We asked our U.S. colleagues from CLA, which operates from more than 120 U.S. locations with round about 7,400 people, what impact the recent handing over of Presidential Power from Donald Trump to Joe Biden has on the economy in the U.S. and especially on foreign companies and investors regarding the U.S. market.
Round about 100 days after the Presidential Election in the United States, what are the major changes in politics as far as it concerns the U.S. economy?
As expected, the Biden Administration is taking a more aggressive approach to taxing corporations. On March 31, 2021, President Biden released a fact sheet covering The American Jobs Plan (“AJP”), which is a $ 2 trillion infrastructure spending bill to repair and upgrade highways, electric grids, broadband, schools and childcare facilities, manufacturing, and R&D investments. The proposed infrastructure spending would be paid for through an increase in the corporate income tax rate from 21 % to 28 %; an increase in the tax rate on global intangible low-taxed income from 13 % to 21 %; the repeal of certain export tax incentives; the elimination of certain deductions and credits available to companies in the fossil fuel industry; and imposition of a 15 % minimum tax on the "book income“ of corporations with financial statement net income of $ 100 million or higher.
It is highly unlikely the AJP will be supported by any House or Senate Republicans. Likewise, President Biden may face resistance from far-left House Democrats who believe the bill does not go far enough on infrastructure spending and centrist Senate Democrats who believe raising the corporate income tax rate would "kill jobs“.
The AJP likely will come up for debate in Congress in late spring or over the summer. Since President Biden only has two years to pass legislation before midterm Congressional elections, we predict the House and Senate Democrats will work towards successfully passing some version of the AJP through a budget reconciliation the vote on which will be split along party lines.
The U.S. market is one of the most important markets for European and so also for German companies. Many German companies are already established in the U.S. via a subsidiary or branch. Do you expect an increase of U.S. operations by German companies and shareholders under President Biden?
Our view is that German and other European companies will continue to expand their U.S. presence provided customer demand remains strong for their goods and services. The economic outlook for 2021 appears favorable, albeit with risks. Many states are allowing residents and businesses to reopen with fewer coronavirus restrictions; the federal government has provided significant liquidity to taxpayers in the form of COVID-19 relief payments; and interest rates continue to remain low from an historic perspective. These factors are expected to provide the catalyst for a robust U.S. economy in 2021.
There are risks to this outlook. A new strain of coronavirus is making its way across the globe and could impact the U.S. economy if there is a significant outbreak over the summer and stay-at-home restrictions are reinstated. Similarly, supply chain disruptions and increased Treasury yields have raised inflation fears that could discourage consumer purchases if their purchasing power for goods and services is diminished. Last, trade disputes between U.S. and various countries and potential geopolitical conflicts (e.g., Iran) also could stifle consumer demand.
What are the main issues a foreign investor should take into consideration by planning to establish an U.S. operation?
We typically encourage clients that are planning to establish operations in the U.S. to take a “people first” approach when making their decision. That is, before getting hung up on tax and accounting matters, first consider whether expanding in the U.S. is best for your customers, employees, and shareholders.
The U.S. is comprised of the federal government and 50 states, each of which has its own unique regulatory framework, workforce talent pools and limitations, and lifestyle opportunities and cost of living challenges. Thus, when evaluating U.S. expansion plans, a company may want to consider a “scorecard” approach by addressing the following questions:
- How will U.S. customers benefit from your local presence?
- What type of skills are required to staff your U.S. operation and does the local market have an adequate university system, trade organizations and professional network that produce qualified candidates to fill open positions?
- In cases where you are relocating employees to the United States, does the local market offer a quality of life (e.g., seasonal temperature, housing prices, schools/daycare, etc.) similar to your employee’s home country?
- Does the city and/or state government provide incentives to new businesses?
- What city and/or state regulatory or licensing challenges exist with a given location?
- Is the political environment stable?
Once the initial assessment is completed, we recommend that companies begin the process of reviewing tax and accounting support needs and planning opportunities to refine the list of suitable jurisdictions and conclude on the expansion plan.
Tasks associated with planning, establishing and running your business in the United States can be time consuming and complex. CLA’s Global advisory team simplifies your entry in the U.S. with one point of contact for all your global needs which can be served in cooperation with our Nexia partners; while you direct your time, energy and focus to innovation, leadership and growth. We help you assemble the right team of strategic advisors and carefully curated tech solutions to make your global vision a reality.
Important questions we ask you to consider in the planning stages are:
- What makes the US attractive- should you expand to the US? When? Acquisition or new operations?
- What are the industry dynamics- who is competition? Do you have a product-market fit? Do you understand the regulatory burden?
- Who is leading your team- who is on your US advisory board? Where does US fit for the company? Where will you find your workforce?
- Evaluate US economic incentives
Key aspects we coordinate with you and other strategic advisors in the initial stages are:
- Determine your US business model - e.g. E-commerce vs. Direct sales vs. sales through agents/distributors
- Real Estate and environment matters- purchase vs. lease real property for your US operations, compliance with federal/state environmental laws/permits etc.
- Consider immigration needs- work with your legal partner to come up with the best immigration strategy. Plan for business visits to establish the US business, employ foreign national workers, plan a reasonable start date etc.
- Create your US entity- if advantageous from a tax, liability, commercial and other perspectives
- Timing to obtain a Federal Employer Identification Number (FEIN)- this could take 4-6 weeks, if you don’t have a US signing officer. The FEIN is required for various US set-ups including a US bank account.
- Initial entity set-up tasks to get your US entity ready to commence operations- Capitalize the US entity- Debt vs. Equity, determine accounting year-end, accounting software set-up, state/local registrations, Open US bank account, obtain required licenses and permits etc.
- Prepare for US tax compliance- We work with you to determine your Federal/State/local compliance obligations, review inter-company transactions to determine withholding requirements, state nexus review and filing obligations etc.
- Employment needs- Employment laws in the US are significantly different from employment laws in Germany. This needs to be kept in mind while creating offer letters & agreements, employee handbooks, payroll compliance, determine employees who qualify as “exempt” from overtime/minimum wage requirements, compensation strategies etc.
- US terms and Conditions w.r.t contracts and agreements- Your US entity will most likely need US terms and conditions for sales/purchase contracts. Work with your legal partner to create template agreement for use by your US entity w.r.t commercial agreements like non-disclosure/supply/purchase/distribution agreements.
- US import/export and security compliance- Work with your legal and tax partners to determine any import/export/security compliance. In addition, if your US business will be involved in work for the US government, various government procurement issues may be raised.
- US intellectual property and trademark registration- You will need to consider how your US operations, manufacturing (if applicable), and sales may affect intellectual property rights of third parties. You also will need to consider how your own intellectual property rights, including patents, copyrights, and trade secrets, can be protected in the US. You may desire to file US trademark registrations for marks that are registered in foreign jurisdictions and/or other marks that you will use in connection with your US operations.
To our understanding, contrary to Donald Trump who decreased tax rates especially for higher income companies and individuals Joe Biden plans to increase tax rates. Could you provide us with more details?
The political climate has changed in Washington, D.C. with Democrats taking over the White House and both houses in Congress. This sea change has placed President Biden in the unenviable position of having to placate both the center-left and progressive wings of his party. Historically, President Biden has been viewed as a moderate liberal, which is one lens through which to view his tax proposals.
Departing from the Trump-era tax cuts, President Biden is proposing to increase the federal corporate income tax rate from 21 % to 28 % and the top federal individual income tax rates from 37 % to 39.6 %. Moreover, President Biden has proposed taxing long-term capital gains at regular ordinary income tax rates, imposing the 12.4 % social security payroll tax on wages above $ 400,000 (currently capped at around $ 143,000), and reducing the federal estate tax exemption from $ 11.7 million to $ 3.5 million.
A more radical approach to tax rate reform would be to rollback the 2017 Trump tax reform which would reinstate the 35 % corporate income tax rate. Similarly, the far-left elements of the Democratic party (e.g., “AOC”) desire to see 1950’s style individual tax rates which were 91 % for top individual earners. There were also suggestions of a high net worth wealth tax on “millionaires and billionaires” from Bernie Sanders during the 2020 Democratic presidential primaries. The point is that President Biden’s tax reform proposals may represent the opening salvo of what may turn out to be significantly progressive tax reform. Then again, it may be much ado about nothing if the party cannot reach consensus on a tax reform agenda.
With the new President, are the times of “America first” and therefore the economical protectionism gone? Do you expect any improvements of trade regulations between the U.S. and Europe?
One of the primary trade disputes between the United States and European countries involves digital services taxes (DST). Many European countries have enacted a DST on gross revenues of nonresident companies from digital advertising services, platform services, content sales, software-as-a-service, and similar digital services. The Trump Administration began an investigation into whether DST enacted by various countries unlawfully discriminates against U.S. digital companies and the U.S. Trade Representative has continued this work under the Biden Administration.
On March 26, 2021, the U.S. Trade Representative determined that DTS implemented by five European countries (i.e., Austria, Italy, Spain, Turkey, and the United Kingdom) on certain goods discriminates against U.S. companies and proposed a 25 % retaliatory tariff. In light of the political clout that U.S. technology companies have in Washington, D.C., it is unlikely the U.S. government will drop the 25 % tariff proposal without significant concessions from these European countries.
Notwithstanding the DST dispute, the Biden Administration has taken a more conciliatory tone on economic matters than the Trump Administration, as shown in its willingness to participate in OECD discussions surrounding the global minimum tax on multinational corporations. We expect this spirit of cooperation to continue.