Unlike the tax structure of many foreign countries (which often have only one level of tax), nearly every level of government in the United States imposes some type of tax. All fifty states, the District of Columbia, and numerous cities, towns and municipalities are authorized, and in fact, have enacted tax legislation. The method of taxation can take many different forms and can be measured in a number of ways. The jurisdiction could, for example, impose tax upon income earned in the jurisdiction, the value of property located with the jurisdiction, or the consideration paid for property or services transferred within the jurisdiction.
One common misperception that persists today is that foreign treaties with the United States preclude the imposition of state and local taxes on foreign businesses not subject to federal tax. Unfortunately, many treaties simply do not apply to state and local taxes. Therefore, many state and local taxes apply to foreign and domestic entities alike.
Domestic businesses dedicate substantial resources to plan for and comply with the various tax schemes established by local governments. Foreign businesses making investments in the United States - whether by acquisition or organic growth - should act no differently.
There are a number of primary considerations that a foreign business should investigate before committing to an investment in the United States:
Choice of entity: There are many different forms of legal entity in the United States, all of which are treated differently for tax purposes.
Location of U.S. Headquarters: Many of the jurisdictions located within the United States have enacted programs to encourage capital investment, new employment, or economic expenditures within their borders. State and local governments compete for new companies by offering tax credits and other incentives to businesses before, and sometimes after, a commitment has been made to open an office.
Defining Marketing and Sales Activities: The headquarters state is not the only jurisdiction that has the authority to impose tax. Many jurisdictions will impose tax upon companies who simply market and deliver product within their borders. Jurisdictions have become very aggressive in targeting non-filing companies, and often send out questionnaires to identify them. Foreign business should establish specific protocols to help define which of their multi-state activities are subject to tax, and develop a system for responding to information requests solicited by taxing jurisdictions.
Value provided by the Foreign Investor: The foreign-based company may employ its knowledge or resources to enhance its presence in the United States. Careful planning should be implemented to ensure that the appropriate documentation is in place to define and quantify those benefits provided to their U.S. operations.