This article continues from Part 1 of the series about Australian businesses expanding into the US. Part 2 takes a closer look at key tax concepts in the US and practical considerations about commencing business operations.
Contrary to Australia where income tax and GST are imposed on a federal level, in the US most states and sometimes individual counties may impose income, sales and franchise taxes. Therefore, when considering Donald Trump’s very much hyped about 21% statutory (federal) income tax policy you must always remember that the additional state income taxes bring the effective rate of taxation in the US closer to the Australian 27.5% – 30% range.
This analysis by the Tax Foundation is a great resource for comparing all the state income taxes. However, you must know that State income tax is allowed as a deduction in calculating federal income, therefore coming to a single figure for the overall tax payable is not as simple as adding the headline statutory tax to the state income tax in a particular state.
The relatively recent developments known as Economic Nexus laws in the sales tax field, add another layer of complexity to the US taxation landscape. The Economic Nexus laws gained prominence following the US Supreme Court decision in South Dakota v Wayfair. Prior to the decision a business had an obligation to report for sales tax in a particular state only if the business had a physical presence in that state. The Wayfair case has overturned this notion and upheld that making online sales via a website can amount to the same presence as having a physical shopfront in the state. In other words, the courts determined that the obligation for sales tax arises in the state in which the economic use and enjoyment of the good or service occurs. Following South Dakota’s lead a number of other states have already passed or are contemplating similar economic nexus laws, forever changing the application of sales tax across the various states.
Establishing a company, choosing a state of domicile and determining state and federal tax compliance is not the final step in getting your subsidiary in the US ready to do business. On a practical level, the newly established entity needs to obtain an Employer Identification Number (EIN) from the IRS before the company is able to open a bank account in the US. With institutions having to comply with ‘Know your Customer’ (KYC) and the Patriot Act legislation, verifying the identity of a non-US parent can be a complex task and if not done properly can pose significant delays to commencing business activities in the US.
The key is for the ultimate responsible parties, i.e. directors of Australian parent, to be prepared to travel to the US and attend a financial institution in person with pre-prepared documentation about the business activities and ownership sufficient to satisfy the banks due diligence process. Last but not least banks may require you make a minimum deposit to open a bank account. Be prepared to deposit the better part of USD 5,000 via EFT (or ‘wire’ as referred to by Americans) when opening a bank account.
Expanding into the US presents a lucrative opportunity for many Australian businesses. The US government and financial institutions generally welcome inbound investment and will work with you to get your business up and running. The changing landscape of tax laws must be considered and intricate understanding of state, regional and federal rules must be gained by businesses aspiring to successfully break into the appealing US markets.
Finally, it pays off having someone who can guide you around the pitfalls suffered by other first time outbound Australian investors. Our office is experienced in providing strategic and practical advice to businesses seeking to explore opportunities in the US and other foreign jurisdictions. We can assist you domestically and work with trusted professionals overseas to provide you with efficient and results oriented strategies to your overseas expansion.
Date of Issue: 15 April 2019
Disclaimer: The contents herein are intended for general information only and should not be construed as legal or accounting advice. Vicca Chartered Accountants Brisbane bears no responsibility for any loss that might occur from reliance on information contained in this publication. Please do not reproduce, transmit or distribute the contents herein in any form without prior permission from Vicca Chartered Accountants, Taxation Accountants Brisbane Australia.