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Nexia Ebner Stolz


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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