Tax Opportunities to Consider When Expanding Your Business Operations to the US

The U.S. continues to be a top destination for companies looking to expand their operations globally. Companies need to consider business, legal and tax issues when expanding. Tax issues to consider include:

State and Local Tax Savings Opportunities and Incentives

Location is an important consideration when considering a company’s supply chain, such as location to ports, distribution channels, etc. Location is equally as important when considering permanent cash tax savings that may exist.

Many states and localities offer tax exemptions encouraging investment into their jurisdiction. These benefits should be considered when evaluating location for distribution, manufacturing or other business operations.

Many states and localities offer:

1. Sales tax manufacturing exemptions
2. Sales tax exemptions
3. Income tax credits
4. Property tax reductions/abatements

Sales tax manufacturing exemptions allows taxpayers that engage in manufacturing or processing to make purchases of qualified equipment, services and machinery tax-free.

Sales tax exemptions available to the energy, financial services, retail and technology industries can provide significant tax savings, usually ranging from 6–10 percent on the qualified spend amount.

Income tax credits including credits for job creation, investment in economically depressed areas, industrial machinery credits and clean energy production can often be used to offset state income taxes. Certain states even allow these credits to be sold to other taxpayers.

For larger investments (like a manufacturing plant or new headquarters), taxpayers may have an opportunity to negotiate with state taxing authorities for a variety of tax incentives related to the economic investment it is making into the community. These types of incentives are best considered during the early planning stages so the company can negotiate with several states and/or local cities to secure the best deal.

Furthermore, opportunities exist to minimize a company’s property tax liability in the form of a tax exemption or abatement. These exemptions and abatements will vary from state to state, and they are applicable to both real and personal property incentivizing companies to move into their local jurisdictions. These incentives can significantly reduce or eliminate a company’s property tax burden for a given period depending on their qualifying activities.

Beyond credits and incentives, a company may have the opportunity to lower its state income tax liability by carefully considering the various states specific apportionment and sales sourcing rules. Very few of the states have the same rules so opportunities exist to lower a companies’ state tax footprint.

Permanent Income Tax Savings Related to Structuring the U.S. Operations

Appropriate structuring can lead to significant tax savings and the most tax efficient structures can look vastly different depending on the specific facts. Some key factors to consider include: location of investors, parent companies and affiliates; tax treaties available; overall business objectives; means of returning shareholder value; and type of operations.

Other common structuring considerations include:

• Whether a separate legal entity should be formed. Although in some cases, a non-U.S. company may be able to avoid tax nexus for U.S. federal income tax purposes, for example, under a tax treaty, this may not always be the case for state income tax or sales tax purposes. A separate legal entity may be preferred to not only manage a non-U.S. company’s tax filing burden but can also drive significant tax savings when combined with additional tax planning.
• Tax planning opportunities related to returning shareholder value, including repatriation and exit strategies. This may include evaluating income tax treaties for exemptions and additional planning opportunities.
• Consider what jurisdiction to further invest in talent and operations given the tax rate differentials between the U.S. (including states) and foreign jurisdictions. This type of planning can result in significant tax savings.
• For companies that export goods or services outside of the U.S. and/or their home jurisdiction there are tax incentives and credits related to exports to consider when making operational and other supply chain related decisions.
• While ultimately a legal decision where to incorporate any separate legal entity can have tax implications that should be considered.

Common Tax Issues and Traps for the Unwary

In addition to the many tax incentives and opportunities, non-U.S. companies must also be mindful of the various required tax filings and specific tax rules related to cross border activity. Some of the most common overlooked areas include:

• Required additional filings for cross border activities that carry significant penalties when not timely filed (in some cases up to $25,000 for failure to file alone).
• Evaluation of the proper tax classification of intercompany transactions, including funding the U.S. operations. This can lead to not only lost tax savings but can also result in unfavorable tax consequences.
• The deductibility of certain intercompany transactions. The U.S. has specific rules when it comes to the deductibility and timing of deductions related to certain types of intercompany transactions which can impact cash flow.
• State and local tax laws are unique for every state with each jurisdiction having its own registration, transaction taxability, exemptions, deductions, tax rates and reporting requirements. Even where a company may not give rise to tax nexus in the U.S. for federal income tax purposes, limited activities such as the sale of goods, can in some cases cause tax nexus for state income and sales tax purposes.
• Non-U.S. investment in U.S. real property such as real estate assets (and certain assets affixed to real property) are subject to a special tax regime which can impact overall tax costs and reporting and generally requires very specific tax planning to optimize a company’s overall tax position.

Need help in evaluating these opportunities and considerations? Weaver’s holistic approach brings our specialty teams together to model out comparative scenarios for you to evaluate. You can find a full list of Weaver’s service offerings here. To learn more about all the ways that Weaver can help, contact us.

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