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Doing Business in the United States a Guide to the Key Tax Issues

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Doing Business in the United States a Guide to the Key Tax Issues www.pwc.com www.pwc.com Doing business in the United States A guide to the key tax issues 2016 © 2016 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. Appendix C: PwC's US inbound specialists For more information, please contact any of the PwC's US inbound specialists listed below. Joel Walters Bernard Moens US Inbound Tax Leader International Tax Services +1 (646) 471-7881 +1 (646) 471-6787 [email protected] [email protected] Jack Abraham Gina Nam People and Organizations Mergers and Acquisitions +1 (312) 298-2164 +1 (646) 471-0489 [email protected] [email protected] Ann Marie Achille Kathryn O’Brien Tax Reporting Strategies Transfer Pricing +1 (312) 298-3331 +1 (202) 414-4402 [email protected] [email protected] Julie Baron Oren Penn Global Mobility Services International Tax Services +1 (703) 762-7261 +1 (202) 414-4393 [email protected] [email protected] Joni Geuther Todd Roberts International Tax Desks State and Local Tax +1 (646) 471-4526 +1 (720) 931-7222 [email protected] [email protected] Craig Grosswald Ellen Rotenberg Tax Projects Delivery Services Financial Services +1 (646) 471-8684 +1 (646) 471-5559 [email protected] [email protected] Lesa Mellis Gary Wilcox People and Organizations Tax Controversy and +1 (408) 817-7400 Regulatory Services [email protected] +1 (202) 312-7942 [email protected] A guide to the key tax issues | 115 Contents Foreword ....................................................................................... 1 I. Federal tax issues ...................................................................... 1 A. Taxes on corporate income ....................................................................... 1 B. Other federal taxes ................................................................................... 2 C. US trade or business ................................................................................. 6 D. Effectively connected income .................................................................. 6 E. Branch income .......................................................................................... 7 F. Permanent establishment (PE) ................................................................ 7 G. Group taxation .......................................................................................... 8 H. Transfer pricing ........................................................................................ 9 I. Thin capitalization .................................................................................. 10 J. Controlled foreign corporations (CFCs) ................................................. 11 K. S corporations .......................................................................................... 11 L. Determining income ................................................................................ 12 M. Corporate deductions .............................................................................. 17 N. Credits and incentives ............................................................................ 25 O. Anti-‘inversion’ developments ............................................................... 29 P. Administrative issues ............................................................................. 34 II. State and local tax issues ......................................................... 53 A. Activities that could subject a foreign entity to state tax ...................... 53 B. Dividing up taxable income among the states: multistate apportionment ........................................................................................ 55 C. Tax filings include more than just the in-state entity: combined, water’s edge, and worldwide filing methodologies, and ‘tax havens’ .. 56 D. Adjustments to federal taxable income ................................................. 58 E. Treatment of foreign-source income ..................................................... 58 Contents (continued) F. States with transfer pricing adjustment power .................................... 59 G. Indirect tax considerations .................................................................... 60 H. Local taxation ......................................................................................... 62 I. Credits and incentives: state and local .................................................. 63 III. US tax treaties .................................................................... 65 IV. Transfer pricing.................................................................. 68 V. The OECD’s BEPS project ......................................................... 72 A. OECD BEPS Action Plan .........................................................................72 B. Increased risk of double taxation ...........................................................73 C. Departing from consensus-building OECD model ................................73 D. Most significant impacts for taxpayers ................................................. 74 E. Ongoing efforts ....................................................................................... 74 F. Proposed country-by-country (CbC) regulations .................................. 75 VI. Individual tax issues ........................................................... 76 A. Personal income tax rates ...................................................................... 76 B. Alternative minimum tax (AMT) ........................................................... 78 C. State and local income taxes .................................................................. 78 D. Residence ................................................................................................ 79 E. Other taxes ............................................................................................... 81 F. Income determination ........................................................................... 83 G. Foreign tax relief and tax treaties .......................................................... 89 H. Other tax credits and incentives ............................................................ 90 I. Tax administration ................................................................................. 90 J. Other issues ............................................................................................ 93 VII. Healthcare ...................................................................... 95 Contents (continued) VIII. Financing US operations ................................................ 97 A. Debt vs. equity ........................................................................................ 97 B. Cash pooling ......................................................................................... 102 IX. Setting up a US tax department ......................................... 104 How can PwC help? .................................................................... 106 Appendix A: Summary of US tax treaty benefits ........................ 108 Appendix B: List of countries with which the United States has entered into social security totalization agreements .............. 114 Appendix C: PwC's US inbound specialists ................................. 115 Foreword Doing business in the United States For the second year in a row, global business leaders rate the United States as their most important market for overseas investment and growth, in PwC’s 19th Annual Global CEO Survey. But while there are many attractions to the US market that drive this positive view, doing business in the United States can be challenging. Global CEOs surveyed also indicated that a clearly understood, stable, and effective tax system is a top priority for society today. How does the US regime measure up against this standard? The United States has a complex system of federal, state, and local levels of taxation. And when surveyed by PwC and the Organization for International Investment, CFOs of US subsidiaries of foreign businesses agreed that improving the tax system is the number-one action that would strengthen the United States as an investment location. So I think we can comfortably say that the US tax system is one aspect of doing business in the United States that requires careful navigation. Further, current debates regarding US tax policy and reform and ever-evolving legislative activity combine to create a challenging environment for companies doing business in the United Statesbut also unique opportunities. I fully appreciate these particular challenges and opportunities, having spent most of my career in senior tax executive roles in non-US companies with substantial US operations. It is often frustrating, but always rewarding, to overcome the confusion and complexity, and identify the critical insights that will enhance business performance and effectively manage risk. This publication is intended to leverage PwC’s extensive experience in regard to US operations of foreign businesses to provide a broad understanding of the basic tax implications of business operations in the United States, as well as to offer helpful observations into the tax consequences for foreign companies. I believe you will find it a useful guide through the many challenges and opportunities. Yours sincerely, Joel Walters US Inbound Tax Leader [email protected]
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