Fluctuations in currency exchange rates can hamper the overall profitability of any firm. With uncertainty abounding and no right way to predict the future rate, setting up a re-invoicing center (RIC) can help you. It helps you streamline the multi-currency payments through a single firm and save considerably on the fluctuation in rates.
How does an RIC work? Then, read on to learn more.
What is Offshore Re-invoicing?
It is an intra-firm strategy that is a prevalent part of a multi-currency management system. Under this strategy, a multi-national company (MNC) streamlines the currency flow among the company and its subsidiaries by setting up an RIC.
As the name suggests, the RIC purchases the goods from one subsidiary and sells them to another. Moreover, to simplify the transition, it re-invoices the goods in the subsidiary's operating currency, such as the Japanese Yen or the British Pound.
The RIC is typically set up in offshore jurisdictions, such as the Cayman Islands and Belize, which are known for their robust financial infrastructure.
This practice helps curb the losses that arise from constant currency fluctuations and multiple bank fee payments on the same transaction.
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How Do Offshore Re-invoicing Centers Work?
The MNC typically incorporates RICs as an International Business Company (IBC) or a Limited Liability Company (LLC). These act as intermediaries between the MNC and the subsidiaries.
To understand it better, let’s analyze it through an example.
Suppose your firm (MNC) manufactures batteries in India (through a local subsidiary) and exports the same to another United States subsidiary. Without an RIC, both the subsidiaries bill each other directly in the currency of their jurisdictions (USD & INR). So whenever these two firms transact, they have to convert the currency as per the current conversion rate. Any negative fluctuation in the currency will lead to losses and vice versa.
That’s where the role of the re-invoicing company or center comes into play. If you set up an RIC in an offshore jurisdiction and manage import and export through it, then neither the Indian nor the US subsidiaries have to communicate directly.
Now, the RIC manages all these currencies through a multi-currency bank account. Moreover, it hedges against currency fluctuations by fixing the transaction for a future date with the bank at a specified forward exchange rate. Thus, instead of losing a hefty amount, the RIC only has to pay the commission to the bank to convert the money at the pre-decided forward rate.
What are the Benefits of Offshore Re-invoicing?
It helps manage multi-currency payments without the hassle of prevailing exchange rates. Aside from this, it also has the following benefits:
Multilateral Netting
Netting simplifies international payments. Netting refers to the process by which two or more parties settle the net difference in a single transaction, instead of making multiple payments back and forth.
Centralized Transactions
In a decentralized system, transactions with multiple subsidiaries generate dozens of invoices in different currencies. With an RIC, all your transactions are in your host country’s currency, while the center handles the re-invoices in multiple currencies.
Enhanced Global Trade
The RIC facilitates global trade as it streamlines international payments and receipts. Moreover, it also removes the administrative and financial frictions and ensures that the firm operates smoothly.
Why Choose BSW?
The offshore re-invoicing can be an ideal tool to streamline global trade, reduce overhead costs, and enhance tax savings. Although you can easily implement it in your existing business model, it is still better to opt for an offshore country for the same. That’s where Business Setup Worldwide (BSW) comes into play.
BSW has 8 years of experience in the global business domain and offshore compliance. Whether you are seeking cost-effective expansion or want to reduce business expenses, BSW has a pinpoint solution for every need. We offer various tailored services with 100% satisfaction, ranging from offshore company formation to tax compliance. Contact us now to book a free consultation.
