Rose Report: Issue 7

Setting Up Shop in the U.S.

At the World Economic Forum in Davos last month, UK Prime Minister David Cameron railed against foreign companies who don’t pay what he considers their “fair share” of taxes in his country. Tax-dodgers, he declared, need to “wake up and smell the coffee.”

Though focused on the United Kingdom, Cameron’s sentiments reflected a broader attitude held by policymakers around the world, including in the United States. With the US economy still rebounding from the recession and the national debt among the country’s most contentious political issues, American legislators and tax enforcers are increasingly fixated on regulating the tax compliance of foreign companies operating on our shores. The last thing the IRS wants is to allow international organizations to set up shop, send all the profit they earn back to their home countries, and avoid paying any US taxes on their earnings.

This is just one challenge confronted by international companies that want to do business in the United States. This ever evolving environment makes it essential for them to ensure they’re in compliance with federal, state and local tax laws. They also have to pay close attention to immigration laws, and even post-9/11 homeland security issues. To operate successfully and legally within the United States, it’s a necessity to work closely with American accountants and attorneys.

A common solution for an organization that wants to operate in the United States without subjecting all of its foreign financials to US oversight is to set up a US subsidiary. Using this legal structure, the foreign-based parent company can isolate all of its US transactions within the subsidiary. When done correctly, the IRS will be able to tax the subsidiary, but won’t have nexus over the parent. There are many complex rules, known as transfer pricing regulations that police the transactions between a parent and a subsidiary. The IRS and equivalent tax authorities in other countries are becoming more aggressive in regulating this area to ensure companies are paying—as David Cameron said—”their fair share.”

The events of September 11, 2001 and the subsequent passage of the USA Patriot Act also led to stricter oversight of international companies and investors that want to establish a presence in the United States. For instance, something as basic as opening a US bank account can now be quite complicated for individuals who are not American citizens. Rose Financial Services, which has clients across Europe, South America, Asia, Australia, and Canada, is experienced in helping clients find creative solutions in these types of situations. One possible way to navigate such hurdles is for the client to work with an international bank that has branches in both the US and its native country.

Once a business has successfully established operations in the US, it must be sensitive to immigration laws. One frequent conundrum arises when the US subsidiary of a company wants to contract with a foreign consultant. Even though the consultant isn’t an employee of the subsidiary, he or she may require a visa. It’s important for the US subsidiary to carefully assess which type of visa will be most appropriate before bringing the consultant into the country. Consultants from different countries may be subject to different rules. Canadian and Mexican contractors, for instance, have more freedom to work within the United States through TN visas, granted under the North American Free Trade Agreement.

Despite the complexities involved, there is no question that expanding the arena of international companies in the United States can be beneficial to both foreign investors and the US economy. Attracting new employers from abroad helps to grow domestic job opportunities. And due to the strength of the American market, establishing a US presence often boosts the credibility of organizations in their home countries and around the world. Says RFS President Ted Rose: “No matter what you hear about how great other markets will be one day in the future, the US is truly the best economy in the world in terms of transacting business today.”