Doing business in the United States

Guiding your global business in the United States

A year after enactment of the new comprehensive US income tax law, businesses operating in the United States continue to be faced with numerous questions on how to interpret and apply the law, amidst the release of newly proposed regulations. Trade negotiations and developments also are garnering headlines in the ever-evolving business landscape in the United States.

Doing business in the United States guides you through the current state of US tax law with descriptions of relevant provisions, updates to prior law, and numerous practical insights. In addition to providing the basic tax implications for business operations in the United States, we share our observations regarding the tax consequences for US operations of global businesses. We also provide our Tax readiness insights to address issues raised by the 2017 tax legislation.

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We share our observations for providing the basic tax implications for business operations in the United States and the tax consequences for US operations of global businesses. We hope our guide helps you navigate these exciting, historic times.

Considerations to help you do business in the US

When it comes to your global business and investment in the United States, we can help global global companies to:

Translating tax into your business reality

Tax reform continues to evolve in 2019 as additional regulations are issued. The Treasury and IRS issued numerous proposed and final regulations during the last quarter of 2018 and the first quarter of 2019. These new rules clarify the provisions of the major US tax change of 2017 and may have significant implications for your business operations in the United States. As a company investing in the US, you will need to:

  • understand the new regulations
  • assess how to apply them to your facts and circumstances through modeling, and
  • calculate the impact on your global operations.

Some notable regulations with potentially significant implications for your US operations include:

  • base erosion and anti-abuse tax (BEAT) that targets certain payments made to foreign affiliates by imposing an additional corporate tax liability
  • interest expense deduction limitations that limit the amount of interest expense that a company can deduct
  • new ‘hybrid’ financing rules denying deductions for certain interest and royalties paid to related ‘foreign’ persons
  • global intangible low-taxed income (GILTI) that requires US shareholders to include certain low-taxed income of CFCs
  • foreign tax credit (FTC) rules that help prevent double taxation on foreign earnings previously taxed by a foreign government
  • foreign-derived intangible income (FDII) that creates a deduction for companies that hold their intellectual property within the United States.

Read our Doing business in the United States to learn more about how these tax law changes may affect your operations in the United States.

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How do you tackle 50 states

Do you know the new implications of indirect taxes on your business?

Following the US Supreme Court’s historic South Dakota v. Wayfair decision, states no longer are restricted from imposing sales tax collection responsibility only on entities with an in-state physical presence. This decision could have a significant impact on entities making sales into US states, and potentially imposes unique burdens for US inbound companies regarding both sales and income taxes imposed by US states.

How certain are you of your state income tax liability? States continue to pass legislation in 2019 adopting or rejecting certain provisions of the 2017 federal tax reform. You need to stay informed about which states have determined how they will follow federal tax reform and which states are still in the decision-making process. States conform to federal tax law:

  • as of a certain date
  • automatically or
  • pick and choose which provisions to adopt.

Did you know that US tax treaties generally do not apply at the state level? While your business activities may not amount to a permanent establishment in the US under a treaty, you may have ‘nexus’ in a particular state. Nexus allows a state to tax a corporation—and the threshold can be quite low, including mere physical presence. Does your activity in various states create nexus and subject you to tax?

Read our Doing business in the United States to learn more about how these tax law changes may affect your operations in the United States.

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How can you finance your US operations?

The 2017 tax reform legislation made important changes that affect financing of your US operations. Among the most prominent of these changes are new limitations on interest expense deductions, new anti-hybrid rules, and the new ‘base erosion and anti-abuse tax’ (BEAT).

Three provisions in particular affect, and likely increase, the cost of financing US operations.

1) The interest expense deduction limitations found in Section 163(j) apply to all taxpayers operating in the US for both related-party and third-party debt. Section 163(j) limits a taxpayer’s US net business interest expense deduction to the sum of:

  • the taxpayer’s business interest income
  • 30% of the taxpayer’s adjusted taxable income (roughly equivalent to earnings before interest, tax, depreciation, and amortization, or EBITDA, through 2022 and to EBIT thereafter).
  • the taxpayer’s floor plan financing interest for the tax year.

Note: These rules bring the US approach to interest deduction limitations more in line with the OECD approach.

2) Section 267A denies a deduction for interest (and royalty) payments paid or accrued by a US corporation to a related ‘foreign’ party pursuant to a ‘hybrid transaction’ or made by or to a ‘hybrid entity’ if (i) there is no income inclusion by the ‘foreign’ related party for ‘foreign’ purposes (based on country of residence), or (ii) the related party is allowed a deduction for ‘foreign’ purposes. Under proposed regulations that may be finalized with a retroactive effective date, certain other types of hybrid arrangements also may result in denied deductions. Note: these rules are intended to be consistent with the BEPS anti-hybrid approach.

3) The BEAT, found in Section 59A, is imposed on certain deductible payments made to foreign related parties based on the amount of base erosion benefit received. The BEAT rate is 5% for tax years beginning in 2018, 10% for tax years beginning in 2019, and 12.5% for tax years beginning after 2025. Importantly, the BEAT rules include reporting requirements for such payments, and the penalties for non-reporting of such payments (as well as previously required reporting of related-party payments) have been increased substantially from $10,000 to $25,000 for each failure to timely report transactions.

Stock or debt? Section 385 regulations address whether an interest in a related corporation is treated as stock or debt, or part stock and part debt. These regulations could apply to many types of related-party debt transactions that routinely arise in the ordinary course of operations. That means they could have a profound impact on a range of modern treasury management techniques, including cash pooling, by characterizing related-party financings as equity, even if they are in form ordinary debt instruments. While the Treasury Department has issued proposed regulations that would revoke the documentation rules in the Section 385 regulations.It is unclear at this time what the future holds for the remainder of the Section 385 regulations.

What’s a company to do? Continue preparations to achieve compliance, but stay focused on the potential for some (or even dramatic) changes affecting the application or even existence of these regulations. IRS focus on whether an instrument is debt or equity is likely to continue, regardless of the future of these regulations.

Focus, focus, focus… The IRS currently is devoting more resources to auditing global companies in the United States, especially regarding financing transactions. Demonstrating results consistent with the arm's-length standard will continue to be vital.

Read our Doing business in the United States to learn more about how these developments may affect financing of your operations in the United States.

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How do you set up a tax department in the US?

Defining success for tax — Each US tax department must identify the factors that determine success for the organization and establish benchmarks and objectives to measure performance related to those factors. Building in agility is key to managing the complexity of tax law changes and complexity. Now, more than ever before, Tax needs to respond quickly to access data and models for planning, forecasting, compliance, controversy, and advocacy.

Deploying technology and data analytics — Technology and data analytics solutions are now critical to efficiently and effectively executing all aspects of the tax lifecycle. ‘Small automation’ is a growing trend that empowers tax professionals to leverage multiple technologies to secure quick process wins without the need for large-scale IT (Information Technology) involvement. Emerging technology solutions such as artificial intelligence (AI) and machine learning (ML) are also gaining popularity – These powerful new tools can be used to perform structured and unstructured activities, gather, and analyze data from multiple sources.

Focusing on people and organization — Technical tax skills are important; however, they are no longer sufficient. To keep up with the rapid pace of technological change and tax complexity, tax professionals need new capabilities. Digital upskilling will enable tax professionals to use new solutions to perform work more efficiently and effectively. A center of excellence (CoE) for digital innovation – a digital lab focused on developing new solutions to business and tax problems is a great way to engage and train professionals. Where deployment of people and/or technology resources are not feasible, a variety of sourcing models are available to meet the needs of the US tax department’s functions.

Being mindful of process and collaboration — A well-run US tax department needs to have defined processes, enabled by technology; however, to be successful, the tax department will need to reach beyond its boundaries, collaborating with other enterprise functions to capture synergies and contribute to return on investment. Whether it’s about an enterprise approach to emerging technologies or the growing concerns around customs and trade, the tax function needs to be included in the discussion to offer tax perspective on opportunities and risk.

Tax should become the trusted advisor to business leadership that the organization needs.

Read our Doing business in the United States and Tax Function of the FutureTax and Finance Priorities for 2019 to learn more about how these developments may affect your operations in the United States.

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It's personal

The 2017 US tax reform law changed individual provisions significantly:

  • US tax liability — Marginal individual tax rates have been reduced; other provisions could reduce a taxpayer’s overall effective tax rate but still others could increase a taxpayer’s effective rate, depending on the taxpayer’s particular facts and circumstances
  • Applicability for a certain period — generally through December 31, 2025, given ‘sunset’ rules

How does all of this affect you?

  • Individual income tax rates – The tax reform legislation reduced the rates, but there are still seven individual income tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These rates for now apply for tax years 2018 through 2025.
  • Individual alternative minimum tax (AMT) – The AMT regime was not repealed for individuals, but AMT exemption amounts were increased.
  • Standard deduction and personal exemptions – The standard deduction was doubled for all filing statuses and the personal exemption was eliminated.
  • Overall limitation on itemized deductions was repealed. The deduction for state and local taxes not paid or accrued in a trade or business generally has been capped at $10,000. ‘Foreign’ real property taxes no longer may be deducted, but ‘foreign’ income taxes may (for those not claiming ‘foreign’ tax credits).
  • Mortgage interest deduction: A deduction still is allowed for interest on ‘acquisition indebtedness’ (real property), but limited to $750,000 of debt for new loans.
  • Itemized deductions previously subject to the 2% floor are no longer deductible. This includes employee business expenses, tax preparation fees, and other 2% miscellaneous items.

As a result, you and your mobile workforce – those individuals working in the United States, or US citizens or residents working abroad – need to:

  • understand the most important aspects of the US tax system as it affects individual taxpayers.
  • evaluate mobility tax reimbursement policies.
  • identify mobility-related processes and controls that may be impacted.
  • assess expected costs and savings, and consider appropriate actions.

Read our Doing business in the United States to learn more about how changes to the US individual tax provisions may affect your US operations.

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Christopher Kong

US Inbound Tax Leader, PwC US

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