What Tax Considerations Will You Have To Manage?
10 Questions for inbound U.S. investors
Question 5 - What tax considerations will you have to manage?
The U.S. federal income tax is one of the highest in the world, and the federal tax rate of 35 percent is just the beginning. Many states and local governments also impose income tax on business entities. Therefore, your U.S. entity’s real Effective Tax Rate (ETR) and its cash tax rate can vary greatly depending upon circumstances, jurisdictions, and important tax structure choices you make at the outset of the investment.
The tax liability of a U.S. investment may also vary depending upon its legal structure. Therefore, entity choices such as a standalone corporation, a partnership, or a branch, or in some circumstances, a hybrid entity, are important decisions.
A multinational that purchases an existing U.S. group has myriad tax issues to confront. For example, in many circumstances the multinational may end up creating a “sandwich” structure where the multinational enterprise owns a U.S. entity that in turn owns other non-U.S. entities. This type of structure can be inefficient from a tax perspective because unlike many countries, the U.S. taxes offshore income. It takes planning to mitigate the inefficiencies.
In addition to corporate tax, investors should know that operating in the U.S. can also involve other taxes like sales and use taxes, local property taxes, and personal income tax for U.S. nationals and foreign nationals.
Questions behind the questions
- Will you raise capital through debt or by contributing equity? Interest payments have one tax impact. Dividend payments have another.
- If a transaction will be debt-financed, how will you introduce the debt into your global structure?
- What will be the breakdown between U.S. nationals, parent-country nationals, and other people working in the U.S. investment location?
- What moves toward entity simplification, on either side of a border, can help your eventual combined organization avoid unnecessary taxes?
Do it now
Consider scheduling lunch with the C-level officer in your organization who is responsible for tax planning. Ask what considerations he or she is applying to the calculus of your planned acquisition – and work to identify ones you’re missing.
A multinational that purchases an existing U.S. group has a myriad of tax issues to confront.
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