With the rapid growth of ecommerce, cross-border buying and selling is more accessible than ever before, and businesses can now reach consumers far beyond their national borders. While selling in the U.S. is often a strategic growth opportunity for international companies, businesses need to be knowledgeable about navigating a complex U.S. tax landscape.
From corporate tax rates to compliance requirements, there are several key considerations you should be aware of if your global company is expanding, or selling, in the U.S. Changing rules and regulations, such as Pillar Two, also continue to impact global business.
1. Select the Appropriate Global Entity Structure
Picking an entity structure to support overseas operations is critical for tax planning purposes. A foreign company may be considered a:
- Corporation
- Limited Liability Company (LLC)
- Unincorporated Branch
- Disregarded Entity
- Controlled Foreign Corporation (CFC)
- Uncontrolled Foreign Corporation
- Foreign Partnership
Whether you opt for the common corporation entity, or choose an LLC or partnership structure, each type has its own tax implications. Before deciding, consider factors such as liability protection, ease of administration and tax treatment.
Additionally, structures typically come with specific tax obligations at the federal, state and local levels. For example, LLCs are not subject to income tax while most states impose an income tax and franchise tax on corporations registered in their jurisdictions.
2. Understand State, Local and Sales Tax
Non-U.S. companies expanding into the United States may still be responsible for state income taxes in their state of incorporation, as well as other states. When a company has people or property in a state, even temporarily, a state tax nexus is formed, meaning the company is subject state income tax in multiple states. State income tax base can also vary widely from state to state. Global companies should also assess potential sales tax obligation.
3. Monitor Global Tax Provisions and Tax Reform
Many countries now support a “two-pillar” solution to global tax reform. In addition to other reform components, Pillar Two ensures large multinational companies pay a minimum 15% effective tax on worldwide income, regardless of where they are headquartered.
While numerous countries, including Canada, the United Kingdom and the European Union, have already implemented Pillar Two legislation, the U.S. has yet to introduce these new laws. This means the U.S. still applies international tax rules, including Global Intangible Low-Taxed Income and Foreign-Derived Intangible Income.
Global Intangible Low-Taxed Income (GILTI)
GILTI is applied to the revenue of non-U.S. companies, or Controlled Foreign Corporations, and requires businesses to pay a minimum tax on intangible assets earned overseas. When referring to GILTI, it is important to mention that the U.S. is a holding company location with unique downward constructive ownership rules that can subject a global company’s foreign affiliates to U.S. tax jurisdiction, even if they are not directly owned by their U.S. business.
Foreign-Derived Intangible Income (FDII)
FDII offers a lower U.S. tax rate of 13.125% to businesses as an incentive to sell products and provide services to foreign persons.
Internal Revenue Code (IRC) Section 367
Restrictions under IRC Section 367 serve as an exit tax on assets leaving the U.S.
As tax reforms continue to evolve, proactive planning and adaptation are essential to maintain compliance and optimize outcomes.
4. Address Compliance With International Tax Treaties
Many countries, including the U.S., have tax treaties in place to prevent double taxation and to promote cross-border trade and investment. Under these treaties, residents of foreign countries may be taxed at a reduced rate or are exempt from taxes. Most U.S. tax treaties have stringent qualification requirements. Therefore, global companies should assess their eligibility for treaty benefits and ensure compliance with treaty provisions to avoid unnecessary tax liabilities. Many global companies are surprised to learn of the unique and stringent qualification requirements of most U.S. tax treaties.
Consequently, careful consideration should be given to structuring one’s U.S. inbound investment structure. In addition to tax treaty qualification there are compliance and reporting requirements to follow under the treaties in order to be eligible and avoid penalties. Requirements can include reporting foreign income and submitting specific forms, such as:
- Form W-8BEN
- Form 8233
- Form 8833
5. Utilize Available Tax Incentives and Credits
The U.S. tax code does offer various incentives and credits to encourage business investment and growth. Global companies should explore opportunities to reduce tax burden through incentives such as:
- Research and Development (R&D) Credits
- Investment Tax Credit (ITC)
- Deductions for Qualified Business Expenses
- Job Creation or Retention Programs
- Export-Related Tax Benefits
Seek Professional Tax Advice
Navigating global operations and international expansion can be complex and requires multinational companies to have a strong cross-border tax strategy focused on tax minimization, business structure, mergers and acquisitions, proactive tax planning and regulatory compliance.
Cherry Bekaert’s international tax professionals align global business strategies to desired outcomes with successful international strategies by providing an array of international tax planning, compliance and advisory services. Our professionals have extensive multi-jurisdictional and cross-border transactions experience in both strategic tax planning and implementation.
With more than 70 years of international tax experience, we understand the complex and changing tax landscape. We can help your company uncover answers to numerous tax questions and decisions, including:
- Does the business need to form a legal entity?
- Where to locate intellectual property?
- How to structure a transaction to minimize foreign taxes?
- What are the reporting requirements for a U.S. company doing business in a foreign country?
- What are the reporting requirements for a foreign company doing business in the U.S.?
