10 Items to Consider When Expanding to the U.S.
If you have made the decision, or are in the process of making the decision, to expand your operations to the U.S., having the knowledge required to start your business correctly is extremely important. The decisions made now will set the course for the future. To help make the process a little less complicated, and to help avoid costly surprises, review these 10 key considerations when expanding to the U.S.
1. Planning for Location and Tax Incentives
When deciding where to locate your U.S. operations, it’s important to look at available tax incentives: federal, state and local. These incentives may depend on the type of industry, the number of potential new jobs to be added or the selection of a specific location within a state. Because the application for many state incentives should be submitted prior to expansion, it is important to talk to state and local economic development groups during the planning stage.
2. Planning for Employees
U.S. employment needs should be determined early in the planning stage because finding the right people for your U.S. expansion is critical. While many foreign-owned companies in the U.S. start by sending a few key employees from the parent company or a global affiliate, there may eventually be a need to hire U.S. employees.
Advance planning can help avoid surprises in meeting employment needs and budgeting for the total cost of the workforce. Typical salary ranges and the type and cost of customary employee benefits in the U.S. can be very different from those found in foreign countries. There may also be recruiting costs associated with finding the right employees for certain key positions. You will want to factor these U.S. employment-related costs into your U.S. business plan.
3. Selection of the Entity Structure
The choice of U.S. entity structure determines how your company will be taxed and is a significant decision to be made when establishing a U.S. entity. The most common entity types used by businesses establishing in the U.S. are corporations and limited liability companies (LLCs). If a business does not file the proper paperwork to select the entity type for U.S. tax purposes, default regulations will apply. While this may not sound like a problem, depending on the ownership structure, the default entity type could have costly tax implications and reporting requirements.
4. Obtaining a US Tax Identification Number
Once you establish a legal entity in the U.S., an Employer Identification Number (EIN) must be obtained from the Internal Revenue Service (IRS). An EIN is needed to open a U.S. bank account and to set up U.S. payroll.
If a responsible party for the company can provide a U.S. Social Security Number (SSN), an EIN may be obtained immediately from the IRS website. If there is no such person, a signed Form SS-4 must be faxed to the IRS to request an EIN. This process takes a minimum of five business days.
5. Meeting Registration Requirements
State and local registrations may be required when your business is established in the U.S. Registrations are unique to each jurisdiction, so it is important to understand the requirements applicable to the locations where your business will operate. The typical registrations you may need include the application for authority to conduct business in a state in which you are not incorporated or organized, payroll registration in the states in which your employees are located, and registrations for the types of taxes imposed in a state in which you do business, such as income tax, franchise tax or gross receipts tax.
Depending on the type of business conducted in a state, a registration to collect and remit sales tax from customers in the state may be required. Other state and local permits and licenses may be required in advance of beginning certain types of operational activity.
6. Selection of the Accounting System
Your newly established U.S. entity will need an accounting system to maintain its books and records. Considering the initial operational and group reporting needs and the anticipated growth of the company is key to establishing the right system from the start. Many cloud accounting applications are available to automate transactional activity and synchronize with a general ledger package. Additional applications may be beneficial for time and expense reporting, job costing or advanced inventory tracking.
Other factors to consider include determining the users involved in each application, the location and language of the users and the training needed. Differences in currency and generally accepted accounting principals used by your U.S. company and the foreign parent company for group reporting also impact the selection and set up of an accounting system in the U.S.
7. Payroll and Employee Taxation
When your U.S. company has employees, it will be required to pay payroll taxes and meet specific employer responsibilities. To manage the U.S. payroll requirements, it is customary to use a payroll company to process payroll, withhold and remit taxes and prepare the quarterly and annual payroll tax returns.
Social Security and Medicare taxes are paid equally by both the employer and the employee. However, if an employee is sent from the foreign parent company to work in the U.S., the employee may be able to opt out of the U.S. social tax system with documentation of continued coverage in the foreign country.
The U.S. imposes tax on a foreign individual based on their U.S. residency status. Once a person is deemed a resident, they become subject to tax on their worldwide income in the same manner a U.S. citizen is taxed. It is important for these employees to understand how transactions in their home country could impact their U.S. taxes. These employees need to receive proper tax advice to ensure they meet their individual U.S. tax obligations.
8. Meeting U.S. Reporting Requirements
There are unique reporting requirements applicable to U.S. entities with foreign ownership. Failure to comply with these reporting requirements could result in significant penalties.
The U.S. Department of Commerce, Bureau of Economic Affairs requires foreign direct investment in the U.S. to be reported for statistical purposes. A Form BE-13 Claim for Exemption must be filed for any acquisition, establishment or expansion by a foreign entity in the U.S. when the cost of the transaction is $3 million or less.
A U.S. corporation must report direct and indirect foreign ownership, as well as transactions with foreign related parties, with its federal income tax return.
A U.S. company making certain payments such as interest, dividends, rents and royalties to related or unrelated foreign parties may be required to withhold U.S. income tax and file an annual report of the transactions.
9. Global Transfer Pricing
If your U.S. company will be engaging in transactions with foreign related parties, it will be important to understand the transfer pricing regulations in the U.S. and other countries of the global group. The U.S. requires that intercompany transactions are priced using arm’s length or fair market value pricing. Certain documentary evidence is required to support intercompany pricing. The U.S. taxing authorities may impose significant penalties if transfer pricing agreements are not arm’s length. Common transactions which require analysis include sales to/purchases from the parent company, management fees, technology fees, royalties and commissions.
10. Seeking Professional Advice
Once the decision has been made to expand to the U.S., you will want to seek the advice of accounting, tax and legal professionals who are well-versed in the unique needs and requirements of a foreign owned U.S. entity.
Common legal advice relates to entity formation, labor laws, intellectual property protection, insurance requirements, visa matters and employment, loan and intercompany agreements.
Having the right accounting and tax advice from the beginning can help you build a realistic business plan, including the tax and employment costs of doing business in the U.S., as well as provide a partner to help guide you through the required steps and registrations effectively. Early guidance and support in setting up an effective accounting and reporting system and planning intercompany transactions and pricing can save time, money and extend your U.S. resource for years to come.