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Doing Business in the United States - under President Biden

On 4 March 2021 Kirthi Mani, Principal-In-Charge, and Michael Smith, Principal, from our Nexia partner CliftonLarsonAllen LLP (CLA) gave us in a webinar an insight view of the actual economic environment in the United States and explained what foreign companies and investors should take into consideration before starting an U.S. operation.

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.

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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.

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