This article is part of a series, “Navigating the Complexities of Setting Up a Business in the USA”. View all the articles in the series here.
Key Takeaways:
- Early tax planning is crucial to avoid costly mistakes and improve your U.S. market entry.
- Carefully evaluate entity structure, supply chain, and transfer pricing strategies.
- Engage with experienced legal and tax professionals to guide your U.S. expansion.
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Foreign direct investment (FDI) in the United States continues to grow, underscoring the country’s appeal to global businesses. However, this influx of investment also highlights the critical need for thorough pre-arrival tax planning. Proper planning is essential for navigating the complexities of the U.S. tax landscape and achieving a smooth and successful entry into the U.S. market.
Importance of Planning Before Entering the U.S. Market
The growing interest in the U.S. market among international investors makes it even more crucial for businesses to engage in comprehensive tax planning before entry. The U.S. tax system is multifaceted, with multiple layers of federal, state, and local taxes — each with its own set of regulations.
For foreign businesses, understanding these complexities early on is vital for mitigating tax liabilities and keeping compliance. Without a robust pre-arrival tax strategy, your company may face unexpected tax burdens, penalties, and operational challenges that could hinder your success in the U.S.
Checklist for Pre-Arrival Planning
Before entering the U.S. market, your business should follow a comprehensive checklist that addresses critical tax and operational considerations. Here are some of the key steps:
Decide the Appropriate Entity Structure
- C corporation or LLC (limited liability company): Given the ongoing growth in FDI, selecting the right business entity is crucial to capitalizing on the favorable investment climate in the U.S. A C corporation may be beneficial for companies looking to raise capital through equity, while an LLC offers flexibility and potential tax advantages.
- Branch, subsidiary, or no taxable presence: Foreign businesses must decide whether to operate as a branch of the parent company or set up a subsidiary in the U.S. Each choice has different tax implications and operational challenges. Another option, if planned appropriately, could be to sell in the U.S. without creating a taxable presence. This can be achieved by conducting limited activities or relying on a U.S. income tax treaty to avoid creating a permanent establishment in the U.S.
- Joint venture or partnership: Some foreign businesses choose to partner with an existing American company to more quickly pierce the market. This option can provide a more systematic and flexible path to U.S. market entry.
Analyze Supply Chain Implications
- Customs duties and tariffs: Understand the impact of U.S. customs duties and tariffs on imported goods. Proper supply chain planning can help minimize costs and avoid delays.
- Logistics and distribution: Evaluate the most efficient logistics and distribution channels for your products in the U.S., considering factors such as warehousing, shipping costs, and regional demand. With FDI driving increased competition, improving your supply chain can provide a critical advantage.
Develop a Transfer Pricing Strategy
- Compliance with Internal Revenue Service (IRS) guidelines: Price intercompany transactions according to arm’s length principles to follow IRS transfer pricing regulations. This is especially important for businesses with significant cross-border and/or cross-state transactions.
- Documentation requirements: Keep thorough documentation of transfer pricing policies and transactions to avoid penalties during an IRS audit.
Understand State and Local Tax Obligations
- Nexus considerations: Determine where your business has nexus for sales and use tax, income/franchise tax and other tax — whether through physical presence, economic activity, or other factors — since this will dictate your state and local tax filing obligations.
- Sales tax compliance: Register for sales tax collection in jurisdictions where your business has nexus and follow state-specific sales tax regulations.
Address Benefits and Payroll Requirements
- Health insurance and retirement plans: Understand U.S. regulations on employee benefits, including health insurance and retirement plans, which may differ significantly from those in other countries.
- Payroll taxes: Prepare for U.S. payroll tax obligations, including Social Security, Medicare, and federal and state unemployment taxes.
Engaging with Legal and Tax Professionals
Working with experienced legal and tax professionals is critical to successfully navigating the complexities of the U.S. tax system. These professionals can provide you tailored advice based on your specific business needs, helping you avoid common pitfalls and improve your tax strategy.
How to Choose the Right Advisors
- Experience and knowledge: Look for advisors experienced in U.S. tax law, particularly those specializing in international and state and local tax issues who have a deep understanding of the industries in which you operate.
- Proven track record: Seek out professionals with a proven track record of helping foreign businesses successfully enter the U.S. market. Client testimonials and case studies can be valuable indicators of their capabilities.
- Collaborative approach: Choose advisors who will work closely with your in-house team and your other consultants to develop a cohesive strategy that addresses all aspects of your U.S. market entry.
Position Your Business for a Seamless U.S. Market Entry
With the U.S. continuing to attract significant FDI, your business must be well-prepared to enter the market. Pre-arrival tax planning is key. By carefully considering entity structure, supply chain logistics, transfer pricing, and state and local tax obligations, you can position your business for long-term success in the U.S.
How MGO Can Help
Entering the U.S. market can be complex, but you don’t have to navigate it alone. Our assurance, tax, and consulting professionals — including International Tax and State and Local Tax teams — are here to guide you through every step of the process.
Reach out to our team today to learn how we can help your business plan strategically to achieve a smooth U.S. market entry.