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Doing Business in United States - Part I
1. SQUIRE.COMSALT LAKE: 215 SOUTH STATE STREET, SUITE 850 / 801.533.0409 OREM: 1329 SOUTH 800 EAST / 801.533.0409
Doing Business In the United States -
Part 1
Joe Hillstead
Sierra Hoggatt
2. • United States Overview
• Financial Statement Audit Requirements
• Choice of Entities
• Income Tax
• US Trade or Business
• Effectively Connected Income
• Other Taxes
• Transfer Pricing
Agenda
6. United States Overview
Page 6
• Population – 328.2 million
• California – 39.5 million (9th largest economy by itself)
• Texas – 28.9 million
• Florida – 21.4 million
• New York – 19.4 million
7. Significant Impacts on Foreign
Investment in the US
COVID-19 economic impact:
• Small business revenue is down 20% since January
• Only Chapter 11 bankruptcies have increased relative to last year
• New business formations fell off in the spring but are on track to outpace
recent years
• The number of labor force participants not at work quadrupled from January
to April
• The number of people not in the labor force who want a job spiked by 4.5
million in April and has remained elevated
• In April 2020 the U.S. personal savings rate reached its highest recorded level
• Low-income families with children were most likely to experience an income
shock
• In 26 states, more than one in five households was behind on rent in July
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8. Significant Impacts on Foreign
Investment in the US
U.S Presidential Election:
• Joe Biden will be inaugurated as the 46th U.S. president on January
20
• Donald Trump will leave office
• Three branches of government
• Democrats retain the House of Representatives
• With the run-off in election in Georgia, the Democrats flipped
the Senate (50 Democrats and 50 Republicans – with the Vice
President having the tying vote)
• Biden’s tax plan generally includes increases in taxes
• Corporate income tax rate is proposed to increase from 21% to
28%
• Individual income tax rate is proposed to increase from 37% to
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9. • Generally – no financial statement audit requirement
unless the company is listed on a publicly listed
• Debt covenants may require a financial statement audit
• Board of directors may require a financial statement
audit
Financial Statement Audit Requirement
10. • Companies in the US are subject to separate federal, state,
and/or local taxes
• IRS (U.S. federal tax authority) collects income (corporate or
individual) tax, capital gains tax, tax on dividends, interest,
and other passive income, and employee payroll tax
• Additional taxes in the states companies conduct business
in
Tax Overview
12. • In the US, how a business is taxed at the federal level
is dependent on how it is organized
• The following slides summarizes the general tax
treatment of corporate and pass-through businesses
Overview of U.S. Entities
13. • Corporation
• Limited Liability Company
• Partnership
• Branch
• Joint Venture
• Sole Proprietorship
Choice of Entity
14. • Organized under state law. Each state has its own rules for creating and
operating
• May be created under law of one state but have principal place of
business in another state (e.g., Delaware, Wyoming, Nevada)
• Most incorporate in the state where the business intends to locate
operations
• To form – Certificate of Incorporation filed with Secretary of State in the
chosen state
• C corporations taxed at corporate income tax rate separate from
company’s owners (21%). Profits distributed to owners as dividends are
also taxed to the individuals (i.e., twice)
• Separate your personal affairs from company business to prevent
creditors from imposing personal liability
Corporations
15. • Formed by registering with Secretary of State in the state where the company is to be
created
• Governed by the state laws where the LLC is formed
• Must have at least one member (owner)
• More flexibility with management and financing
• Owners have operating agreements which govern operation and organization (as
opposed to articles of incorporation for corporations)
• Can elect to be taxed as a corporation or have income pass through to members
• Many foreign companies investing in the United States prefer to be taxed at corporate
level because LLCs treated as partnership require a mandatory withholding regardless of
whether profits are distributed.
• Member personal liability is limited to investments
Limited Liability Companies
16. • Check-the-box rules allow taxpayers to elect the tax
characterization of legal entities
• LLCs have the default classification of being a
disregarded entity or a partnership depending on the
number of owners
• Eligible to make entity classification election to change
to a corporation for US income tax purposes
Check the Box Rules
17. • Agree with another party to do business together in the US
• Written agreement not required, but advised
• Can be formed by oral agreement or by conduct without filing documents with
states
• General and limited partnerships can be formed
• Partnerships do not have same liability benefits as corporations or LLCs
• Each state and the District of Columbia have their own laws governing the
formation and operation of partnerships
• Partnerships are treated as pass-throughs for U.S. federal income tax purposes
(i.e., their income/loss is passed to their owners who report the income on their tax
returns)
Partnerships
18. • Foreign companies are not required to conduct business in the US through a US
entity
• Unlike a subsidiary – not a separate legal entity of the parent company
• Branch offices are considered to be the foreign company operating in the US
• Branch offices in the US and conducting business in the US are considered to be
doing business in the US
• Although the U.S. has a worldwide income regime, U.S. branches would be subject
to tax on their U.S. sourced income (i.e., a territorial system)
• Liability of foreign company would not be limited to liability just at the branch level.
Not advised for tax and liability reasons
• Intercompany charges like management fees, interest, royalties, etc. may be more
difficult to justify under a branch
Branch
19. • New companies must obtain an employer identification number
(“EIN”) from the IRS
• Required for filing tax returns and to identify the company
• Required before transacting business or opening bank accounts
• Fill out SS-4 form online, by mail, or by fax
• Foreigners without an individual taxpayer identification number
(ITIN) cannot use online services to obtain an EIN
Employer Identification Number
20. • Corporations formed in the US are subject to federal
income tax on their worldwide income
• Taxed on net income (gross income less allowable
deductions)
• The federal income tax rate is 21% (the Biden proposal
increases this rate to 28%)
• Remember state income taxes (average combined rate
= 27%)
Corporate Income Tax
21. U.S. tax law contains the following two-pronged system
for taxing the U.S.-source income of foreign corporations
or foreign persons:
i) U.S. source investment type income – dividend,
interest, or royalty income taxed at 30%. The
business controlling the payments must withhold this
tax
ii) If a foreign corporation is engaged in a U.S. trade or
business within the United States, the effectively
connected income is taxed at 21%.
U.S. System for Taxing Foreign Persons
22. • No definition in the tax statute
• Based on facts and circumstances.
• Must have a profit motive and be considerable,
continuous, and regular activities.
• Isolated activities don’t rise to the level of a trade or
business
• Clerical and collection-related activities aren’t sufficient
for profit-oriented
US Trade or Business
23. • All US-source active income earned by a non-US person
• Certain kinds of income are treated as ECI if they pass either of
the 2 following tests:
• Asset-Use Test : The income must be associated with US
assets used in, or held for use in, the conduct of a US trade
or business
• Business Activities Test: The activities of that trade or business
conducted in the United States are a material factor in the
realization of the income
Effectively Connected Income
24. • Certain types of income generated through a US office can be
effectively connected income
• Rents and royalties for use of intangible property outside the
US derived in the active conduct of a US trade or business
• Foreign dividends or interest derived in active conduct of
banking in the US
• Gain from the sale outside of the US of inventory and
property held for sale when the sale is made through a US
office or fixed place of business
Foreign Source Income can be ECI
25. • Tax Cut and Jobs Act revised the 35% corporate rate
on effectively connected income to a flat rate of 21%
beginning January 1, 2018
• Certain US-source income not effectively connected
with non-US corporation’s business continues to be
taxed on a gross basis of 30% (investment-type
income: dividends, interest, royalties)
Corporate Income Tax for Non-US Corporations
Engaged
in US Trade or Business
26. Overview of U.S. Sales Tax
• 45 state currently have a sales/use tax
• Average US sales tax rates
1981 = 6.5%
Today = 8.5%
• Imposed on the end consumer – unlike GST/VAT
• Transaction taxes (transaction taxed, not goods/services)
• Trust fund taxes
28. • South Dakota v. Wayfair (June 21, 2018)
• Physical presence vs. economic presence
• Generally $100,000 or 200 transactions
Overview of U.S. Sales Tax
29. • Capital gains or losses are the gains or losses that a
company experiences on the sale of a capital asset
(investment type)
• If the selling price is higher than the owner’s basis in that
asset, a capital gain results
• After 2017, corporate taxable income is subject to a flat 21%
rate and net capital gains included in taxable income also
subject to the 21% rate
Capital Gain Taxes
30. • Compensation paid to employees for services
performed in the US creates wages subject to:
• Federal income tax withholding
• Federal insurance contributions act (FICA)
taxes
• Federal unemployment tax (FUTA)
Payroll Taxes Affecting Employers
31. • If no exemption applies, foreign employer must withhold
social security tax equal to 6.2% of wages for the employee
and pay 6.2% for the employer up to $137,700 of wages in
2020
• Medicare tax is 1.45% for the employee and 1.45% for the
employer. No cap. Additional .09% Medicare tax on wages
over $200,000
• FUTA tax is on the employer only and ranges between .6%
and 6%, depending on the credits for state unemployment
taxes, on the first $7,000 of wages paid to an employee
Payroll Taxes
32. • Foreign employer must withhold, make timely deposits,
and file quarterly and annually the employment tax
returns, Forms 941 and 940, and annual wage
statements (W2 and W3s)
Payroll Taxes
33. • Corporate officers and other employees traveling to the US
for even a short period of time may generate employment
tax liabilities
• Wage withholding requirements still apply if the employees
don’t acquire a US social security number
• To obtain a possible exemption from US-source wages from
withholding, track travel days within the US and keep
documentation
• Could also have state income tax, state unemployment tax,
workers compensation insurance tax, and other state level
taxes occur
Payroll Taxes
34. • For employees sent to the US by a foreign employer
• Amounts less than $3,000 and visits of less than 90
days
• Certain treaties may eliminate the requirement to
withhold income taxes (but generally not the need to
report) if the necessary documents are gathered
De Minimis Federal Income Tax Exemption
35. • Foreign companies doing business in the US may not
shift profits to foreign parent to avoid taxes
• Transfer pricing occurs when foreign parent company
charges US subsidiaries unreasonably high prices for
goods and services to move pre-tax money overseas
• IRS auditing more inbound companies – focus on
intangible and financing transactions and on permanent
establishments
Transfer Pricing
36. • Global Intangible Low-Taxed Income
• Shareholder’s pro rata share of CFC’s total net income
less 10% return on tangible assets
• Full amount include in income, reduced by 50%
deduction in tax years 2018-2025 and 37.5% after
2025
• Corporate taxpayer can claim 80% credit of the CFC
foreign taxes with GILTI
GILTI
37. • Controlled foreign corporation – corporate entity registered
and conducts business in a different jurisdiction or country
than the residency of the controlling owners
• More than 50% of the stock is owed by US Shareholders
• Rules designed to reduce tax evasion and abuse of tax
shelters
• Way to tax US business owners on their income from foreign
corporations
• File Form 5471
CFC
38. • Section 59A of the IRC
• BEAT rate is lower than regular corporate tax rate and BEAT
is imposed only to the extent it exceeds regular tax liability
so taxpayers without significant amounts of base erosion tax
benefits wouldn’t be subject to additional tax
• Taxpayer with taxes significantly reduced through tax credits
could be subject to tax under BEAT even when the taxpayer
doesn’t have significant amounts of base erosion payments
Base Erosion & Anti-Abuse Tax
39. Thank You!
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