FOREWORD
This guide is for information only, As it is a general guide we recommend that
you seek professional advice before taking action. No liability can be accepted
by HLB USA for any action taken or not taken as a result of this information.
For further advice contact the HLB USA office nearest to you or your HLB USA
partner listed on this site.
© HLB USA
1997. A member of HLB International A worldwide organization of accounting
firms and business advisers.
ABOUT HLB INTERNATIONAL
HLB International is a worldwide organisation of professional accounting firms,
each providing clients with a comprehensive and personal service relating to
auditing, taxation, accounting and general and financial management advice.
Formed in 1969, HLB can assist clients to do business in over 90 countries,
with more than 1,200 partners and 9,000 staff in over 420 offices.
Up-to-date information and general assistance on international matters can be
obtained from any of the partners of HLB member firm in the United States listed
on this site or from the Executive Office in London:
HLB International Executive Office
Spectrum House
20-26 Cursitor Street
London EC4A 1HY
Telephone +44(0)20 7334 4783
Fax +44(0)20 7405 5548
email mailbox@hlbi.com
GENERAL INFORMATION
GEOGRAPHY
The 48 states and the District of Columbia which comprise the
"mainland" of the United States occupy approximately 7.7 million
square kilometers. Northwest and next to Canada is Alaska, a large state of 1.5
million square kilometers. About 3,400 kilometers west of the mainland is a
chain of islands (Kauai, Oahu, Maui, Lanai, Molokai, and Hawaii) which together
comprise the state of Hawaii. Their total land area is 16,641 square
kilometers. Outlying U.S. areas include the Virgin Islands, Guam, the
Commonwealth of Puerto Rico, American Samoa, and minor Pacific islands.
Mountains, plains, deserts, fertile soils, minerals, and fossil resources with
a variety of climates exist in the United States. Its altitudes reach a high of
6,198 meters (Mount McKinley, Alaska) and a low of 86 meters below sea level
(Death Valley, California).
Certain areas of the United States are sparsely populated. For example, Alaska
had a 1990 population of 550,000 with a land area of 1.5 million square
kilometers; Wyoming had 453,600 residents in 251,201 square kilometers. These
low populations are in contrast with the state of New York, which had 18
million residents in 122,707 square kilometers.
Deciding where to conduct business in the United States should include
geography, population densities, ease of people and product transportation, and
economic considerations. Americans frequently refer to regions of the U.S. by a
descriptive title. The regions, the states in each region, and a brief
description follow:
NEW ENGLAND
Massachusetts, Connecticut, Maine, Vermont, Rhode Island, and New Hampshire.
Second highest concentration of people. (Approximately 72 per square km.) Major
industries tourism, education, some manufacturing, and fishing.
MID-ATLANTIC
New York, Maryland, Virginia, Pennsylvania, West Virginia, New Jersey,
Delaware, and the District of Columbia (the nation's capital, which is not a
state). Heavily populated. (Approximately 80 per square km.) Major industries
tourism, textiles, and manufacturing.
SOUTH
Texas, Georgia, Florida, Louisiana, Tennessee, South Carolina, North Carolina,
Mississippi, Arkansas, Alabama, and Kentucky. Major industries textiles,
agriculture, resources, tourism, electronics, and new industry.
MID-WEST (also called central)
Wisconsin, Illinois, Ohio, Minnesota, Iowa, Nebraska, Missouri, North Dakota,
South Dakota,
Indiana, Kansas, Oklahoma, and Michigan. Major industries agriculture, heavy
industry, and
manufacturing.
MOUNTAIN (also sometimes referred to as western)
Colorado, Arizona, Wyoming, Utah, New Mexico, Montana, Nevada, and Idaho.
Sparsely
populated. (Approximately 5 per square km.) Major industries tourism, minerals,
and other
resources. Attracting greater investment interest in recent years.
PACIFIC
California, Oregon, Washington, Alaska, and Hawaii. Major industries tourism,
lumber,
agriculture, electronics, high technology, and natural resources.
GOVERNMENT
The federal government is a republic that derives authority from its citizens
under a constitution adopted in 1787. It was first amended by the Bill of
Rights in 1791, which provided individual civil rights through ten separate
amendments. The constitution has 17 additional amendments, the last of which
was proposed on September 25, 1789, and ratified on May 18, 1992. The branches
of the federal government are the executive, the legislative, and the judicial.
EXECUTIVE
The chief executive of the U.S. government is the President. A term of office
is four years; elections are held in even years (1996, 2000, etc.). The
President cannot be elected to office more than twice. The President's
specified duties include acting as commander-in-chief of the
armed forces, making treaties, appointing various federal officials, and
executing and enforcing the laws of the federal government. In reality, the
U.S. Presidency has assumed a powerful role in American government, accepting
not only these specified constitutional powers, but also taking on leadership
positions such as: promoting his political party's legislative and political
agenda; exerting influence on long-term economic and political trends; speaking
for the U.S. in matters of world importance; beginning limited military
operations; operating a large bureaucracy of hundreds of departments and
thousands of employees. The American Presidency has attracted such power that
one commentator has called it "The Imperial Presidency."
LEGISLATIVE
The legislative branch of the U.S. government is bicameral. The House of
Representatives (called "the House") has 435 members from 435
districts throughout the U.S. that are apportioned on population. The Senate
has 100 members (two from each state). Collectively, these two bodies are
called "the Congress." Members of the House are elected for two year
terms with the entire House elected every two years; elections occur in even
years (1996, 1998, etc.). Senators are elected for six year terms. Their terms
are staggered so that only one-third of the Senate is elected every other even
year.
For legislation to be successful, it must be passed by both the House and the
Senate and, to be effected, must be approved by the President. If the President
disapproves (vetoes) legislation, the legislature can override the President's
veto with a two-thirds vote of both the House and the Senate. The Senate is
also empowered to approve all treaties in which the President enters; a
two-thirds vote is required for treaties to be binding.
JUDICIAL
A Supreme Court and other federal courts located throughout the United States
exercise the judicial power of the U.S. government. The Supreme Court is the
court of last appeal. It decides which cases from lower courts it chooses to
review. The Supreme Court, in the famous 1803 Marbury vs. Madison case, took
the responsibility of determining the constitutionality of laws passed by the
U.S. Congress. The Supreme Court also can rule whether laws passed by state or
local legislative bodies conform with the intent and meaning of the U.S.
constitution.
STATE AND LOCAL GOVERNMENT
Each state operates under its own constitution. Each state government has
executive (governor), legislative (all but Nebraska's are bicameral), and
judicial branches. Counties and cities are generally organized with similar
branches of government that can operate under various titles. Each state except
Louisiana bases its law on the "common law" that originated in
England. Despite this more or less common legal heritage, the laws of the
various states are different on myriad topics. Many states have adopted uniform
legislation for business matters (the Uniform Commercial Code, abbreviated as
"UCC").
POLITICAL PARTIES
The two major political parties in the U.S. are the Democratic Party and the
Republican Party. Other political parties exist, but they have often been a
means of protest and a way to introduce social and other reforms. They have
been important at times, but have not been notably important or successful since
the 1940s.
Both major political parties trace their roots to the country's early political
leaders. Some believe the Democratic Party to be one of the world's oldest
political parties, connected with Thomas Jefferson, and established in 1792.
While the first Republican Party candidate to be elected President was Abraham
Lincoln in 1860, the Republican Party's roots include a predecessor party
("the Federalists").
The Democratic Party is frequently described as the liberal party that
emphasizes domestic social issues and uses the power of government to
experiment with solutions to societal problems and to raise the standard of
living. The Republican Party is portrayed as the conservative party that
promotes issues beneficial to business and prefers to use free enterprise to
maintain or improve the U.S. standard of living with minimal governmental
regulation. In reality, these descriptions are not totally accurate. "Each
major party has its inner contradictions and cannot be reduced to a simple formula."
Both parties include representatives of every economic, ethnic, and
issue-oriented group, and neither party has a monopoly on "liberal"
or "conservative" philosophies as they relate to modern domestic or
international issues.
POPULATION
The population of the U.S. at its 1990 census was 248 million; its 1996
population is estimated at 265 million. About 51 per cent of the population is
female. The median age is 33 with increase to 35.7 expected by 2000. Americans
live in 99 million households. Employment includes 115 million.
The United States has many racial and ethnic groups. About 23 million Americans
are of Hispanic origin, 8 million of Asian or Pacific Islands origin, and 31
million of African origin. Approximately 20 million are immigrants, and nearly
one-third of the country's population growth came from net immigration in 1992.
Demographers predict the states that will add the most people in the next two
decades are Arizona, California, Colorado, Florida, Georgia, Nevada, North
Carolina, Texas, Virginia, and Washington.
LANGUAGE
English is the predominant language used in the United States. However, 31.8
million Americans speak a language other than English at home. Of those, about
one-half speak Spanish. Spanish is spoken and used in written documents, signs,
advertisements, etc. where large populations of Spanish-speaking people live,
particularly in Texas, Florida, some mountain states, and California.
CURRENCY
The dollar is the medium of exchange; each dollar is 100 cents. Commonly used
coins are pennies (1 cent), nickels (5 cents), dimes (10 cents), and quarters
(25 cents). The most commonly used paper denominations are the $1, $5, $10,
$20, and $50 "bills." Each paper "bill" is the same size
and color no matter the amount it represents, a matter of confusion for
non-Americans. Cents are commonly displayed in decimal form (i.e., 1 cent is
$.01).
TRAVEL TO THE UNITED STATES
VISAS
Citizens of Andorra, Austria, Belgium, Denmark, Finland, France, Germany,
Iceland, Italy, Japan, Liechtenstein, Luxembourg, Monaco, the Netherlands, New
Zealand, Norway, San Marino, Spain, Sweden, Switzerland, and the United Kingdom
may enter the U.S. without visas if they have tickets to return home in 90 days
or less; they may enter for business or pleasure. All other non-immigrant
travelers to the U.S., other than Canadians, must obtain a visa that is
appropriate to the nature of the visit. Such a visa may be obtained from a U.S.
consulate office in the travelers home country. Documentation of the visitor's
permanent residence and proof of financial arrangements which make it
unnecessary for the visitor to work in the U.S. should be available when
applying for a visa. Those who wish to work in the U.S. or live in the U.S. as
traders or investors must have visas authorizing such activities.
Business visitors obtain a B-1 visa. These temporary business visitors may use
a B-1 visa to negotiate contracts, take a product order, consult with
associates, attend a convention, perform research, attend a meeting of a board
of directors if a member of a U.S. corporation's board, and engage in
litigation. If the visitor receives any payment, other than reimbursed
expenses, he may not qualify under the B-1 visa category and must obtain a
temporary worker visa. Entry on a B-1 visa can be granted for up to one year
with six month extensions available. In addition to the documentation of
residence and finances mentioned above, the visa application should include a
letter from the travelers employer explaining the business purpose of the
travel and stating that the foreigner will not need to obtain employment in the
U.S. for financial support.
A temporary visa to visit the U.S. for pleasure is a B-2 visa. The B-2 visa
category includes tourists, those seeking medical treatment, persons attending
non-business conventions, and amateur entertainers and athletes. For most
European countries that do not require visas from U.S. citizens to visit, visas
are granted for an indefinite duration. At the point of entry, the Immigration
and Naturalization Service (INS) usually admits visitors for six months.
Extensions are available.
Other visas are issued for the purposes of treaty traders, treaty investors,
employees, etc. and are discussed in this booklet under the heading
"Immigration Law for Foreign Employees and Investors."
BUSINESS
ENVIRONMENT
HABITS
Americans are informal. The use of given names ("first names") is
common, even between subordinates and managers. Titles, except for medical
doctors, are not used. Business is often conducted over breakfast, lunch, or
dinner. Business entertainment may be conducted at relaxed events such as the
opera, sports events, or even in personal residences. Business hours are
usually from 8 a.m. or 9 a.m. to 5 p.m. (17:00) or 6 p.m. (18:00). Businesses
do not close during the lunch hour period, which ranges from about 11:30 to
1:30 p.m. (13:30). Most Americans eat dinner at approximately 7 p.m. (19:00).
LEGAL ENVIRONMENT
The use of litigation in the United States to solve business and other disputes
is well known. However, the risk and expense of litigation are not an
impediment to conducting business in the United States. Alternative dispute
resolution methods such as arbitration and mediation are gaining popularity.
And, while litigation in the U.S. has increased, most businesses successfully
operate for many years absent litigation of any kind.
ECONOMIC ARRANGEMENTS
IMPORTS AND EXPORTS
The U.S. is a member of the General Agreement on Tariffs and Trade (GATT) and
several other international economic associations. The United States is an
active export and import country. Its 1996 exports of goods and services
totalled $625 billion; its imports totalled $818 billion. Its 1996 major export
trading partners, in approximate order of volume, were: Canada, Japan, Mexico,
United Kingdom, South Korea, Germany, Taiwan, Netherlands, Singapore, France,
Hong Kong, Brazil, Belgium/Luxembourg, China, Australia, and Italy. Its 1996
major import trading partners, in approximate order of volume, were: Canada,
Japan, Mexico, China, Germany, Taiwan, United Kingdom, South Korea, Singapore,
France, Italy, Venezuela, Hong Kong, and Belgium/Luxembourg.
NORTH AMERICAN FREE TRADE
AGREEMENT
In 1992, Canada, Mexico, and the United States entered in the North American
Free Trade Agreement ("NAFTA"). The agreement will reduce or
eliminate tariffs, export taxes, duty waivers, customs fees, and other trade
barriers between the countries so that when the agreement is fully effective,
businesses in the two countries will be able to ship goods either way across
the three borders free of tariffs. Implementation of NAFTA began on January 1,
1994.
FOREIGN INVESTMENT IN THE U.S.
The major sources of foreign direct investment in the U.S. are Japan, United
Kingdom, the Netherlands, Canada, Germany, France, and Switzerland.
INVESTMENT FACTORS
GOVERNMENTAL POLICY AND
INCENTIVES
The federal government allows investment in the U.S. consistent with the needs
of the country. This attitude basically treats foreign capital on the same
basis as U.S. capital. Any investment in the U.S should be made based on sound
commercial practices, since there are no tax or other special privileges given
to foreign investors.
Investments by non-U.S. individuals or companies are limited in national
security matters such as atomic energy and defense, communications, banking,
and some other business areas. There are other restrictions: some states prohibit
the sale of land (usually agricultural) to foreign investors; certain real
estate managed by the federal government cannot be sold to foreigners; the sale
of agricultural land to a foreigner must be reported to the Secretary of
Agriculture. Legal counsel should review any proposed investment to be certain
it is not restricted or limited by federal or state law.
A foreign business operating in the U.S. is entitled to obtain for itself the
same federal government-sponsored assistance to business (such as programs of
the Small Business Administration) that exists for domestic operators and the
same basic tax treatment. Many state and local governments offer aggressive
incentives to attract foreign businesses in their particular area. Such
incentives commonly include income and real estate tax concessions, financing,
and sometimes opportunities to purchase or lease operating facilities at
greatly reduced prices.
Some states have created offices to promote investment in their state and to
provide information on current incentives and other possibilities. The United
States Chamber of Commerce also provides investment information and publishes
material on business in the U.S.; this organization can be contacted at U.S.
Embassies or consulate offices.
LABOR AND POLITICAL ATTITUDES
Laboring Americans do not resent foreign ownership of businesses unless jobs
are threatened. Conversely, if foreign investment creates jobs, foreigners are
heartily welcomed. Some politicians occasionally express concern about foreign
investments in the U.S., but investment restrictions on foreigners are not
seriously contemplated.
SOURCES OF FINANCE
An investor should review sources of government-sponsored financing that might
exist at the time investment is considered. In addition, one should be
generally aware of other sources of financing through banks, the equity market,
and other lenders.
BANKS AND OTHER
FINANCIAL INSTITUTIONS
The most common financial institutions are:
NATIONAL BANKS
National banks operate under a federal charter. They do not maintain offices
nation-wide as do large banks in other countries, but may operate in more than
one state. They are required to operate under the Federal Reserve System and
the Federal Deposit Insurance Corporation (FDIC). The most important aspect of
the FDIC, for depositors, is that this governmental agency insures deposits up
to $100,000 in the event of a bank failure. A national bank is also regulated
by the state in which it operates.
STATE BANKS
State banks function under a charter granted by the state government and are
regulated by the state banking commission. Most state banks voluntarily belong
to the Federal Reserve System and the FDIC. The distinction between national
and state banks is disappearing.
SAVINGS AND LOAN ASSOCIATIONS
These entities historically operated savings accounts for individuals and made
loans to finance the purchase of personal residences. These institutions now
operate as commercial banks in many respects. They may be organized under state
or federal charters, but state-chartered and federal-chartered associations are
regulated by the Office of Thrift Supervision (OTS), a bureau of the U.S.
Department of the Treasury. Most associations are insured under the FDIC.
CREDIT UNIONS
Resemble savings and loan associations, but are organized by and for a specific
group, usually the members of a church, the employees of a company, etc. Credit
unions provide inexpensive credit to members.
There are a few banks in each major U.S. city that offer international banking
services; your HLB International representative can recommend a bank suitable
to your needs.
LIFE INSURANCE COMPANIES
These insurers offer a variety of financial products, such as life, health, and
disability insurance, annuities, investment funds, etc. These institutions
invest vast amounts in stocks, bonds, real estate, mortgage loans, etc. while
they await eventual long-term claims.
STOCKBROKERAGE HOUSES
Also referred to as "broker-dealers" or "investment
underwriters." These entities represent customers for whom they purchase
stocks, bonds, and other investments and earn a commission for doing so. These
institutions also function as advisers for businesses in a variety of
sophisticated financial transactions and as investors or sales representatives
for businesses that obtain equity by selling securities to the public.
BORROWING
In the U.S., a bank borrowing is made with a signed loan agreement and a note
payable promising to repay the loan on a certain date (or dates if monthly,
quarterly, or annual payments are made) at a defined interest rate.
The forms of borrowing commonly used are:
LINE OF CREDIT
Short-term in nature to finance seasonal cash flow requirements; amounts
borrowed and repaid periodically. A fee may be charged to establish the loan.
Interest rate is usually fixed, but may vary according to "prime interest
rate," which is described as the interest a bank charges its most favored
and financially strong customers. Many lines of credit require the debtor to be
out of debt to the bank for a number of days each year to insure that the line
of credit is used only for short-term financing purposes. Designated assets
often act as security for the loan. A specified savings or checking account
balance may be required ("compensating balance") for the loan's
duration. A line of credit with a longer term of up to several years is known
as a revolving line of credit. Notes may be issued for 60 or 90 day periods,
but are "rolled over" when due and paid at ultimate maturity or
converted to a term loan.
TERM LOAN
Specifies a maturity date of one to ten years, with monthly or quarterly
principal and interest payments; used to finance expansion or other long-term
needs that cannot be financed with a line of credit. Interest charged relates
to the credit-worthiness of the borrower and may float with "prime."
Assets may be pledged as collateral.
LEASING
An alternative to ownership or other financing methods. Under an
"operating" lease, the lessee makes rental payments for a period,
upon the end of which the asset is returned to its owner. Under a
"capital" lease, the lessee makes payments under a non-cancelable
agreement and has the option to purchase the asset at the end of the lease for
a small amount. Interest imputed under lease arrangements is usually higher
than under loan arrangements.
BANKERS ACCEPTANCE
Used to finance the purchase of goods on a short-term basis and usually in
conjunction with a letter of credit. As soon as the transaction is accepted and
title has passed, the banker's acceptance can be discounted.
U.S. exporters can obtain assistance from the Export-Import Bank of Washington
(Eximbank), a government agency. Eximbank finances, guarantees, and insures
payment for goods of U.S. origin. The Foreign Credit Insurance Association
(FCIA) offers export credit insurance. Other federal agencies enter into the
export arena to assist with trade to developing nations, emergency situations,
etc.
RAISING EQUITY
If equity financing is desirable in place of or in addition to debt financing,
a corporation (or other entity) may issue and distribute its stock (or other
equity interests). It may "go public." This generic term is
synonymous with the term "flotation" and means selling shares of
stock to "the public." "The public" is a narrow technical term
that generally means outside investors who are not presently owners of the
business.
Stock of a company that has gone public can be easily transferred or sold
because it is normally valued in some market. A company that has gone public is
referred to as "publicly-held" in contrast to non-public companies,
which are referred to as "closely-held" or "privately-held"
companies.
Large and small companies may sell to the public stock that is traded
"over-the-counter." This market, referred to as the "OTC market"
or the "penny market," is operated by securities dealers under
regulation by the Securities Exchange Commission (SEC), the National
Association of Securities Dealers, and a state agency in some states.
"Going public" requires filing "registration statements"
with the SEC and perhaps with state agencies. This process requires audited
financial statements and vast disclosures about the company, "the
registrant." The potential investors must be provided very detailed
"prospectuses" that explain the uses of the capital and furnish much
information about the company, its directors, officers, operations, etc. Some
companies which start on the OTC market ultimately grow and seek a listing on a
prominent stock exchange.
Many large well known companies sell shares of stock to investors through stock
exchanges such as the New York Stock Exchange and the American Stock Exchange.
Listing is possible only after meeting strenuous exchange listing requirements
and providing very substantial accounting and other disclosures through annual
statements filed with the SEC in addition to audited financial statements.
The basic rule in the U.S. is that no stock or other security may be offered or
sold unless the offeror has filed a registration statement with the SEC and/or
one or more states and the registration statement has become effective, or
unless the security is exempt from registration.
If a limited number of investors or very sophisticated investors (such as
financial institutions or venture capitalists) are asked to consider making an
investment, or if the equity to be raised is less than specified amounts, the
security can be exempt from registration. Potential investors should be
provided with a "private placement memorandum" that describes the
offeror, its directors, officers, use of the equity funds, etc. These
securities are not easily transferred between parties and are not valued in a
trading market.
Before taking any action to raise equity in the U.S., consult a competent
attorney who is skilled in the many intricacies of selling stock to outside
investors. If the amount to be raised is significant, an investment banker
should also be engaged at an early stage of the effort. Member firms of HLB
International will be able to refer you to the appropriate attorneys and
investment bankers for equity-raising advice.
FOREIGN EXCHANGE CONTROL
The United States does not impose any exchange controls and a foreign investor
can repatriate capital, loans, and income. Some payments, such as dividends,
interest, royalties, and service income may be subject to a withholding tax
(see the "Taxation" section in this booklet). The rate of exchange
between the dollar and other currencies is not controlled by a U.S. national
bank; the dollar is valued in relationship with other currencies in a worldwide
market. Currency transactions of more than $10,000 must be reported to the
Internal Revenue Service.
IMMIGRATION LAW FOR FOREIGN EMPLOYEES
AND INVESTORS- TYPES OF VISAS
As
previously mentioned, all visitors must have a proper visa to enter the United
States. This is so unless they are citizens of countries for whom a 90-day stay
for business or pleasure is visa exempt. (See the section on "Travel to
the United States" in this booklet.) Those who wish to work in the U.S. or
live in the U.S. as traders or investors must have visas authorizing such
activities.
TREATY TRADERS (E-1)
This visa allows an alien to reside in the U.S. to carry on significant trade
between the U.S. and the alien's own country. Forty-two countries have treaties
with the U.S. which allow their citizens to obtain an E-1 visa. They are
Argentina, Australia, Austria, Belgium, Bolivia, Brunei, Canada, Colombia,
Costa Rica, Denmark, Estonia, Ethiopia, Finland, France, Germany, Greece,
Honduras, Iran, Ireland, Israel, Italy, Japan, Korea, Latvia, Liberia,
Luxembourg, Mexico, the Netherlands, Norway, Oman, Pakistan, Paraguay,
Philippines, Spain, Suriname, Sweden, Switzerland, Taiwan, Thailand, Togo,
Turkey, the United Kingdom, and Yugoslavia.
(as of April 1, 1993, the U.S. has recognized
three states, Croatia, Slovenia, and Bosnia-Hercegovina, as successor states to
the former Yugoslavia).
The company must be majority-owned by citizens of the employee's own country.
The employee must be in a supervisory or executive position or have skills
essential to the company's operations. Trade may be in goods or services. An
E-1 visa grants unlimited entry for a period of several years, depending on the
alien's country, and one year extensions are available for as long as the trade
continues and the treaty is in effect.
TREATY INVESTORS (E-2)
This visa is for citizens of treaty countries who make an investment in the
U.S. or who are executives, managers, or essential employees of a treaty
investor. The venture must be majority-owned by the foreign citizen or by other
nationals of his country; the investment must be active (not passive such as
real estate) and must be "substantial" in relation to the nature of
the particular enterprise. Otherwise the E-2 is similar to the E-1. E-2
countries include Argentina, Australia, Austria, Bangladesh, Belgium, Bulgaria,
Cameroon, Canada, Columbia, Congo, Costa Rica, Czech Republic, Egypt, Ethiopia,
Finland, France, Germany, Grenada, Honduras, Iran, Ireland, Italy, Japan,
Kazakhstan, Korea, Kyrgyzstan, Liberia, Luxembourg, Morocco, Mexico, Moldova,
Netherlands, Norway, Oman, Pakistan, Panama, Paraguay, Philippines, Poland,
Romania, Senegal, Slovak Republic, Spain, Sri Lanka, Suriname, Sweden,
Switzerland, Taiwan, Thailand, Togo, Tunisia, Turkey, United Kingdom,
Yugoslavia (see comment
above about Yugoslavia), and Zaire.
WORKERS
HAVING SPECIALTY OCCUPATIONS (PROFESSIONALS) (H-1B)
Workers in specialty occupations can be admitted to the U.S. under this visa.
Holding a bachelor of arts or science degree in a professional discipline can
usually qualify an applicant under this category. While the employer does not
have to demonstrate that no U.S. citizen is available to perform the job, the
employer must attest to the U.S. Department of Labor that the alien will be
paid either the prevailing wage for that occupation or the actual wage paid by
the employer for persons in the relevant occupation, whichever is higher. The
employer must also show that the position requires a person of professional
ability, and that the proposed employee has sufficient credentials. This visa
is initially available for up to three years with extensions to six years
possible.
INTRACOMPANY TRANSFEREES (L-1)
This visa category is used for a foreigner who has worked for a related company
outside the U.S. for at least one year within the previous three years. The
employer must be an international company doing business in the United States
and at least one other country through a subsidiary, parent, affiliate, or
branch office. The intracompany transferee category is available for executives
and managers. Individuals with specialized knowledge may also qualify. The
initial visa is issued for a three year period. It is possible to obtain extensions
of up to seven years for managers and executives. Non-management holders of
specialized knowledge are limited to a five year stay.
FOREIGN STUDENT FOR
PRACTICAL TRAINING (F-1)
A foreign student can easily obtain approval for practical training that is not
available in the student's home country if he or she has attended a U.S.
college as a foreign student. The time period allowed for the training will not
exceed one year.
TEMPORARY WORKER (H-2)
This category is for temporary workers whose skills are in short supply, and
the time required to perform the job is of limited duration. This visa is more
difficult to obtain than the H-1B because the employer must apply to the
Department of Labor for evaluation of the availability of U.S. workers to
perform the job. The H-2 visa is for an initial period of one year with
extensions available up to three years.
TRAINEES
(H-3 and J-1)
Temporary trainees can be admitted under an H-3 visa and trainees sponsored by
an exchange program can be admitted with a J-1 visa. The H-3 is normally used
to train an individual from a foreign country in a process that can be learned
only in the United States. The program must include substantial classroom-style
teaching and be relatively unproductive; such employment must not displace a
U.S. worker. An H-3 visa is granted for the length of the training program, up
to two years. A J-1 visa is for a student, scholar, trainee, teacher, or any
other person coming to the U.S. to temporarily participate in a program
authorized by the United States Information Agency. Some of these programs
require employment, some permit it, and others prohibit it.
OTHER VISAS (O, P, and R)
U.S. immigration law authorizes a number of additional non-immigrant visas that
permit work in the United States. An alien with extraordinary ability in the
sciences, arts, education, business, or athletics may be eligible for the O
visa. Athletes, entertainers, and other performers may be eligible for P visas.
A religious worker may seek an R visa to work for a temporary period in the
United States. Each visa has special eligibility criteria and time limits.
PERMANENT
RESIDENCE (GREEN CARD)
An employer that wants to permanently hire a foreign individual to work in the
United States faces a complicated process. Permanent residence may be granted
to special immigrants, immediate relatives of U.S. citizens, "close"
relatives of citizens and permanent residents, and, most important to business,
to persons with offers of permanent employment in the United States.
In most cases an employer must first prove, through a process known as
"labor certification," that no U.S. worker is available for the
position. If a particular foreign individual has had sustained national or
international renown, is an outstanding professor or researcher, or is a
multinational company's executive or manager, that step may be eliminated.
Individuals holding advanced degrees or having exceptional ability may
immigrate. Professionals holding bachelor's degrees and persons in skilled
occupations requiring two years of training or experience may also immigrate.
Employers may also petition for unskilled workers. In almost all cases an
employer must demonstrate an inability to find a U.S. worker.
The Immigration act of 1990, which became effective for these purposes on
October 1, 1991, greatly increased the number of available immigrant visas for
employment-based immigrants. Instead of a 54,000 per year limit,
employment-based immigrants may total 140,000 per year. Other than the
processing time involved in obtaining a labor certification and permanent
residency itself, visas are available in all categories other than the
"unskilled" category without the wait that was previously common.
CONDITIONAL PERMANENT
RESIDENCE FOR ALIEN ENTREPRENEURS
The Immigration Act of 1990 created a new classification of immigrants. That
law set aside 10,000 permanent residency visas per year for aliens who establish
a new commercial enterprise in the United States after November 29, 1990, that
employs ten U.S. workers. The investment must be one of $1,000,000 unless it is
in a rural area or an area of high unemployment. In those instances, the
investment need only be $500,000. Establishing a "new commercial
enterprise" has been defined by regulation to include restructuring an
existing business, saving a troubled business, and expanding an existing
business, as well as creating a new business.
The alien investor need not be involved in the day-to-day management of the
investment, but must have a role in formulating policy for the enterprise. The
permanent residency is conditional for the first two years. At the end of the
two-year period, the Immigration and Naturalization Service reviews the
progress of the enterprise to insure that the statutorily required amount
actually has been invested and that ten U.S. workers continue to be employed
because of that investment. Investors may join together to create an investment.
Each may obtain permanent residency if each invests the requisite amount and
creates the requisite number of jobs.
CAUTION
The U.S. immigration law is complicated. Like all laws, it is subject to change
at any time. Before taking steps to obtain a visa under any of the categories
discussed above, one should obtain advice from an attorney who specializes in
immigration issues.
IMPORT AND EXPORT OF
GOODS
GENERAL
Most imports are free of restrictions, but quotas are imposed for some
products. Quotas may be absolute (allowing a maximum quantity of a product
during a time period) or variable rate (resulting in a higher rate of duty on
quantities in excess of a certain amount). From time to time, imports from and
exports to certain countries may be restricted or embargoed. A license or
permit must be obtained to import certain goods, some of which are subject to
product safety and health controls. Most goods imported into the U.S. are
subject to an import duty. The method used to assess tariffs under the
Harmonized Tariff Schedule is very complex. Anyone exporting to the U.S. should
obtain a ruling on the tariff classification and the rate of duty on specific
items from the Commissioner of Customs before commencing business. This will
reduce delays at the port of entry and will prohibit surprise calculations.
CONTRACT
LAW
It is important when selling goods in the United States that the contracting
parties choose the law that will govern the transaction. Choices include the
law of the seller's country, the law of the buyer's state, or the United
Nations Convention on Contracts for the International Sale of
Goods ("CISG"). Most courts in the U.S. will honor a choice of law
designated in a contract unless it is unreasonable. In addition, the parties to
the contract can modify the provisions of the governing law by mutual
agreement. Without choosing governing law, a contract dispute is left to
uncertainty.
RELIEF PROVISIONS
Selling products in the U.S. at less than the product's fair market value,
selling heavily subsidized products, violating patent or similar laws, and
injuring a U.S. industry can be reasons for a U.S. business to seek relief
against a foreign competitor. Such relief could result in the foreign company's
payment of hardship duties on its products. Foreign exporters and domestic
importers should become familiar with these provisions to avoid unhappy and
expensive situations.
MARKING
The U.S. requires that foreign products imported into the U.S. be marked with
the country of origin. Failure to do so can result in the imposition of
additional duties. Complexities include products that are made in more than one
country. Foreign sellers and domestic importers should seek advice and
assistance from legal counsel and customs brokers regarding this important
requirement.
FOREIGN TRADE ZONES
AND BONDED WAREHOUSES
"Foreign trade zones" (FTZs) are areas that are legally outside the
customs territory of the United States. Similar to free trade zones throughout
the world, these areas are used by importers and exporters to store,
manufacture, exhibit, label, package, sort, and modify goods
before selling them. Duties are paid on these items only when they are imported
into the market out of these zones. An additional benefit is that the customs
valuation does not include the processing value added to the goods while in the
FTZ.
A "customs-bonded warehouse" may receive goods free of duty. Similar
to a foreign trade zone, but with less flexibility as to the types of activities
that may be performed, a warehouse may save significant duties. The importer
and the warehouse operator obtain a bond to guarantee payment of duties.
DUTY
DRAWBACKS
Duty drawbacks are often overlooked. Duties paid on imported merchandise may be
refunded if the merchandise is later exported.
U.S. GOODS RETURNED
U.S. goods that are exported and returned to the U.S. (including articles
assembled, processed, or refined abroad which utilize U.S. metal articles or
other components) receive preferential tariffs.
U.S. MANUFACTURERS
Smaller U.S. manufacturers previously had little interest in exporting because
of the complexities involved. Now they know the effort is worthwhile. They have
found that by selling internationally they have improved economies of scale in
production, marketing, and distribution and have increased profits. U.S.
manufacturers have also learned that by responding to the preferences of
foreign customers and the innovations of foreign competitors, they are better
able to compete for sales at home. As a result of these attitudes, a variety of
U.S. products are available to sell internationally. Contact the U.S. Embassy
or consulate office in your area or your HLB International representative for
additional information about U.S. manufacturers which seek to export products.
EMPLOYMENT REGULATIONS
Federal,
state, and local law regulate employment in the United States. The federal
government regulates employment through the Fair Labor Standards Act, the
National Labor Relations Act, the Equal Pay Act of 1963, the Civil Rights Act
of 1964, the Age Discrimination in Employment Act, the 1992 Americans with
Disabilities Act, and other legislation. The federal agencies that regulate employment
are the Department of Labor, the Equal Employment Opportunity Commission, and
the National Labor Relations Board.
Important matters that may be regulated by federal or other authorities and
that one should consider when establishing a business or hiring employees for
the first time include:
minimum wages
overtime pay
holiday pay*
vacation and sick pay*
rest periods*
fringe benefits
term of employment**
child labor
termination pay
military, voting, disability, maternity, and jury leave
written employment agreements
collective bargaining agreements and unionization
* not
mandated by the federal government
** generally "at will" in the U.S.
OTHER REGULATIONS
Federal,
state, and local agencies with thousands of regulations influence business. An
all-inclusive list is beyond the scope of this booklet, but examples of matters
which are regulated include: the environment; safety of workers; usefulness and
safety of pharmaceuticals; access to business facilities by physically
handicapped or disabled persons; ingredients of food products; trademarks,
patents, and copyrights; monopolistic and anti-trust practices; safety of
transportation; plant closings or mass layoffs. No matter what enterprise one
might enter, one should make a search for all the laws which impact that
specific business to avoid major oversights.
ESTABLISHING A BUSINESS
The
nature of business structure is left to the 50 states. The primary business
structures, which are similar in title and operation to similarly-named
businesses in other countries and which are more or less uniform throughout the
states, are sole proprietorships, partnerships, corporations, limited liability
companies, branches, and joint ventures. A business might be commenced through
a merger or acquisition.
SOLE PROPRIETORSHIPS
A single individual owns and operates the business. The proprietor is
personally responsible for all liabilities accruing to the business, is
entitled to all the income from it, and pays individual income taxes on that
income. No legal action is required to establish a sole proprietorship other
than registering the business trade name, if desired (required in some jurisdictions),
and obtaining certain licenses to collect sales taxes, payroll taxes, etc.
There are no governmental fees to establish a proprietorship. This informal
business needs to maintain adequate records in order to calculate net income
for tax purposes (the proprietor also should require good records for
management purposes), but such records may consist of worksheets summarizing
income and expenses using sales slips, bank deposit records, cancelled checks,
and similar items to document transactions. There are no statutory audit
requirements, but lenders, sureties, and others may require audits.
PARTNERSHIPS
A partnership is an association of individuals or other entities to operate a
business. While not required, most partnerships operate under a written
partnership agreement that describes the responsibilities and benefits to each
partner; partnerships operate under state law. The partners are responsible for
the actions of the partnership and those of the other partners in the ordinary
course of business. Partners are taxed individually on the income of the
partnership.
Most states permit a special arrangement of partnerships called limited
partnerships. In these partnerships, a limited partner (or more than one) is
liable for the debts of the partnership only up to the amount of his capital.
Limited partners do not participate in controlling the affairs of the limited
partnership. There must be at least one general partner who is not protected by
limited liability. Limited partnerships usually include in their name
"limited partnership," "limited," "company," "L.P.,"
"Ltd.," or "Co." With proper planning, limited partnerships
usually are treated as partnerships for tax purposes so that income passes
through to the partners.
There are usually no stated costs to establish a partnership, but legal counsel
should be consulted regarding the preparation and adoption of the partnership
agreement and the necessity to register the partnership with a state or local
governmental agency. Accounting, at a minimum, should allow the computation of
net income for tax purposes; double entry accounting records are recommended.
Many partnership agreements require that financial statements be prepared
according to generally accepted accounting principles. Some partnership
agreements require that the financial statements be audited or reviewed by
independent accountants, but there are no statutory audit requirements unless
the partnership's equity interests are publicly traded (see section on raising
equity). Lenders and
other outside parties may require audits.
CORPORATIONS
The incorporated business is a distinct entity from its owners, the
"stockholders" or "shareholders," who are not personally
liable for the debts and actions of the corporation. This is the most formal
means of conducting business and is preferred by foreign companies doing
business in the U.S. because of U.S. tax law and insulation from legal claims.
Corporations, which are "incorporated" under state law by filing
"articles of incorporation" with the proper state agency, can exist
perpetually even when the stockholders transfer their ownership to others. Most
states require that corporations include "corporation," "incorporated,"
"company," or "limited" or abbreviations such as
"inc.," or "corp." in their name.
Corporations operate under the general direction of a board of directors which
establishes thepolicies under which the officers conduct daily corporate
business.
There are no restrictions on ownership of corporations. The U.S. corporation
may be a subsidiary that is wholly-owned by foreigners. There is no foreign
investment approval process, and there is no citizenship or residency
limitation on directors or management. Except for certain industries, there are
few minimum capital requirements, and a corporation may have only one
shareholder.
Each state has established a fee schedule for the incorporation of a
corporation and the services of legal counsel are usually required to assist
with the incorporation process. Accounting records should be formalized and use
double entry accounting. There are no statutory audit requirements unless the
company's stock is publicly traded (see section on raising equity). Lenders and
other interested parties may require audited financial statements.
LIMITED
LIABILITY COMPANIES
The limited liability company (often called an "LLC") is a newer form
of entity that combines limited liability for owners (called
"members") like that of a traditional corporation with the structural
flexibility and the tax flow-through traits (if properly planned) of a
partnership. Besides limited liability for members, other characteristics
include a limited life and limited transferability of ownership interests.
An LLC is formed by filing organizational documents with a state agency. Most
state LLC laws require that the entity's name include "Limited Liability
Company," "LLC," "Limited Company," or "LC"
to designate its legal status.
"Operating agreements" or "LLC regulations" define the
rights and powers of the entity's members and designate the management of the
LLC; these documents are the equivalent of a partnership agreement or corporate
by-laws.
This entity is not available in all 50 states, but many states have adopted
legislation that recognizes LLCs, and other states have pending legislation.
There are no statutory audit requirements, but audits may be required by
members, lenders, and others.
BRANCHES
A foreign company may operate a branch, perhaps a simple sales office, in any
state. The company would be subject to state laws and would have to be
registered as a "foreign corporation" in most states, subject to the
usual corporate laws and state and federal income taxes. As a branch operation,
the liabilities of the branch are the responsibility of the corporate owner.
While there are no statutory audit requirements, adequate accounting records
should be maintained for tax and management purposes. Branches have become
unpopular.
JOINT VENTURES
A foreign company may form a joint venture with a company in the U.S. for a
specific purpose for a particular length of time. The joint venture may be
organized under partnership or corporation laws and will be taxed dependent on
its predominant characteristics. A joint venture agreement should clearly
describe the relationship between the parties and their respective
responsibilities. The agreement also should provide for the resolution of
disputes.
ACQUISITIONS AND MERGERS
A foreign company may want to conduct business in the U.S. by acquiring or
merging with an existing business (the target). If the target is a corporation,
an acquisition could be accomplished by: buying the target's outstanding shares
of stock for cash or by giving the acquiror's stock in exchange; by acquiring
the target's assets for cash or for the acquiror's stock; merging the target
with another company owned by the foreign investor. Some states have specific
rules regulating mergers (take-overs). The use of stock (or other securities)
in these transactions might require approval by the U.S. Securities Exchange
Commission or state securities regulatory agencies. Certain larger (defined in
reference to sales, assets, and value of voting stock) mergers and acquisitions
(including the formation of joint ventures) are required to file
"pre-merger" notifications and to observe waiting periods. The
Committee on Foreign Investment in the United States (CFIUS) has the power to
review and possibly prohibit a merger or acquisition if the transaction might
pose a threat to U.S. national security. It is possible to notify CFIUS of the
planned transaction so that a 90 day period runs for CFIUS to review the
transaction during which CFIUS must approve or prohibit the transaction. If
CFIUS fails to do so within the 90 days, the transaction is deemed approved.
Before beginning any acquisition or merger negotiations or transactions, you
should seek in-depth advice.
ACCOUNTING AND AUDITING
Certified public accountants (CPAs) in the United States are licensed and
regulated by the states (this is true for all professions). The American
Institute of Certified Public Accountants (AICPA), the national organization of
CPAs, prepares and grades the national uniform CPA examination on behalf of the
states and acts on matters of national importance for the accounting
profession. The AICPA is a member of the International Accounting Standards
Committee (IASC).
U.S. accounting principles "consist of the financial accounting and reporting
assumptions, standards, and practices that a business firm must use in
preparing external financial statements."
Accounting principles in the U.S. are composed of official pronouncements of
the Financial Accounting Standards Board (FASB) and other sources (including
the Securities Exchange Commission for publicly-held entities under its
jurisdiction) which together comprise generally accepted accounting principles.
FASB is an entity supported by the private sector and is not financed,
regulated, or dominated by any government. U.S. accounting principles differ in
various respects from international accounting principles promulgated by the
IASC.
Auditing standards in the U.S. are established by the Auditing Standards Board
of the AICPA. They differ in some respects from the International Standards on
Auditing issued by the International Auditing Practices Committee of the
International Federation of Accountants.
Audit requirements for specific types of entities are discussed under the
captions for those organizations.
TAXATION
GENERAL STRUCTURE
Taxation in the United States is complex and ever-changing. The federal
government levies these taxes:
income (broadly defined and including capital gains) on individuals,
corporations, trusts, and estates (partnership income is taxed to the
partners);
estate (death);
gift;
payroll, such as social security, payable by both employer and employee, and
unemployment insurance;
excise taxes on tires, gasoline, communication services, weapons, lubricating
oils, aircraft, trucks, aviation fuel, and air travel tickets; tariffs and
customs duties;
stamp taxes on alcoholic beverages, cigarettes, and the gambling industry.
The rates of any of these taxes and the methods used to calculate them can
change at any time.
Taxes imposed by states and local governments vary widely, but usually consist
of income, payroll, property, sales and use, inheritance, severance, and
transaction taxes. These state and local taxes can be significant. Their
effects should be considered when any transaction is contemplated.
Congress legislates the federal tax law. The Internal Revenue Service (IRS), a
branch of the U.S. Treasury Department, administers the law. This
administrative function includes issuing rulings and regulations to clarify the
law, developing and processing tax forms, auditing tax returns, and collecting
delinquent taxes. The courts rule on tax issues when there are litigated
disputes between the government and taxpayers.
This booklet superficially discusses taxation in the United States. In-depth
professional advice should be obtained before business is transacted.
INCOME
TAXATION
GENERAL PRINCIPLES
Taxation in the U.S. has generally adopted those criteria Adam Smith identified
as his "canons
of taxation."
His canons were:
EQUALITY. Equality means paying taxes in proportion to income (ability to pay).
U.S. taxes are generally progressive.
CONVENIENCE. Tax should be easily assessed and collected and administrative
costs kept low. Self-assessment and filing of returns by taxpayers on a
"pay-as-you-go" method in the U.S. have been convenient.
CERTAINTY. Taxpayers should be able to predict "what, how, when"
taxes are imposed. The U.S. previously scored high on this canon, but has not
scored as high in recent years because massive changes in tax law have been
adopted almost every year.
ECONOMY. Only nominal costs by the government to collect taxes should be
necessary and small costs for taxpayers to comply. The government's costs to
collect income taxes have been tolerable, but new complexities are imposing
substantial costs for taxpayers to comply with the U.S. income tax law.
REPORTING
PERIODS
Most individuals (including sole proprietorships) report income on the calendar
year. Corporations may generally use a fiscal year that closes at the end of
any month. Partnerships, limited liability companies, and corporations that
elect to be taxed as a partnership adopt the tax year of their partners since
partnership income "flows through" to the partners upon whom it is
taxed. A fiscal year normally is chosen the first time a tax return is filed.
OVERVIEW OF INCOME
The Internal Revenue Code ("the Code") defines taxable income as
"all income from whatever source derived." This definition was
devised to tax all revenue -- from whatever source, and wherever earned -- of
U.S. citizens, U.S. residents, and U.S. corporations. After that ample
inclusion, the Code then excludes from taxation such income as: life insurance
proceeds; welfare and veterans' benefits; compensatory damages; gifts; meals
and lodging (for employer's convenience); damages for injury; some disability
payments; other similar items. Corporate income is taxed at the corporate level
and is taxed again when dividends are received by the shareholder.
OVERVIEW
OF DEDUCTIONS
For business returns of corporations, proprietorships, and -artnerships
(limited liability companies usually report as partnerships), deductions
consist of: the cost of goods sold, depreciation, interest, bad debts, repairs
and maintenance, travel, taxes except income, advertising, salaries and wages,
retirement plan contributions, business gifts (not over $25), business meals
and entertainment (only 50%), professional fees, charitable contributions
(limited for corporations), and any other "ordinary and necessary business
expenses."
Individuals may deduct medical expenses (with limitations), interest paid on a
personal residence mortgage (with limitations), interest paid to carry
investments (with limitations), property taxes, state and local income taxes,
charitable contributions (with limitations), employee business expenses (with
limitations), and some miscellaneous items. A specified deduction (called a
"personal exemption") is also granted for each dependent supported by
the taxpayer, including himself and his spouse.
Since income is so broadly taxed, both businesses and individuals may deduct,
with some limitations, losses that result from transactions entered into for a
profit. Examples include losses incurred in the sale of real estate or capital
stock.
ALTERNATIVE MINIMUM TAX
This tax ensures that individuals and corporations pay a "minimum
tax" by aggregating and taxing several items that receive preferential tax
treatment under the tax law.
FORM VERSUS SUBSTANCE
In tax planning for a U.S. operation, the form versus substance concept must be
considered. Many non-U.S. tax jurisdictions rely heavily on just the paper form
of the transaction. The U.S. tax authorities have the power to overturn the
form of the transaction to the detriment of the taxpayer, even though the form
of the transaction is structured properly, if the underlying forces, the
"substance" of the transaction, warrant a different tax treatment.
INDIVIDUAL TAXATION
The general matters regarding income and deductions previously discussed are
sufficient for a brief review of individual taxation.
RATES
The individual tax rates in effect at January 1, 1998, are 15, 28, 31, 36, and
39.6 per cent. The marginal 28 per cent rate applies to taxable income
beginning at the following levels (lower income levels are taxed at 15 per
cent):
|
Filing status |
Taxable income over |
|
Single |
$ 25,350 |
|
Unmarried head of household |
$ 33,950 |
|
Married, filing jointly |
$ 42,350 |
|
Married, filing separately |
$ 21,175 |
The 31 per cent marginal rate begins at the following levels:
|
Filing status |
Taxable income over |
|
Single |
$ 61,400 |
|
Unmarried head of household |
$ 87,700 |
|
Married, filing jointly |
$ 102,300 |
|
Married, filing separately |
$ 77,975 |
The 36 per cent marginal rate begins at the following levels:
|
Filing status |
Taxable income over |
|
Single |
$ 128,100 |
|
Unmarried head of household |
$ 142,000 |
|
Married, filing jointly |
$ 155,950 |
|
Married, filing separately |
$ 77,975 |
The 39.6 per cent marginal rate begins at taxable incomes of $278,450 for
joint, single, and unmarried head of household tax filers and at $139,225 for
married filing separately taxpayers.
For higher income taxpayers, the benefits arising from itemized deductions and
personal exemptions are phased out so that some high income taxpayers pay a
marginal tax rate of more than 41 per cent. Amounts at which the 28, 31, 36,
and 39.6 per cent rates and the phase-outs occur are adjusted each year for
inflation.
CAPITAL
GAINS
Net capital gains (the excess of net long-term capital gains over net
short-term capital losses) of individuals are taxed at a maximum rate of 20 per
cent except for gains from collectibles (coins, works of art, antiques, etc.)
which are taxed at a maximum rate of 28 per cent. A reduced tax rate of 18 per
cent will apply to certain gains after 2000 for assets held for five years.
Capital gains result from the sale of any asset except inventory or property
held for sale to customers in the usual course of trade, notes or accounts
receivable derived from ordinary trade or business, depreciable business
property, real property used in a trade or business, and certain intellectual
property. Long-term capital gains are gains from the sales of assets held for
more than 18 months except for gains from collectibles which must be held more
than one year to qualify.
Also, non-corporate taxpayers may exclude 50 per cent of the gain on the sale
of certain shares issued to them after August 10, 1993, by eligible
"C" corporations after holding the shares for five years. Several
requirements must be met to qualify for this favorable tax treatment.
DUE DATES
Individual income tax returns are generally due April 15 for calendar year
taxpayers or the 15th day of the fourth month following the close of a fiscal
year; extensions up to six months can be obtained. Estimated taxes must be paid
in quarterly installments during the year unless all taxes due are withheld
from employment earnings.
CHILDREN
The unearned income (principally interest, rents, royalties, annuities, capital
gains, and dividends) of children under age 14 is taxed at the parents' rate
determined as if the income were the parents' income.
CORPORATE TAXATION
GENERAL
The discussion above regarding the nature of taxable income and deductible
expenses combined with the following noteworthy corporate distinctions are
sufficient for a brief review of corporate taxation.
Personal service corporations (law, medicine, accounting, etc.) are subject
to a flat 35 per cent tax rate and are generally required to report on a
calendar year.
"S corporations" are corporations in every meaning, except that
they pay no income tax and their income is taxed to shareholders as if they
were partners in a partnership; this election is made by the shareholders, who
usually must be U.S. resident individuals.
Corporations which pay their own tax are called "C" corporations.
The cash method of accounting is denied for many corporations (companies with
less than $5 million in sales are exempted from this rule).
Corporations cannot deduct net capital losses against non-capital income.
Net operating losses can be carried back for refund for two years and forward
20 years to offset future taxable income.
41.176 per cent to 100 per cent of dividends received by "C"
corporations can be non-taxable.
A 39.6 per cent tax (penalty) can be applied to corporate accumulated
(retained) earnings (including U.S.-source income of foreign corporations if
any shareholder is subject to U.S. income tax on distributions) in excess of
$250,000 or the reasonable needs of the business.
A 39.6 per cent tax (penalty) can be applied to undistributed personal
holding income (passive income from stock, bonds, etc. and for personal
services performed by a shareholder) of certain personal holding company
corporations, including a foreign corporation with personal service contracts.
Corporate tax returns are due the 15th day of the third month following the
close of the corporation's fiscal year (extensions up to six months available).
Corporations are required to pay quarterly payments of their estimated taxes
for each fiscal year. Those with taxable income of $1 million or more must pay
100 per cent of the current year's tax to avoid penalties. Smaller corporations
can base their estimated taxes on 100 per cent of the prior year's tax.
A corporation that elects foreign sales corporation (FSC) status and that
meets other requirements can have export income partially exempted from U.S.
tax.
An interest charge domestic international sales corporation (IC-DISC) can
defer taxable income attributable to $10 million or less of qualified exports
with the corporate shareholders paying an interest charge on the deferred tax.
Entities other than corporations may elect their classification for federal
tax
RATES
The income tax rates for corporations in effect at January 1, 1998, are:
|
Taxable income |
Tax rate |
|
$50,000 or less |
15% |
|
$50,001 - $75,000 |
25% |
|
$75,001 - $100,000 |
34% |
|
$100,001 - $335,000 |
39%* |
|
$335,001 - $10 million |
34% |
|
$10 million - $15 million |
35% |
|
$15 million - $18,333,333 |
38%** |
|
over $18,333,333 |
35% |
* Includes a 5% "recapture" tax under
1986 law.
** Includes additional 3% "recapture" tax under 1993 law.
GENERAL
ASPECTS OF INTERNATIONAL TAXATION
The tax laws
of the United States as they pertain to the taxation of foreigners are many and
complex. Comprehensive explanations of them would require many pages. The
following
material is a brief overview.
Foreign individuals and corporations are generally subject to these U.S. taxes:
(1) regular income tax rates (see tax discussion above) on income which
is "effectively connected" with the conduct of a trade or business in
the United States. If such income is earned through a partnership, the
partnership must withhold tax at regular income tax rates (35 per cent on
corporate partners and 39.6 per cent on non-corporate partners) on the foreign
partner's share even if the income is retained by the partnership; a
partnership also might be subject to the U.S. branch profits tax of 30 per cent
on income not retained in the U.S. operation.
(2) a flat 30 per cent (or treaty rate) on U.S.-source investment, fixed
or determinable annual or periodic ("FDAP") income not effectively
connected with a U.S. trade or business; these include dividends, rents,
premiums, annuities, royalties from timber, coal and iron ore, and gains from
the sale of patents, copyrights, etc., if payments are made on future
productivity.
(3) regular income tax rates on the net gain from the sale of U.S. real
property at regular tax rates (individual or corporate) under the Foreign
Investment in Real Property Tax Act ("FIRPTA"); the minimum tax rate
is 26 per cent on gains up to $175,000 and a minimum tax rate of 28 per cent on
gains over $175,000. Included as real estate are direct ownership of real
property and perhaps related personal property, interests in natural resources
and leaseholds, and equity interests in a U.S. corporation if 50 per cent of
the value of its assets (excluding some liquid assets) consists of U.S. real
property interests. The tax on the sale of real property is collected through
the buyer's withholding ten per cent of the gross purchase price unless the
Internal Revenue Service agrees to a lesser rate to reflect a lesser actual tax
on the gain.
(4) estate and gift taxes (rates range from 18 to 55 per cent) on all
worldwide property owned by resident individuals and estate taxes on U.S.-situs
tangible and intangible property owned by foreigners not resident in the United
States. Tangible U.S.-situs property owned by non-resident foreigners is
subject to gift taxes. Tangible property includes real estate and personal
property. Intangible property includes stock issued by a corporation organized
under U.S. law and debt obligations of the U.S., other political units of the
U.S., or of a U.S. partnership, corporation, estate, trust, citizen or resident
of the United States. This tax is beyond the scope of this booklet. Please seek
professional assistance
The United States has income tax treaties with Australia, Austria, Barbados,
Belgium, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Finland,
France, Germany, Greece, Hungary, Iceland, India, Indonesia, Ireland, Israel,
Italy, Jamaica, Japan, Korea, Luxembourg, Mexico, Morocco, Netherlands, New
Zealand, Norway, Pakistan, Philippines, Poland, Romania, Russia, Slovak
Republic, Spain, Sweden, Switzerland, Trinidad & Tobago, Tunisia, the
former U.S.S.R. (in effect for Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan,
Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan), and
the United Kingdom.
FOREIGN
INDIVIDUALS RESIDENT IN THE U.S.
Objective standards of immigration status and the number of days a person is
physically present in the U.S. are the preeminent determinants whether a
foreign national will be considered a resident of the U.S. and subject to U.S.
tax on his worldwide income. An alien individual is treated as a resident of
the United States for any calendar year if the individual is a lawful permanent
resident ("green card holder") of the United States at any time
during the calendar year, or the individual meets the substantial presence
test. An individual meets the substantial presence test with respect to any
calendar year if:
- the individual was present in the United States on at least 31 days during
the calendar year, and
- the sum of the number of days on which the individual was present in the U.S.
during the current year and the two preceding calendar years (when multiplied
by the applicable multiplier determined under the following table) equals or
exceeds 183 days.
|
In the case of days in: |
The applicable multiplier is: |
|
Current year |
1 |
|
1st preceding year |
1/3 |
|
2nd preceding year |
1/6 |
For example, a foreign national who was in the United States for
|
120 days in 1998 x 1 |
= |
120 |
|
120 days in 1997 x 1/3 |
= |
40 |
|
120 days in 1996 x 1/6 |
= |
20 |
|
|
|
180 |
would not be considered to have had a substantial presence in the U.S.
There are exceptions to this rule and certain events that occur before or after
substantial presence can escape U.S. taxes. One significant exception to the
substantial presence test is for individuals who have a tax home in another
country or a closer connection to a foreign country. IRS form 8840,
"Statement of Closer Connection Exception," can be used to document
the claim for a closer connection. Each situation should be studied carefully.
Nonresident aliens temporarily working in the U.S. as employees of their
nonresident foreign employer may be exempt from U.S. tax if they are in the
U.S. less than 90 days, their gross income is less than $3,000 yearly, and
their employer is not engaged in trade or business in the United States. Tax
treaties may also affect these individuals.
Nonresident aliens are subject to U.S. social security taxes (see the
"Other Taxes" section in this booklet) on income from services
provided in the United States. Totalization agreements provide exceptions to
eliminate dual social security coverage and taxation when a person from one
country works in another and is required to pay such taxes to both countries on
the same earnings. The U.S. has totalization agreements in effect with Austria,
Belgium, Canada, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,
the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United
Kingdom.
Nonresident aliens subject to U.S. income tax on wages and salaries pay at the
normal graduated rates on their income as either single individuals or as
married filing separately. Income taxes are withheld from salaries and wages by
their employer. Deductions are limited to business expenses and can be taken
only against effectively connected income (income connected to a U.S. business),
contributions to U.S. charities, and casualty losses on U.S. property. Most are
allowed one personal exemption, although residents from some countries can
claim more than one.
FOREIGN BUSINESSES IN THE
U.S.
EXPORTING INTO THE U.S.
Example 1: A Canadian Company, C, manufactures its products in Toronto. Based
on market research, the company believes it could successfully sell its
products to U.S. customers. C advertises in U.S. trade journals from its office
in Toronto and begins to receive requests for orders from U.S. companies. The
Canadian company ships its goods from Toronto, issues its invoices from Canada,
and receives payments in the mail from its U.S. customers without having an
employee in the United States.
It seems clear that the Canadian company is not engaged in trade or business in
the United States. Consequently, the profits it makes from selling its products
to U.S. consumers are not subject to U.S. income tax.
The U.S. looks to all the facts and circumstances to determine whether the
foreign company has engaged in trade or business in the United States. For the
U.S. government, it is an all or nothing proposition. If it is unsuccessful, no
tax is collected; if it is successful, the potential for significant revenue
exists.
The United States has entered into a series of tax treaties with foreign
countries that, in effect, seek to encourage a greater amount of commerce with
those countries without income tax getting in the way. A tax treaty allows a
foreign corporation resident in a foreign country with
which the U.S. has a tax treaty to conduct more activities in the United States
without being subject to U.S. tax as long as it does not create a
"permanent establishment" in the United States. This allows the
foreign company to engage in trade or business in the United States and, as
long as it is not through a permanent establishment, avoid U.S. tax.
FOREIGN
CORPORATION REPRESENTATIVES IN THE UNITED STATES
When a foreign corporation begins to have personnel representing it physically
in the United States, it is more likely to be considered as engaging in trade
or business. However, there are two different types of representatives,
resulting in two different outcomes to the trade or business determination.
INDEPENDENT AGENTS
An independent agent is a person who works for himself in an independent
contractor capacity
when engaging in activities on behalf of a foreign corporation in the United
States.
Example 2: An Italian company, I, retains a Denver-based distributor, D, to
handle I's products
on a consignment basis. D, an independent distributor, does not take title to
the products. D
uses its best efforts to see that customers located by I receive proper
delivery of the products.
D does not advertise or solicit sales, has no capabilities to repair the
product, and must
consult I when one of its customers is dissatisfied and seeks a replacement
product. Based on
these facts, the foreign corporation is not considered engaged in trade or
business in the
United States.
DEPENDENT
AGENTS
The more difficult situation is the so-called dependent agent who is under the
control of the foreign corporation in terms of its activities in the United
States.
Example 3: A Korean corporation, K, sends sales representatives from Seoul to
the United States. These representatives bring with them a supply of inventory
and have complete authority to bind K on sales contracts.
In this situation, K itself can be considered as doing business in the United
States because of the control it maintains over its own employees. Indeed, the
very fact that they are employees can raise the issue of K's being subject to
U.S. tax at this early stage. Even if they were not employees, but had the same
authority, K would still be subject to U.S. tax.
Tax treaties play an important role in this matter. A standard provision of
most tax treaties deals with the subject of when the presence of an independent
agent or a dependent agent will constitute a permanent establishment. Remember,
a tax treaty gives the foreign corporation additional protection by saying it
may engage in business in the United States as long as the business is not
conducted through a permanent establishment.
Article 5 of the U.S. Model Income Tax Treaty defines a permanent establishment
as "a fixed place of business through which the business of an enterprise
is wholly or partly carried on" including especially a place of
management; a branch; an office; a factory; a workshop; and a mine, oil or gas
well, quarry, or any other place of extraction of natural resources.
This definition gives an independent agent wide latitude to conduct activities
without forming a permanent establishment of the foreign corporation. On the
other hand, a dependent agent (and these are the terms used in tax treaties)
has to be certain that he does not "have and habitually exercise" the
authority of the corporation.
INVENTORY
IN THE UNITED STATES
Example 4: An Australian company, A, has customers in the United States who are
complaining that it takes too long to fill their orders for A's products. To
solve this problem, A should have inventory in the United States.
Just having inventory physically located in the United States does not
automatically result in the foreign corporation being treated as doing business
in the U.S. if the foreign corporation does nothing more in the United States.
However, if a company like A, in example 4, has, in addition to the inventory,
dependent agents who are soliciting and consummating sales in the U.S., it will
have crossed the line and be exposed to U.S. tax.
TECHNOLOGY
TRANSFERS TO THE UNITED STATES
Example 5: A Swiss corporation, S, has developed sophisticated technology in
the manufacture of food products. S could have avoided U.S. tax by having only
independent agents in the U.S. and exporting its products from Switzerland.
However, S realizes that customs duties were too high.
Three scenarios arise from the fact pattern in Example 5.
1. If S sets up its own manufacturing plant in the U.S. (and uses its
technology in the U.S.), it will be considered engaged in trade or business in
the U.S. and subject to U.S. tax.
2. If S enters into a licensing agreement with a U.S. manufacturer under which
S transfers to the U.S. manufacturer the right to make its products under
license from S, S retains ownership of the intangible assets (such as a U.S.
patent) or other intangible property rights.
3. If S allows the manufacturer to have the right to use that technology, it
may put restrictions on the U.S. company so that it cannot transfer the
technology to S's competitors.
In Situations 2 and 3, S is not engaged in business in the U.S. and is not
subject to U.S. tax. However, S will want to receive royalty income (the form
of compensation that often results from these types of licensing agreements)
from the independent manufacturer. Royalties paid by the U.S. manufacturer to S
for the use of technology in the U.S. is considered "FDAP" income
subject to U.S. withholding tax. As a result, S would have an initial exposure
to U.S. tax in that form. However, the U.S. has a tax treaty with Switzerland,
which, in effect, says that such royalties are exempt from withholding. As a
result, S can achieve its objective by having its products made in the U.S.
(and therefore avoiding the substantial customs duties that would result if it
exported its products from Switzerland) without incurring significant U.S. tax
on the royalty income.
CONTRACT
MANUFACTURING
Example 6: A Belgian company, B, would like to manufacture in the U.S., but it
does not want to license a U.S. party (perhaps because B has very significant
marketing acumen, but may not hold a patent or other kind of intangible asset
that could be licensed). However, B's U.S. customers have complained about
delays in availability of inventory and B has realized that customs duties and
other factors will not enable it to service the U.S. market by exporting from
Belgium. In this situation, contract manufacturing can be an interesting
alternative from commercial and tax viewpoints.
A contract manufacturer would be a party in the United States with
manufacturing facilities, willing to make the products to B's specifications.
This type of activity often involves manufacturing non-sophisticated products,
but marketing them extensively in a sophisticated manner. The marketing aspect
would then be the element that would add value to the product for the U.S.
market (as opposed to the manufacturing itself).
As a party unrelated to B, the U.S. contract manufacturer would be dealing at
arm's length automatically. Therefore, the question is to what extent the U.S.
contract manufacturer/foreign company arrangement results in B's doing business
in the United States? If B does not have its employees in the U.S. (or only for
a very short period of time), it would seem that it is not engaged in trade or
business in the United States.
In a more complex situation, B operates with the U.S. contractor on a
"take or pay" contract, i.e., the contract manufacturer produces the
products to B's specifications and B must either take that inventory or pay for
it. In such a situation, once this property is produced, it comes under B's
ownership. Now B has inventory in the U.S. from which it is making sales. It
might be that even in a situation like this, B would not be subject to U.S.
tax, since Article 5 of the U.S.-Belgium Tax Treaty defines a permanent
establishment as not merely having inventory in the United States.
PERMANENT
ESTABLISHMENT IN THE UNITED STATES
Example 7: A German corporation, G, establishes a permanent enterprise in the
U.S.; G is now considered a U.S. taxpayer and will be required to report income
that is effectively connected with its U.S. trade or business and pay the
appropriate income tax.
When a foreign company is directly involved in a business in the U.S., it is
necessary to separate the income and expenses attributable to the U.S.
operations from those that are not. This often produces commercial
difficulties, since the way a company measures income and expenses from a
business standpoint often does not compare with the way it has to measure
income and expenses for tax purposes. For example, G probably treats its U.S.
branch operations as if they were a separate company. The U.S., however, views
G as a taxpayer. Consequently, it needs to have information not only with regard
to what is going on in the U.S., but also as to what is happening outside the
United States. In addition, a branch level tax of 30 per cent (can be
eliminated or taxed at a different rate by treaty) is charged to corporations
on income effectively connected with a U.S. branch that is not retained in the
business.
G can avoid this problem by forming a separate subsidiary. G can form (1) a
U.S. subsidiary, (2) a German subsidiary, or (3) a foreign subsidiary that is
not incorporated in Germany.
1. U.S. subsidiary. Such a subsidiary would have to report its income and
deductions and pay the proper tax, but G, the German parent, would not be
required to report its income. If the parent and subsidiary deal with each
other on an arm's-length basis, the foreign parent's income would not be
subject to U.S. tax, while the U.S. subsidiary's income would be. Most foreign
companies prefer this arrangement.
2. Foreign subsidiary incorporated in parent's country. The objective of
creating another company would be to insulate the foreign parent's income from
direct U.S. taxation. If G creates a German subsidiary whose only activity
would be the operation conducted in the U.S., the initial objective would be to
avoid paying the U.S. withholding tax that would be due on dividends paid from
the U.S. subsidiary to G. While the U.S. tax law contains a U.S. branch tax on
dividend equivalents from a U.S. branch to its head office outside the U.S.,
Germany is one of the countries with a tax treaty with the U.S. which avoids
the U.S. branch tax.
3. Other foreign non-U.S. subsidiary. If G establishes a subsidiary in some
other foreign country, it will be for German tax purposes, not U.S. tax
purposes. For example, if G established a subsidiary in a country that does not
subject the income from U.S. operations to as high a tax rate as Germany, it
would save the difference between the German tax and that foreign country's
tax.
DOUBLE
TAXATION RELIEF
Most foreign countries provide some kind of relief in their tax law to avoid
double taxation when a company created in their country does business outside
the country. This may be accomplished in many ways, including the two most
common methods.
(1) The foreign country exempts earnings generated outside its country from
taxation. If this is the case, the foreign company will want to keep its U.S.
tax to a minimum since there is no benefit under its own system for taxes
incurred in the United States.
(2) The foreign country provides a tax credit for taxes paid to the United
States. When the home country's tax rate is as high or higher than the U.S. tax
rate, incurring a U.S. tax may not be significant.
Tax treaties need to be considered in this regard. Some tax treaties have
specific double tax provisions. These rules provide double tax relief over and
above what is contained in the internal tax laws of the home country.
INVESTMENTS TAXED AT
FLAT 30 PER CENT
Example 8a: If a Togo Corporation, T, buys shares in a U.S. company which is
the distributor of its products and receives dividend income from those shares,
the U.S. company will have to withhold at the flat rate of 30 per cent on those
dividends.
Example 8b: If T wants to help its customers in the United States and provides
financing on which it receives interest income from U.S. customers, the income
will be subject to the 30 per cent withholding tax.
Example 8c: Aware of its U.S. customers' weak financial condition, T decides to
invest in the customers to help them overcome difficult times. The investment
takes the form of a purchase of shares on which dividends are not paid.
However, the investment appreciates in value. After three years, T either sells
the customers' shares or the customers redeem the shares for cash. T would not
be considered engaged in trade or business in the United States. In addition,
the capital gains it realizes on the sale or redemption of the shares is not
considered income for U.S. tax purposes.
Example 9: A Brazilian company, B, wants to benefit from the lower inflation
and foreign exchange relief arising from investing in securities that have not
been denominated in cruzeiros (the Brazilian currency). If B buys the usual
form of debt by putting money with companies in the United States, it will be
subject to U.S. withholding tax of 30 per cent on the interest income it
receives. However, if B invests in portfolio debt or puts money on deposit with
U.S. banks, a special exception enables B to receive "FDAP" income in
the form of interest without being subject to U.S. tax.
TAX TREATIES AND INVESTMENTS
For companies seeking to invest in the United States, the benefits conveyed by
tax treaties should not be overlooked. These treaties have special rates of
withholding tax (including zero per cent) that apply to dividends, interest,
rentals, and royalties paid by a U.S. party to a foreign corporation. Examples:
(1) A corporation resident in the United Kingdom can receive interest income
exempt from the 30 per cent U.S. withholding tax. (2) A Netherlands corporation
will be subject to only a 15 per cent withholding tax on dividend income (as
opposed to the 30 per cent rate) from an investment in an U.S. corporation's
shares.
To ensure that the foreign company is entitled to claim the benefits of a tax
treaty, it must be established that the foreign corporation is actually
resident in the country with which the United States has signed a tax treaty.
Further complications arise because of tax treaty provisions designed to
prevent abuse.
GENERAL REPORTING FOR
FOREIGN INTEREST
FORM 5472 - TAXATION
U.S. corporations that are controlled (25 per cent of voting or value of stock)
by foreign"persons" and all foreign corporations engaged in a trade
or business within the U.S. annually must file form 5472, an informational form
in which transactions with related foreign "persons" are reported.
For the purposes of this reporting, "persons" include: individuals
who are not citizens or residents of the U.S.; partnerships, associations,
companies, and corporations not created under the laws of the U.S. or any
state; foreign trusts; foreign estates; and foreign governments or agencies.
There are very few exceptions from filing this form, the most significant of which
is the exception from filing if the corporation has no reportable transactions
of the types listed in Parts IV and V of the form. Other exceptions require
careful study of the particular circumstances involved. Two copies of this form
should be filed (1) with the corporation's U.S. income tax return or separately
with the proper Internal Revenue Service Center and (2) with the Internal
Revenue Service Center in Philadelphia.
FORM 5471 - TAXATION
U.S. citizens and residents who are officers, directors, or shareholders in
certain foreign corporations, and U.S. corporations, partnerships, estates, and
trusts annually must file form 5471, an informational form, with respect to
each foreign corporation with which they are involved. There are five
categories of filers, each of which must be carefully noted by any person or
entity that is a prospective filer. Two copies of this form should be filed (1)
with the reporting persons income tax return with the proper Internal Revenue
Service Center and (2) with the Internal Revenue Service Center in
Philadelphia.
Substantial penalties may be imposed for failing to file these information
reports or for failing to maintain the proper books and records.
OTHER
MAJOR REPORTING REQUIREMENTS
The U.S. government also has enacted reporting requirements under the
International Investment and Trade in Services Survey Act of 1976
("IITSSA") and the Agricultural Foreign Investment Disclosure Act of
1978 ("AFIDA").
IITSSA requires reports to the U.S. Department of Commerce about investments in
U.S. business enterprises (incorporated or unincorporated) when a foreign
person owns or controls a ten per cent or more interest. The reports involved
are initial investment reports, quarterly update reports, annual update
reports, and quinquennial reports. IITSSA also requires the U.S. Department of
the Treasury to obtain data about foreign portfolio investments in the United
States. These reports are filed every five years. Finally, IITSSA requires
reporting regarding foreign exchange transactions, credit transfers, and the
export of U.S. currency.
AFIDA requires foreign persons to make reports about the acquisition or
transfer of agricultural land (farming, ranching, forestry and timber lands)
within 90 days after the transaction.
OTHER TAXES
As
mentioned previously, federal, state, and local governments raise revenue
through a variety of taxes. The more important are:
SOCIAL SECURITY TAX
The 1998 tax rate on both the employer and the employee is 7.65 per cent each
that includes a retirement and disability component of 6.2 per cent and a
Medicare Hospital Insurance component of 1.45 per cent. Wages up to $68,400 are
subject to 6.2 per cent; all wages are subject to the 1.45 Medicare Hospital
Insurance component. Expect covered wages to increase as well as the rate in
years beyond 1998. For the self-employed, the tax rate is at 15.3 per cent
comprised of 12.4 per cent for retirement and disability coverage (maximum
taxable self-employment net income is $68,400) and 2.9 per cent for Medicare on
all self-employment net income.
FEDERAL
UNEMPLOYMENT TAX
The wage base for unemployment tax is $7,000, and the rate through 2007 is 6.2
per cent, subject to a maximum 5.4 per cent state credit on the first $7,000 of
wages. The rate is scheduled to decrease to six per cent in 2008, but the wage
base may increase.
SALES TAXES
There are no federal value added or sales taxes. Sales taxes are collected on
the sales of a wide range of goods and services in many states and local
governmental areas.
LOCAL
INCOME
Most, but not all, states impose income taxes on individuals and corporations.
Some cities and other local governments assess income taxes on corporations and
individuals that are calculated in a variety of fashions. Some impose a flat
tax on businesses and/or workers.
PROPERTY TAXES
Many state and local jurisdictions levy taxes on tangible personal property. For
a business, tangible personal property may include product inventories,
equipment, office furniture, supplies, etc.