Reinvoicing centers are subsidiaries or separate divisions of a multinational corporation that handles intra-firm transactions in different currencies. Such divisions are the centers of invoice processing and billing for other divisions located around the world. They bill and pay all invoices in the currency of the originating country and then re-invoice the affiliate branches in the local currency. The goal of a reinvoicing center is to protect the larger corporation from risks of foreign currency fluctuation.
Breaking Down Reinvoicing Center
Reinvoicing centers are employed to limit the firm's risk of transaction exposure. Suppose U.S.-based XYZ Corp. has subsidiaries in France and Canada. The French subsidiary owes the Canadian subsidiary debt in Canadian dollars for an intra-firm purchase of processed goods. The U.S. arm of XYZ recently received payment in Canadian dollars and now owes a debt in Euros. Instead of having each portion of the company engaged in its foreign exchange transaction, a reinvoicing center funnels the different inflows and outflows of money, making the process more efficient and stable.
The invoice center can also determine a preset foreign exchange rate for hedging against currency fluctuations. Here, the optimal solution is to have the French subsidiary exchange Euros to the U.S. office for Canadian dollars.
Advantages of a "Reinvoicing Center"
Reinvoicing centers are a popular mechanism to hedge against foreign exchange risk and manage liquidity within local divisions and the larger group. Having each entity transmit invoices to the center effectively concentrates external foreign exchange risk for intra-firm transactions. In other words, the separate divisions transact in their local currency and do not need to navigate the external foreign exchange market.
Moreover, reinvoicing centers can inject liquidity to local divisions requiring capital. It effectively improves the company's short term liquidity management by providing flexibility in intra-firm payments. Reinvoicing can also improve export trade financing and collections and reduce bank costs and payment terms.
Disadvantages of a "Reinvoicing Center"
A reinvoicing center can be rewarding for a large multinational, but some risks remain. For one thing, operating an efficient reinvoicing center comes at a cost to the larger corporation. It's an additional overhead cost that does not eliminate local accounts payable and receivables departments but instead supplements those services. A company must be clear the reinvoicing center creates advantages and risk management mechanisms that outweigh the costs.
In addition to costs, reinvoicing centers can complicate tax filings. Dealing with different currencies around the world is sometimes considered a tax evasion strategy. To avoid this risk, the center must apply documented procedures and understand the tax positions in advance.