International Businesses

Global Businesses: Navigating US Tax Rules

Posted on June 1, 2022 by

Eric Lin

Eric Lin

Sue Tuson

Sue Tuson

Share This

The US has some of the most complicated tax rules around the world. Minimizing the global effective tax rate while remaining compliant is always the goal for companies doing business globally. Here are some of the easy-to-miss complexities in US tax that business owners should know.  

Transfer Pricing 

With high product consumption, the US imports enormous quantities of products from foreign countries. Many companies operate manufacturing centers in other countries and set up wholesale or distribution centers in the US. The US company usually buys the products from the foreign related party and sells to its customers in the US. In this case, the higher the cost paid to the foreign related party, the lower the profits that will remain in the US. Conversely, the lower the cost paid to the foreign related party, the more profits that will remain in the US. The price charged between related parties is called the transfer price. Because the transfer price can be manipulated to control the profits realized in a jurisdiction which, in turn, impacts the tax liability, there are rules requiring that the transfer price be at arms-length. 

The arms-length principle requires the price of transactions between related parties should be in line with the price of transactions between independent parties. In the event of an IRS (Internal Revenue Service) audit, the agent may ask for the transfer pricing documentation to confirm that the price between related parties met the arm-length principle. 

Foreign Tax Withholding 

For US companies who make payments to foreign persons including entities and individuals, the US government has a right to tax a foreign person’s US sourced fixed determinable, annual, or periodical (FDAP) income. Common types of FDAP income include the rents, dividends, interest, royalties, and other personal services. The source of income depends on the type of income. For example, source of service income is the place where the personal service is performed, source of interest income is the residence of the payer, source of rental income is the location of the property.  

A US payor must collect withholding tax and remit it to the IRS in the case it is applicable. If the tax is not properly withheld, the U.S. payor (withholding agent) will be liable for the cost of non-compliance, including withholding tax, interest, and penalty. The statutory rate of withholding is 30%. The statutory rate may be reduced or eliminated by claiming tax treaty benefits. Therefore, it is important for the US payor to understand the withholding taxes requirements and stay in compliance. 

Federal & State Income Tax Filings  

When selecting the type of legal entity that will be used to conduct business in the US, it is important to understand the differences in how any types are taxed. There are corporate entities and certain entities that can elect to be treated like corporations that file income tax returns and pay taxes at the corporate entity level. There are limited liabilities companies and partnerships that pass income to its owners who pay tax at the individual level. Pass through entities would require the business owner to obtain a US tax identification number and file tax returns in the US. 

Besides paying Federal income taxes, the company will have state income tax compliance requirements. As the US has 50 states, each has its own tax rules and regulations. State income tax filing requirements are determined based on the “nexus,” or connection. Every state will set its own nexus threshold and once the threshold is met businesses are required to file state income taxes with that state. State income tax filings are not based on where the company is incorporated; therefore, reviewing the company’s state activities including employees, customers, inventory, fixed assets, and offices annually is highly recommended. 

Sales & Use Tax 

The US does not have a VAT (Value Added Tax) system, instead most states impose a sales/use tax system. Most states impose a sales/use tax on businesses when they exceed certain sales thresholds in the state. These taxes are on the gross sales price charged to customers. It is important for all businesses selling to US customers to understand when they are required to collect these taxes from their customers and remit them to the state(s). 

Employees or Independent Contractors 

The classification between employees and independent contractors may not be clear in the US. For employees, the employer is responsible for withholding and remitting the employers share of payroll taxes 6.2% of social security and Medicare tax of 1.45% along with the employees share of payroll taxes at the same rates. The employer is also responsible for issuing a W-2 form annually. Independent contractors are considered self-employed and, as such, are required to pay 15.3% of self-employment taxes. The payor is responsible for issuing a 1099 form to payees. As employees or independent contractors have different filing requirements, the taxpayer needs to review carefully. The IRS considers 20 factors when determining employment. The facts generally fall into three categories: 

  1. Behavioral Control: Does the employer control (or have the right to control) what the worker does, and how the worker completes his/her job through instructions, training, or other means? 
  2. Financial: Are the business aspects of the worker’s job controlled by the payer? This includes things like how the work is paid, whether expenses are reimbursed, and who provides tools and supplies. 
  3. Relationship of the Parties: Are there written contracts or does the worker receive employee-type benefits? Will the relationship continue after the work is finished? Is the work performed a key aspect of the employer’s business? 

Continue the Conversation 

Understanding US tax requirements for your global business can be complex. Please contact us today to learn more.  

Eric Lin

Manager

Eric is core to the firm’s China practice and is skilled & passionate about sharing his knowledge to help closely held companies expand.

Sue Tuson

Shareholder

With her advanced technical skills and experience with complex global businesses, Sue is known to be a creative & responsive international tax advisor.

Related Insights

Digital Advisory Services

Using Standardization for Anything-But-Standard Results

Posted on June 29, 2022 by

Elly Mioduszewski
Running your business is hard, but how it’s run can be made easier. Implementing standardized work processes can provide you and your team with more time to look at results so you can determine where to go next—rather than spending unnecessary time capturing and correcting routine activity. 

Tax & Assurance Guidance

Understanding Your Cash Flow is Important-Here’s Why

Posted on June 24, 2022 by

Dave Van Damme
Managing cash flow in a business should go far beyond ensuring that you have funds available to pay your current bills. While that’s a threshold every new business should meet, developing deeper cash flow management skills is necessary to scale your business and prevent unnecessary stress. 

International Businesses

Teresa Gordon Selected for Select USA Mentorship Program 

Posted on June 24, 2022 by

Clayton & Mckervey
C&M Shareholder Teresa Gordon will be participating in SelectUSA’s Select Global Women in Tech (SGWIT) Mentorship Network.

Sign up for our newsletters

Get business and industry-specific news and knowledge straight from our consultants and accounting specialists.

The Sound of Automation Podcast

The Sound of Automation Podcast

Industrial automation businesses are the driving force behind Industry 4.0, and Clayton & McKervey is here to help.

Insights & Perspectives

Using Standardization for Anything-But-Standard Results

Running your business is hard, but how it’s run can be made easier. Implementing standardized work processes can provide you and your team with more time to look at results so you can determine where to go next—rather than spending unnecessary time capturing and correcting routine activity. 

Read More

The Sound of Automation Podcast

Industrial automation businesses are the driving force behind Industry 4.0, and Clayton & McKervey is here to help.

Skip to content