Doing Business in United States - Enterprise Ireland · Doing Business in United States 5 October...

Doing Business in United States

5 October 2015

Jim AlajbeguPartner

Firm Leader - International

Tax

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InternationalOur service leaders

Our international service leader

Personal and confidential

Baker Tilly Virchow Krause

International Tax Service Leader

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Our work with international companies

> 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



International Audit Services

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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


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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

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 Assessment of importance

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.

Empirical evidence points to a positive correlation between protection of IP and economic growth

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.


– cont.Key location factors Description Assessment of importance

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

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

Potential productivity increase

for their company

Empirical evidence points to a positive correlation between protection of IP and economic growth


– cont.Key location factors Description Assessment of importance

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 thansuch legislation in most developed economies.

Where FOEs Are Located

Source: The Brookings Institution

Where FOEs Are Located

Source: The Brookings Institution

No

rth

east

Th

e M

idw

est

So

uth

West

TOP FIVE INDUSTIES PER REGION

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 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.


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.


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).


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.


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

> 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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U.S. Inbound Taxation

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

State Apportionment

Tax RateTax

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



• 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

YearEstate tax exemption

Basis methodGST tax

exemptionTop estate/

GST tax rateGift tax

exemptionTop gift tax rate

2009 $3.5 million Step up in basis $3.5 million 45% $1 million 45%

2010

- 0 -Modified

carryover basis- 0 - 0%

$1 million 35%

$5 million Step up in basis $5 million 35%

20111 $5 million

Step up in basis

$5 million

35%

$5 million

35%20122 $5.12 million

(portable)$5.12 million

$5.12 million(portable)

2013 $1 million Step up in basis $1.36 million 55% $1 million 55%

2013 ATRA

$5.25 million(portable)

Step up in basis $5.25 million 40% $5.25 million 40%

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)





• 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 non-

U.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 present-

interest 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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