What it means
Imagine a manufacturer that produces in one country and sells to customers in dozens of others. Without a central structure, each sales subsidiary deals with its own currency risk and the factory may invoice in a currency that does not suit the buyer.
A reinvoicing centre sits in the middle and handles both sides. The centre buys from the producing company in one currency, usually the producer's own, and sells on to the customer or sales subsidiary in the customer's currency.
The goods may still ship directly from the factory to the customer, so the centre acts on paper rather than in the warehouse. The centre earns a margin for its role.
The main benefit is currency management. Because all the exposure sits in one entity, the group can net positions, hedge centrally and avoid many small, duplicated hedges.
The centre can also manage credit risk, collect cash and fund subsidiaries. Tax authorities pay close attention to these structures.
The prices between the producer, the centre and the buyers must follow the arm's length principle, meaning they should be set as independent parties would set them. The centre usually needs real people, decisions and risk management in its location, since a shell company with no substance can be challenged.
Smaller groups may find the cost and complexity too high. Alternatives include invoicing in a stable currency, using natural hedges by matching costs and revenues in the same currency, or using a treasury function without a separate invoicing entity.
The right choice depends on the group's size, currencies and tax position. Practical set-up needs careful thought.
The centre needs bank accounts in several currencies, systems to issue invoices and track receivables, and clear policies on credit limits and hedging. Group finance teams often start with a pilot covering a few countries before extending the structure to the whole group.
In practice
Real-world examples.
Example
A machinery maker produces in one country and sells in twenty. A reinvoicing centre buys at the factory price and invoices each distributor in its own currency, so the factory sees one steady stream of payments.
Example
A technology group's treasurer wants to reduce hedging costs. By routing sales through a reinvoicing centre, she hedges the net currency position once instead of in each subsidiary.
Example
A tax adviser reviews a group's reinvoicing structure and finds that the mark-up was set without a transfer pricing study. The group commissions a study to support the margin before an audit arises.
Formula
Calculation
Centre margin = resale price - purchase price
Mark-up on cost = centre margin / purchase price
A reinvoicing centre buys goods from the producer for $1,000,000 and resells them to a sales subsidiary for the local currency equivalent of $1,080,000. Centre margin = $1,080,000 - $1,000,000 = $80,000. Mark-up on cost = $80,000 / $1,000,000 = 8%. If the customer's currency weakens by 2% before payment, the exposure that sits in the centre is $1,080,000 x 2% = $21,600, which it can hedge in one place.Case study
Seen in the real world.
Alderwick Industries is an illustrative, fictional manufacturer with factories in two countries and customers in thirty. Its finance team found that more than a dozen subsidiaries were each hedging currency exposure separately, and several of them were losing money on poorly timed trades.
The group set up a reinvoicing centre with a small team that bought from the factories and sold to the subsidiaries at a documented mark-up. Currency hedging moved to the centre, and the group reduced its hedging costs and gained a clear view of its overall exposure. The illustrative lesson is that central management of currency risk can save money, provided the pricing is properly supported.
Alderwick began with a pilot covering three countries and measured the savings in hedging costs and administration. After a year the results justified extending the centre to the rest of the group, and the board approved the plan.
Watch out
Common mistakes.
- Setting up a centre purely for tax reasons, when authorities expect real substance and arm's length pricing.
- Assuming the centre eliminates currency risk, when it concentrates the risk so that it can be managed in one place.
- Overlooking customs and indirect tax, when moving invoices through another entity can change how duties and taxes apply.
Questions
People also ask.
What does a reinvoicing centre do with the goods?
Usually nothing physical, since the goods ship directly from producer to customer while the centre handles the invoice and payment.
Why is it located in a particular country?
The location is chosen for its treasury expertise, banking links and tax treatment, though the choice must be backed by real activity.
Is it the same as a shared service centre?
Not exactly, because a shared service centre performs back-office tasks, while a reinvoicing centre acts as a trading entity in the flow of goods.
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