is always needed to control by the onshore corporation.

The general process of re-invoicing saved the onshore corporation $160000 in taxes less a small re-invoicing charge.