Investing in the United States
July 11, 2023
With the promise of access to a large, open market, many businesses from around the world are interested in investing in the United States. And while global economic shocks in the last few years have certainly taken their toll, that interest has continued.
Investing in the United States still attractive
In 2023, the US ranked number one on the Kearney foreign direct investment (FDI) index for the 11th year in a row. Against a backdrop of global economic instability, the country’s market offers relative safety to cautious investors. As such, it’s seen a steady flow of investment and business expansion in the last few years, with FDI rates now 30% higher than they were pre-pandemic.
Tax specialists at CBIZ MHM, a top 10 US accounting and advisory firm, have noted the continued interest from overseas businesses in setting up in the US.
“I see a fair amount of inbound US investment and expansion from around the world in all different businesses, and all different industries. [In the last 12 months], I’ve seen that continuing,” says Don Reiser, an international tax specialist at CBIZ.
“I haven’t seen a significant slowdown. Obviously, with a slowing economy, you’re seeing maybe fewer M&A transactions. That’s not necessarily a reflection of the US; that’s a reflection of just transactions globally, affected by interest rates and other factors.”
Incentives for investing in the US
Another possible reason for the continued expansion to the US may be the recent introduction of government incentives for investment, through legislation like the Inflation Reduction Act and the Bipartisan Infrastructure Law. Many states also have economic development incentives available to growing companies.
For businesses looking to capitalise on those advantages, there are some important decisions to make early on, including location, structure, business type, and plans for the future.
Tax incentives themselves are rarely the main driver for these choices. Rather, they need to be weighed up carefully in the context of other factors.
“When we look at incentives, I’ve had some clients ask, ‘what’s the best state?’ Well, it depends on the facts, so it’s really important for the client to have at least an idea of the geographic area in the United States that they’d like to locate to,” says Chris Baltimore, managing director of tax incentives at CBIZ.
“This might be based upon workforce or customer access, logistics or a number of things. But it’s really about understanding what kind of capital investment the client’s going to make and what their headcount growth looks like, because those are the two real driving factors of any incentive program.
“You have to look at the entire picture because every state has its own specific tax structure, and there are multiple types of taxes. For instance, Texas is popular because they don’t have a true state income tax; but the property taxes in Texas are high, and so while you save in one pocket, you have additional costs in another category.”
Determining your structure
Kathy Rhodes, international tax specialist at CBIZ, says her number one recommendation for businesses setting up in the US is to understand the structure they want and how they plan to get money out: do you plan on reinvesting the money, getting dividends, or having management fees or royalties, for example?
These questions lead into considerations about another major consideration – transfer pricing. The US has a heavy focus on the rules around transactions within multinational companies, and, as such, Rhodes says this is one of the biggest issues businesses starting in the US run into.
“I always tell people, countries expect to have their fair share of the profits. So, if the company’s in the UK and now they’re opening up a sales branch in the US, then the US would expect that sales branch to generate a profit, whereas the UK company would like to drain all the profit off because it was taxed at 19% previously, while the corporate tax rate in the US is 21%.
“So you might want to save tax by getting a management fee or similar to the UK. But transfer pricing says no, you can’t do that: there ought to be a certain amount of profit based on what you do and the risks that each of you assume.”
The complex set of rules that govern these transactions can be a barrier to entry for some international businesses, with costly transfer internal pricing studies required to avoid problems or IRS penalties down the line. This becomes more important the more established the US arm of your business becomes, but it’s a good idea to consider it from the start.
Navigating the tax system
Another major challenge for businesses new to the states is the complexity of the US tax system itself.
“The US presents unique challenges due to its federal and state tax systems,” says Reiser. “Many countries only deal with their federal tax systems, but in the US, we have to navigate both federal and state taxes. Each state has its own tax rules, and companies need to comply with them. Understanding state tax rules adds complexity to the overall process.”
For instance, while a European company might be used to applying VAT rules – and perhaps dealing with cross-border transactions and international tax treaties – many are unfamiliar with the US sales tax system and the way it applies across different states.
To handle this complexity, Reiser notes that businesses’ best course of action is to rely on the expertise of professionals in this area.
“I think you really need, in advance, to engage your accountants and your lawyers to talk through the business and structuring so that when you enter, you have a pretty good handle on what you’re facing,” he says. “Then you can sort out the issues among your advisors. To me, that’s the lesson.”
With over 50 offices across the US, CBIZ MHM has a specialist team to support international investors to make the right decisions for their business. With 6,500 personnel, they are confident they can support with a national level of expertise, as Kathy can attest,
“In our office, we are organised into different industry teams, and specialisms— software developers make up a significant portion of my clientele. However, I also have clients in the retail and wholesale sectors. If we lack expertise in a particular area, we have colleagues located throughout the United States and various offices who can provide the necessary knowledge and support to help navigate the state regulations and get the best outcome for the client.”
If you are interested in investing in the United States, please get in touch.