What Should I Know About Doing Business With United States Customers?

 

Picture Courtesy: Pixabay Alaska Aurora Borealis

You may have now heard this ad nauseum- 2020 was the "Year of The Pivot". Everything went online and we were all for the most part working with our clients virtually. 

When 2021 came by, it did not look like much was going to change with how we were doing business and networking with our colleagues. I, like many others, realized that this was a great thing to happen! People who were earlier reluctant participants in the virtual world were now embracing it with enthusiasm; we were able to reach far more people in our effort to offer niche foreign tax reporting and compliance services for inbound and outbound cross border operations. 

In an ongoing effort to also network virtually, I have met many enterprising business women, solopreneurs, accountants and fellow tax professionals in the foreign tax compliance and reporting space; my most longstanding membership of all has been the one that I have with HEN India. 

HEN stands for Her Entrepreneurial Network and was founded by a very smart visionary, Ruche Mittal. I have met so many women here who are either starting off with very interesting business ideas or are already doing very well and looking to scale. Naturally, their eyes turn towards one of the biggest markets in the world- the United States. 

Here are answers to some questions I get frequently from members of HEN India and others who want to do business in the United States: 

Do I Have To Set Up An Entity In The US To Do Business?  

There is no necessity to set up an entity in the United States. However, your current foreign entity can be elected to be classified for U.S purposes as:

1. A Disregarded Business (If owned by a single person)
2. A Partnership (If owned by multiple people) 
3. Or an Association Taxed as a Corporation. (Could be owned either by a single person or many)

Note: An election CANNOT be made for Per-se corporation listed under the Regulations. 

Will I Owe Taxes In The US? 

When operating as a foreign entity in the United States, there are two types of income on which you would pay taxes to the United States-Income that is sourced to your entity and income that is sourced to the United States:

• Effectively Connected Income {ECI} 

If you are carrying on a for-profit business in the U.S., and your entity satisfies an asset use test or business activities test, you will be subject to income tax. The taxes are calculated at graduated rates. 

A tax return must be filed within the due date (or extended due date) and deductions and credits are available if return is filed timely. 

• Fixed or Determinable Annual or Periodic Income {FDAP} 

This is income sourced to the United States and includes dividends, rent, salaries, wages, premiums, interest (exceptions apply), remuneration, director's fees etc. FDAP income is generally subject to a flat 30% withholding rate by the payor and deductions and credits are NOT permitted against this income. If the payor has properly withheld these taxes, there is no requirement to file a tax return. For those who have to file a return, rate of tax can be mitigated under DTAA or Double Tax Avoidance Agreement rules. 

Sale of Goods In The United States:  

If the goods are an inventory property- generally the sales are subject to income tax by the country where they are being manufactured or production activities are mainly conducted. 

If the goods are personal property- generally the sales are subject to income taxes where the seller resides. 

Can I have a Branch In The US? 

Yes, one can have a branch in the United States. However, a branch profits tax of 30% is imposed on the branch's US net ECI (which is US income minus the amounts reinvested in the United States). 

Branch profit tax can be mitigated by provisions of a tax treaty (if one exists with United States and the country where seller resides). 

Will I Have To Pay Sales Tax on Goods And Services?  

Sales Tax rules are based on which state in the U.S. the entity is believed to have a PE in. A foreign entity is deemed to have a Permanent Establishment (PE) either by way of a branch/ fixed place or there can be PE attributable to an agent acting on behalf of the foreign entity. 

Currently, Sales Tax calculations for foreign entities conducting online sales in the U.S. is ambiguous. 

Moreover, this area of taxation on international movement of goods and services is still evolving and there is much talk among various nations on how the governments can tax this revenue. Rules, regulations and various standards are still a work-in-progress. For those start-ups and businesses looking to cater to the US market, advance planning can mitigate United States taxation by avoidance of permanent establishment and other issues. 

---

Do not forget to read my disclaimer here. Please consult an Enrolled Agent for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com.