Doing Business in United States
5 October 2015
International
Baker
Tilly Virchow Krause
Our service leaders
International Tax Service Leader
Our international service leader
Jim Alajbegu
Partner
Firm Leader - International
Tax
Personal and confidential
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Our work with international companies
Baker Tilly Virchow Krause
International Audit Services
> Audits of private and publicly traded companies headquartered in the US and their
international subsidiaries
> Audits of US subsidiaries of foreign parent companies and required reporting packages
> Audits of consolidated financial statements of internally headquartered firms and their US
subsidiaries
> Audits of US Generally Accepted Accounting Principles (GAAP) and International
Financial Reporting Standards (IFRS) financial statements
> Global risk assurance services, including Sarbanes-Oxley (SOX) Section 404
> Agreed-upon procedures and other assurance services engagements
> Service Organization Controls (SOC) 1 reports / Standards for Attestation Engagements
(SSAE) 16 services
Personal and confidential
3
Baker Tilly Virchow Krause
International Tax Services
Compliance & Consulting / Transfer Pricing
- M&A / Cross Border; Supply Chain Planning; Repatriation; Tax Controversy; Non-Income
Tax / Indirect Tax; Business Tax Compliance
Quantitative Group/ IC-DISCs
- IC DISCs, E&P Studies, Foreign Tax Credit Studies, OFL Studies
Expatriate / Inpatriate Individual Tax Compliance
- Expats, Inpats, Tax Equalization, Human Capital
Financial Services
- FATCA, Master Funds, Withholding Tax
Estate & Trusts
- International
Personal and confidential
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Our work with international companies
Focus on global expanding companies
> Serve more than 1,000 international active companies
> Gained over 100 new internationally-focused clients in the past year
> Work with more than 150 public registrants worldwide, including Fortune 1000
companies
> Perform the global audit of more than 100 companies
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General Information
Geography
• Location: North America
• Area: 9,826,675km2
• Land boundaries: Canada and Mexico
• Coastline: North Atlantic and North Pacific Oceans
• Climate: Generally temperate, but arctic in Alaska, tropical in Florida and
Hawaii, semi-arid in the Great Plains west of the Mississippi River, and arid
in the Great Basin of the Southwest
• Terrain: Hills and low mountains in the east, vast central plain, mountains in
the west, rugged mountains and broad river valleys in Alaska, rugged
volcanic terrain in Hawaii
• Time zone: GMT –5 to –10 (Daylight Savings Time +1 hour)
General Information
People
• Population: 319.3m
• Ethnic groups: White 77.7%, Black 13.2%, Asian 5.3%, Amerindian and
Alaska native 1.2%, native Hawaiian and other Pacific islander 0.2%,
Hispanic or Latino 17.1%, two or more races 2.4%
• Religion: Protestant 51.3%, Roman Catholic 23.9%, Jewish 1.7%, Mormon
1.7%, other Christian 1.6%, Buddhist 0.7%, Muslim 0.6%, other and
unspecified 2.5%, unaffiliated 12.1%, none 4%
• Languages: No official national language. English 79.2%, Spanish 12.9%,
other Indo- European 3.2%, Asian and Pacific Island 3.7%, other 1%
General Information
Government
• Country name: United States of America
• Government type: Constitution-based federal republic
• Capital: Washington, D.C.
Administrative divisions
• The United States of America
comprises 50 states and the District of
Columbia
• Additional dependent areas (American
Samoa, Baker Island, Guam, Howland
Island, Jarvis Island, Johnston Atoll,
Kingman Reef, Midway Islands,
Navassa Island, Northern Mariana
Islands, Palmyra Atoll, Puerto Rico,
Virgin Islands, and Wake Island)
General Information
Political situation
• The United States of America is a constitution-based federal republic with a
strong democratic tradition.
• There are three branches of government at the federal level (Executive,
Legislative and Judicial).
• The president is the chief of state and the head of government.
• A bicameral Congress consists of the Senate and the House of
Representatives
Economy
• GDP – per capita: US$49,115 (2013)
• GDP – real growth rate: 2.2% (2013)
• Unemployment: 5.8% (Oct 2014)
• Currency (code): Dollar (US$)
Country Attractiveness Factors
Please describe and assess (from 1 to 10 where 1 is the most important) how important to importers and investors each of the following
categories in the table is:
Key location factors
Description
Transport and logistics
infrastructure
United States does have world class
ports plus a freight rail, air
transportation, and a road network
that are capable of not only serving
the large U.S. market but making
the United States a base for exports
as well.
Stability and transparency of
political legal and regulatory
environment
Business regulations are among the
most transparent and least
cumbersome, including appropriate
intellectual property protections.
Country or region’s domestic
market
The US economy is the largest in
the world, and with median
household income of $51,017,
offers a large and steady demand
for a variety of products.
Assessment of importance
Empirical evidence points to a
positive correlation between
protection of IP and economic
growth
Country Attractiveness Factors
– cont.
Key location factors
Description
Corporate taxation
On average, firms make 10.6 tax
payments a year, spend 175.0 hours
a year filing, preparing and paying
taxes and pay total taxes amounting
to 43.8% of profit
Local labour skill level
The US workforce is among the
most skilled and productive globally
– more than 30 percent more
productive than Germany’s and
nearly twice as productive as South
Korea’s
Labour costs
Compensation costs in Northern
Europe were, on average, $12
higher than compensation costs in
the United States, while those in
Latin America were $28 lower than
the US level
Potential productivity increase
for their company
Empirical evidence points to a
positive correlation between
protection of IP and economic
growth
Assessment of importance
businesses have learned that
today’s low wages may be gone
tomorrow and that other costs and
risks can offset the savings from
cheap labor
Country Attractiveness Factors
– cont.
Key location factors
Description
Telecommunications
infrastructure
Programs and policymaking focus
largely on expanding broadband
Internet access and adoption in
America, expanding the use of
spectrum by all users, and ensuring
that the Internet remains an engine
for continued innovation and
economic growth.
Stability of social climate
Predictable and stable regulatory
regime, including appropriate
intellectual property protections
Flexibility of labour legislation
Labour legislation in the United
States has tended to contribute to
faster job creation rates than
such legislation in most developed
economies.
Assessment of importance
Where FOEs Are Located
Source: The Brookings Institution
Where FOEs Are Located
Source: The Brookings Institution
Where FOEs Are Located
Source: The Brookings Institution
Where FOEs Are Located
Northeast
The Midwest
South
West
TOP FIVE INDUSTIES PER REGION
Source: The Brookings Institution
Sector Evolution
• Manufacturing is largest industry for foreign investors and accounted
for one-third of cumulative foreign direct investment.
• Because the US has the world’s largest and most liquid financial markets,
foreign companies have invested heavily in the US finance and
insurance industries.
• Wholesale trade is the third largest industry for foreign investment.
Source: Foreign Direct Investment in the United States 2014 Report,
Organization for International Investment (OFII)
Sector Evolution
• The energy revolution, particularly in shale gas production is
drawing investor attention to the US market.
• As investors consider their portfolio of investments, we can expect to
see increased interest in particular oil and gas, chemicals and
process industries, and other energy-intensive sectors.
• We have already seen the price of natural gas liquids, such as
ethane. drop to make the US the world's second-cheapest location
for chemical manufacturing.
• SABIC, the world's largest petrochemical manufacturer, and other
foreign groups including Braskem, LyonellBasell, PPT Global
Chemical, and Royal Dutch Shell are considering or have made
commitments to invest in the US.
Source: Foreign Direct Investment in the United States 2014 Report,
Organization for International Investment (OFII)
Investment Incentives
• Foreign businesses operating in the United States can generally
obtain the same federal government-sponsored assistance to
businesses that exist for domestic operations
• Additionally, many state and local governments offer incentives to
attract businesses to their area, including financing and
opportunities to purchase or lease facilities in designated areas at
reduced prices.
• Various tax credits, holidays and concessions are also available at
federal and state levels.
Business Entities
• The C corporation is the most common form used by large
businesses (although it is available to all US companies). It is a
separate legal entity distinct from its shareholders.
• Small businesses can elect for S corporation status under the
Internal Revenue Code (IRC). All shareholders must consent to the
corporation’s election.
• A corporation, regardless of C or S status, is governed by a set of
bylaws, has a board of directors who oversee its business activities,
and is owned by its shareholders who hold shares of the
corporation’s stock.
• Business formation, organisation, registration and licensing are
generally governed by state law. A corporation is established in
accordance with the laws of the state of its incorporation.
Business Entities
• A partnership is generally formed by two or more persons or
entities to undertake business as co-owners. A partnership includes
a syndicate, group, pool, joint venture or other unincorporated entity.
• Partnerships may be organized as a general partnership or as a
limited partnership. While federal tax treatment of both types is
substantially similar, the treatment of general partnerships and
limited partnerships may differ for state tax and legal purposes.
• All partners in a general partnership are jointly and severally liable
for partnership debts.
• A limited partnership has one or more general partners and one or
more limited partners. Limited partners are liable for partnership
debts up to the amount of their individual investments, while general
partners are fully liable for all partnership liabilities.
Business Entities
• A limited liability company is a distinct business entity, formed
under state law, that offers an alternative to the corporation or
partnership structure.
• It has greater flexibility than a limited partnership for members who
wish to participate in managing the business without incurring
personal liability. Unlike an S corporation, there are no restrictions
on the type or number of owners of an LLC.
Business Entities
• A limited liability company is a distinct business entity, formed
under state law, that offers an alternative to the corporation or
partnership structure.
• It has greater flexibility than a limited partnership for members who
wish to participate in managing the business without incurring
personal liability. Unlike an S corporation, there are no restrictions
on the type or number of owners of an LLC.
Business Entities
• A foreign corporation may operate in the United States through a
branch. The branch is often required to register with the state in
which it is conducting business. Whether a corporation’s activities
rise to the level of “conducting business” depends on the laws of
each state. Failure to register, however, could result in penalties and
may prevent the branch from initiating legal action in a particular
state.
• If a branch is used, all of the foreign corporation’s assets are
potentially subject to US creditor claims. Conversely, if a US or
foreign subsidiary is used, the liability is limited to the assets owned
by that subsidiary.
• For domestic entities, an unincorporated branch is simply an
extension of the entity, as opposed to a separate legal entity. Its
income is considered as directly earned by the parent company
Audit and accounting
requirements
Publicly traded company
• A company with securities traded on a US stock exchange is
generally required to have its annual financial statements audited by
an independent certified public accountant in accordance with US
audit principles.
• The company is also required to comply with the Sarbanes-Oxley
Act of 2002 which, among other things, requires certain officers of
the corporation to attest that the audited financial statements fairly
reflect the company’s financial position.
Audit and accounting
requirements
Private companies
Non-publicly traded (i.e., private) companies are not subject to audit or
disclosure requirements, although an audit may be conducted to:
• Comply with a bank lending agreement
• Satisfy a stockholder agreement
• Obtain third-party insurance cover, such as a performance bond
• Establish a series of audited financial statements in anticipation of
“going public”, or
• Provide shareholder comfort concerning the accuracy of the
financial statements.
Audit and accounting
requirements
• All businesses need to maintain proper books of account and
documentation for taxation and other purposes. This is especially
true if there are inter-company transactions or activities between US
and foreign related parties.
• There is no general requirement that such books and records be
maintained in the US although, if requested, they should be readily
available and in English.
• Convergence between US generally accepted accounting principles
(GAAP) and International Financial Reporting Standards (IFRS) has
been ongoing since 2002.
• Although adoption of IFRS is not yet fully implemented, the
requirement for foreign companies registered in the United States to
use US GAAP when preparing their financial statements has been
relaxed on condition their accounts.
Exchange controls
There are no exchange controls in the United States.
• Foreign Corrupt Practices Act (FCPA) applies to any act by US
businesses, foreign corporations trading securities in the United
States, American nationals, citizens and residents and any person
who has a degree of connection to the US.
• Anyone physically transporting, mailing or shipping currency or
negotiable monetary instruments in excess of US$10,000 at one
time into or out of the United States, is required to file an information
report (FinCEN 105) with the Bureau of Customs and Border
Protection.
• A separate IRS information reporting requirement applies if a person
receives in excess of US$10,000 in cash in connection with a trade
or business.
Exchange controls
Anti-money laundering
• Government efforts to combat money-laundering, terrorist financing
and other criminal activities include information sharing between US
states under the Bank Secrecy Act (as expanded by the USA Patriot
Act of 2001), the creation of the US Treasury’s Financial Crimes
Enforcement Network and information sharing between countries
under bilateral tax information exchange agreements (TIEAs)
concluded by the United States with its trading partners.
• The US has also entered into agreements, or has entered into
negotiations, with a number of countries under the US Foreign
Account Tax Compliance Act (FATCA), which aims to improve tax
compliance involving foreign financial assets and offshore accounts
Exchange controls
Recommendations
• Conduct internal audit to assess potential violations and liability and
prepare for anti-corruption due diligence.
• Implement a robust compliance program including reporting, record
keeping and internal controls.
• Address FCPA issues early and proactively.
Banking and Financial
Institutions
Several types of financial institutions are common in the US
• National banks operate under the Federal Reserve System (FRS)
and the Federal Deposit Insurance Corporation (FDIC).
• State banks with charters granted by the state government are
regulated by the state banking commission (under FRS and FDIC).
• Savings and loan associations and credit unions typically serve
individuals and private groups, offering financing of personal
residences, but they offer commercial banking services as well.
• Life insurance companies and stockbrokerage houses offer
alternative financing options through annuities, stocks, bonds, real
estate and mortgage loans.
• Venture capital is another alternative. A company also may issue
and distribute its stock (or other equity interests).
Banking and Financial
Institutions
Opening a bank account
• In general, it is strongly recommended that a business entity
maintains a separate bank account. This would help keep entity in
compliance with IRS record-keeping requirements and will provide
for a better way to manage company’s cash flow.
• Today all US banks are required to document verification that the
person opening the account is the person on the I.D. they’re
receiving.
Recommendations
• The easiest solutions practically all banks chose to go with is simply
having one of the employees in their branches make sure that the
person opening the account in the branch is the same person in the
photo I.D.
Banking and Financial
Institutions
Obtaining financing
• Borrowing from a bank involves executing a signed loan agreement
and a note payable promising to repay the loan on a certain date at
a defined interest rate.
• Typically, the bank and its customer will execute additional
documents securing collateral pledged against the loan. Banks offer
a variety of loan products depending on a customer’s need,
intended purpose and creditworthiness.
• The most common forms of bank debt include term loans, lines of
credit, and letters of credit.
• Leasing offers another alternative to ownership or other financing
options.
Employment Regulations
Complex Framework of Overlapping Laws and Regulations
• Compensation and Wage Laws - Minimum Wages, Restrictions on
Executive Compensation
• Workplace Safety - Occupational Safety and Health Administration
• Labor Relations and Unions
• Equal Opportunity and Anti-Discrimination - gender, race, color, sex,
religion, age or national origin
Recommendations
• Reputational Risk: Labor issues are very political in the United
States, often garnering outsized media attention.
• Class Actions: Treat labor issues as if they have the potential for a
class action lawsuit.
• Consider cultural differences and management styles.
.
Employment Regulations
Visas
• Generally, a citizen of a foreign country who wishes to enter the United
States must first obtain a visa, either a nonimmigrant visa for temporary
stay, or an immigrant visa for permanent residence.
Treaty Investor Visa
• Treaty Investor (E-2) visas are for citizens of countries with which the United
States maintains treaties of commerce and navigation. This includes
Poland.
• You must be coming to the US to engage in substantial trade, including
trade in services or technology, in qualifying activities, principally between
the US and Poland; or
• develop and direct the operations of an enterprise in which you have
invested a substantial amount of capital.
Potential Risks
Regulation of US Securities Markets
• The United States securities laws are highly complex and regulate
access to the public and private capital markets.
• Renewed focus after corporate governance scandals of early ‘00s
(Enron, Worldcom) and recent financial crisis - led to SOX and Dodd
Frank
Carefully consider
• Type of deal (public v. private, etc.) and securities laws implications
• Type of financing will be required. Both to effectuate the transaction
and to operate the business.
• Level of disclosure the acquiring company is comfortable with
(reporting requirements may be triggered)
• Exit strategy at the outset - IPO? Financial/Strategic Sale?
Potential Risks
Renewed focus on consumer protection in recent years.
• Growth in consumer litigation, particularly class action litigation over
consumer products, foods and beverages (everything from shoes to
tires to cellphones).
• Recent increase in government enforcement actions brought by
federal government and state agencies/attorneys general.
Recommendations
• Have strict compliance programs in place to ensure compliance with
US manufacturing, safety, advertising, and labeling standards.
• Seek approval from legal department for all marketing and
advertising materials (particularly those relating to health, nutritional,
fitness benefits of the product).
• Retain experiences class action counsel
The most common problems foreign
businesses are struggling with and
how to overcome them
• When talking about businesses, you can refer to both foreign
investors and companies
Intelectual Property
The world's best intellectual property (IP) protection regime
• Appropriate trademark protections protect companies' investments
in brand and reputation.
• Up-front vetting of a brand or mark guards against potentially costly
trademark disputes in the future.
• Government fees for obtaining a US patent are among the lowest in
the industrialized world.
Recommendations
• Assess acquirer’s current IP practices, including any potential
infringement under US laws.
• Understand the role IP plays in the target business and the extent to
which the target has protected such rights.
Taxation
• Domestic corporations are liable for federal income tax on their
worldwide income and for state income taxes on income arising in
and allocated to individual states. They also may be liable for
municipal income taxes in some cases.
• Foreign corporations are potentially liable for US federal, state and
municipal taxes on income that is effectively connected to the
carrying on of a trade or business in the United States, and for a
branch profits tax. Liability for federal tax and for the branch profits
tax may be subject to the terms of a relevant double tax treaty
Taxation
• Taxable income is calculated based on gross income less allowable
deductions
• Generally based on worldwide income
• Graduated income tax, with rates ranging from 15- to 35-percent
• Differences in federal and state systems
• Generally considered one of the most complicated tax systems
Taxation
• US tax law provides that every corporation subject to taxation must
file a return
• Foreign corporations engaged in a trade or business in the United
States at any time during the taxable year must file Form 1120-F
• Filing requirement applies even when income is exempt from tax
because of a treaty (State income taxes are imposed by most US
states and are not subject to tax treaties)
Taxation
• Engaged in trade or business within the U.S. implies something
more than a single isolated act or transaction
• It means conducting and continuing business by carrying on
progressively all the acts normally conducted with the business
• This determination is made by applying the regulations to the facts
and circumstances of each case
• A permanent establishment is deemed to exist in a State where a
person (other than an independent agent) has the authority to sign
contracts on behalf of a resident of the other State and habitually
does so
Taxation
General factors to consider
• What activity does the foreign corporation have in the U.S.?
•
•
•
Part of active business
Percentage in relation to total sales
Continuous and regular (i.e., not isolated, casual or occasional transaction)
• Did corporation engage a dependent agent to conduct activity in
U.S.?
• If independent agent has been engaged, what are the extent of his
activities, and are they continuous and regular, percentage, etc.
Taxation
• Activities of persons subject to a high degree of control by the
relevant foreign person, such as employees and so-called
“dependent” agents acting exclusively or almost exclusively for an
entity, are properly imputed to it
• Even activities of independent agents have sometimes been
imputed to foreign persons if the relationship between the
independent agent and the foreign person is characterized by some
degree of regularity
Taxation
• Activities of persons subject to a high degree of control by the
relevant foreign person, such as employees and so-called
“dependent” agents acting exclusively or almost exclusively for an
entity, are properly imputed to it
• Even activities of independent agents have sometimes been
imputed to foreign persons if the relationship between the
independent agent and the foreign person is characterized by some
degree of regularity
U.S. Inbound Taxation
> Foreign Corporate Investor
− U.S. Branch vs. U.S. Subsidiary
− 100% U.S. Subsidiary Key issues
»
»
»
»
Profit in the U.S./Repatriation of U.S. Profits
Transfer Pricing - inter-company transactions
Earnings Stripping Rules (Sec 163(j))
Home office support – Management/Oversight Fees
− U.S. Branch – Key issues
» Branch Profits Tax
» Interest Expense deduction
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U.S. Inbound Taxation
> Investment in U.S. Real Property
− Direct and indirect investment in U.S. real estate by
foreign taxpayers is treated as income effectively
connected with a PE in the U.S. (IRC Sec 897)
− Section 897 also includes taxing the gain on the
sale of stock held by non-U.S. persons in U.S.
corporations if such corporation’s main assets are
interests in U.S. real estate (U.S. real property
holding corporations)
− Withholding tax at the rate of 10% on the proceeds
from the disposition of interests in U.S. real estate
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Taxation
• Each state has it its own filing requirement rules!
Taxation
A state will typically have either or both of the following types of
taxes
• Corporate income tax
•
Based on taxable income (“old school” tax)
• Privilege/franchise tax
•
A tax for the right of doing business in the state (“new school” tax)
What determines a state filing requirement?
• Nexus describes the amount and degree of business activity that
must be present before a state can tax an entity's income.
• If a taxpayer has nexus in a particular state, the taxpayer must pay
and collect/remit taxes in that state.
Taxation
A state income tax computation
Federal Taxable
Income
State
Modifications
State Taxable
Income
Tax
Tax Rate
State
Apportionment
Tax Incentives for Business
•
•
•
•
•
US Research and Development (R&D) Tax Credit
Empowerment Zone Credits
Variety of state and local tax credits
Domestic Production Activities Deduction (DPAD)
Facility Review
•
•
•
Cost Segregation
Repairs and Maintenance Review
Section 179D Deduction
Tax Incentives for Business
•
•
•
•
•
US Research and Development (R&D) Tax Credit
Empowerment Zone Credits
Variety of state and local tax credits
Domestic Production Activities Deduction (DPAD)
Facility Review
•
•
•
Cost Segregation
Repairs and Maintenance Review
Section 179D Deduction
U.S. transfer taxes and
ownership of US property
• Planning for globally-mobile/dual-jurisdiction individuals
•
•
•
Frequency of moves increasing
Ease of global asset ownership
Increases in complexity of investments and continued use of strategic
ownership structures
• Impact(s) on US and/or Polish taxation, and estate plans
U.S. transfer taxes and
ownership of US property
• US transfer taxes
•
•
•
Estate tax (at death)
Gift tax (during life)
Generation-skipping transfer tax (either/both)
• Other US taxes
•
“Exit” tax
Estate, gift, and GST taxes post-ATRA
U.S. transfer taxes and
ownership of US property
Year
Estate tax
exemption
Basis method
GST tax
exemption
Top estate/
GST tax rate
Gift tax
exemption
Top gift tax rate
2009
$3.5 million
Step up in basis
$3.5 million
45%
$1 million
45%
-0-
Modified
carryover basis
-0-
0%
$1 million
35%
Step up in basis
$5 million
2010
$5 million
20111
$5 million
20122
$5.12 million
(portable)
Step up in basis
2013
$1 million
Step up in basis
2013
ATRA
$5.25 million
(portable)
Step up in basis
35%
$5 million
$5 million
35%
$5.12 million
(portable)
35%
$1.36 million
55%
$1 million
55%
$5.25 million
40%
$5.25 million
40%
$5.12 million
1 Beginning
in 2011, there was the introduction of the portability of the estate tax exemption between married couples (Note: not applicable to GST tax
or state estate tax exemptions). Under ATRA, portability provision extended.
2 Estate, GST, and gift tax exemptions were indexed for inflation in 2013.
Annual exclusion for 2015 indexed for inflation to $14,000 (up from $13,000 in 2012)
U.S. transfer taxes and
ownership of US property
• Estate tax exemption for non-U.S. person (non-citizen, non-resident)
is $60,000 (versus current $5.43 million)
• Gift tax exemption for non-U.S. person is zero (versus current $5.43
million)
• No marital deduction for estate tax purposes for transfers to nonU.S. citizen spouses (versus unlimited)
• Lifetime gifts to non-U.S. citizen spouses are afforded enhanced
annual exclusion, currently $147,000
• Annual gift tax exclusion of $14,000 per donee per year for presentinterest gifts for both U.S. and non-U.S. persons
Offshore Voluntary
Disclosure Initiative
>
>
>
>
•Program administered by IRS following U.S.
Treasury pursuit of foreign banks (like UBS) who
have U.S. account holders who have not been U.S.
tax compliant
Started in 2009 – current program still ongoing;
Taxpayers offered opportunity to file corrected tax
returns and information disclosures with reduced
penalties;
Compliance reduces risk of criminal penalties;
Cases we have seen were complex due to quality of
information; outstanding tax and penalties in some
cases very significant.
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