Trading with/in the US

As with any new market, research is key. The more general aspects to consider when forming your business plan were covered in a previous article ‘Growing the UK’s export community - How to take your business global’, which was published on our website in May.

In basic terms, you should initially decide whether there is a market for your product or service and whether you can supply that product or service at a competitive price after taking account of taxes and tariffs. You also need to be clear on where in the U.S. you intend to sell it (see below). In order to do this, research is key and you should be generous with the time taken to properly research the market, or this could cost you dearly at a later stage. Once you have fully researched the market you can build a business plan around this.

Specific points to consider in respect of the location in the U.S. include proximity to transport links such as airports and ports (remember the U.S. is a large country), location of suppliers, employees and customers, and where to locate for tax purposes. It is often possible to negotiate with the state and local authorities for incentives and benefits such as tax breaks, reduced power costs, lease incentives etc. However, these incentives are normally only available to companies creating a substantial amount of local jobs.

When assessing the suitability of your product or service for the U.S., you should understand that a disadvantage of the U.S. market is that there is a lot of competition, causing saturation of products or services which can degrade margins. This is worsened by a high cost of living in major cities and people shop around for the best deal. Salaries can also be higher as a result.

Culturally, the U.S. might seem very similar to the UK, however they tend to be much more direct when negotiating and, due their litigious nature, are likely to spend a considerable about of time scrutinising contracts and paperwork. It is usual for formal negotiations to start with a Non-Binding Summary of Key Terms (NB-SOT). Most recommend that you should do the drafting throughout, regarding both NB-SOTs and contract drafts and allow the U.S. supplier or customer to comment on your documents.

Before you develop your plan extensively, you should ensure your products can be legally imported into the U.S. and you understand what licenses and permits are required, including labelling.

It is a good idea to involve your professional advisors while forming your plan so that they can assist with this. Having both an accountant to consider tax implications and help with forecasts, and a good lawyer who can deal with both UK and U.S. law, would be immensely beneficial at this stage. 

Methods of accessing the U.S. can range from using a local representative, through to setting up a new company in the U.S. or acquiring an existing U.S. company. This has been considered in more detail in our article ‘Setting up or expanding overseas - Our recommendations for business owners considering their international strategy.’

1. Using local representation to export to the U.S.

This can be the easiest and quickest way to access the U.S. initially. Direct sales through local representation involves collaboration with a U.S. based agent, representative, distributor or dealer. Each of these are distinct and you need to decide whether you only deal with one of these and you must be clear on how each of these differs. It is important to conduct appropriate due diligence, which should involve a U.S. lawyer who should also be involved in drafting agreements and contracts.

2. Sales through a local branch or subsidiary in the U.S.

This may be a better option for the long-term, but could be more expensive and the tax impact needs to be carefully considered.

3. Joint venture or strategic alliance in the U.S. market

A U.S. lawyer should be involved in the ‘due diligence’ on your prospective joint venture partner and again tax planning is important.

4. Online selling in the U.S.

You can sell your products and services over the internet through your own website which will need to be adapted to support U.S. electronic payments/credit cards, U.S. addresses and zip codes (equivalent of UK post codes) or via an online marketplace.

The UK government has a good ‘selling online overseas’ tool on their website to help find the best place to sell your products online. You can also take advantage of special deals negotiated by the government for UK businesses.

5. Licensing and technology transfer to and within the U.S.

You could choose to license your technology in the U.S. but this comes with specific risks, to avoid this:

• protect your intellectual property (IP) before negotiating an agreement
• conduct ‘due diligence’ on licensees
• make sure contracts are drafted by lawyers who understand both UK and U.S. law
• the tax impact needs to be carefully considered.

In the U.S., it is essential to get a U.S. lawyer involved who understands federal and state legislation.

6. Own office with own staff or partner’s staff in the U.S. 

You can put your own managers and staff on the ground in the U.S. and start your office or you can work through a partner via a joint marketing agreement or strategic alliance. Both options have advantages and disadvantages. You will need to consider the tax and legal implications as well as the laws and regulations around global mobility, such as the requirement for visas if employing or moving people across borders. It can be expensive and time consuming obtaining the correct work visas.

7. Company acquisition in the U.S. 

You can get market share by acquiring a competitor or supplier that is already in the U.S. This gives you instant presence, market intelligence, access to customers and infrastructure, but again requires strong due diligence.

The U.S. is known for its strong customer service and this has resulted an expectation for high standards for products and customer care. This is best mitigated by using a U.S. lawyer who understand both UK and U.S. law, and by familiarising yourself with U.S. commercial standards, government requirements, voluntary standards and industry practices for your product. Furthermore, make sure you have good internal processes for product development and safety, incident reporting and investigation and responses.

To find a good lawyer, you could consult the list of state bar associations in the U.S. The U.S. Embassy also maintains a list of American attorneys based in the UK, while the American Bar Association has a list of US law firms.

It is important to note that, unfortunately, business insurance is often much higher. 

The U.S. is not a single national market; it is a federal system. You will need to treat each state as an individual ‘country’ with its own procedures. You need to determine the implications of developing your business in a specific state, or whether national entry is possible for your product or service. In many ways, the U.S. should be viewed as 50 markets, as each region has its own rules and regulations and this can be very daunting. We have worked with our U.S. firm on many occasions to help our clients with this and would suggest using a firm that has access to a strong global network with a good presence in the U.S. 

All corporations in the U.S. have to register with a government body in the state they incorporated in. Business filing documents are available through the relevant state government authority. Privately held companies don’t have to make their financial statements available to the public and this can result in record keeping/accounting being less accurate as, unless it is a listed business the information will not have been audited. This needs to be considered if looking at acquisitions and it also makes assessing suppliers’ & customers’ credit worthiness harder than in the UK.

Opening a bank account in the U.S. can be challenging as you won’t have a U.S. credit record and they also have robust ‘know your client’ procedures which can be very demanding. It is common for smaller businesses to struggle with these as they are designed for large multinationals and require a lot of details including information on risk and training. The UK banks which have branches or associate banks in the U.S. should make the process easier and may be a good first port of call.

Getting paid in the U.S. may be less of a risk than with some other countries, but you should ensure you have a clear contract specifying the terms for payment. If a dispute arises you will need to go through the U.S. legal system for resolution. This generally takes place in the U.S. state specified in the contract and abides by state laws. UK Export Finance (UKEF) can help UK companies to get paid by insuring against buyer default.

Cashflow generally needs careful consideration and this is covered in our piece on ‘Easing the impact on cashflow when exporting goods and services’.

Trading with the U.S. and the method you use to achieve this can have many tax implications and, when putting your plan together, you need to consider the impact of all taxes and tariffs on your profitability. This is a highly complex area and the type of trading, product and the state you are operating in will all have an impact. It is impossible to cover all of these aspects in one article, so we have used a case study here to highlight some of the points which you should be aware of.

Case One: Selling into the US with no physical presence except for stock If the only activity the foreign company has in the U.S. is holding title to stock in an independent warehouse, then the company is usually protected from federal taxation through the tax treaty. A federal tax filing is normally made with the IRS to show the protected activities and to disclose the treaty position, but no tax is due with the tax return. Depending on the state where the activity takes place, state tax filings may be required and state tax may be due since most states do not follow the federal treaty protection. Each state has its own measure for nexus (akin to the treaty concept of Permanent Establishment, or “PE”). The tax treaty and respective state tax rules should be reviewed to confirm the proper filings and taxes are completed and remitted timely. Some state taxes that may apply are sales and use tax, income tax, franchise or gross receipts tax, or property taxes.

Case Two: Hiring an employee in the U.S. without a separate US entity The income tax treaty with the U.S. protects activities which are preparatory or auxiliary in nature from creating a filing requirement in the U.S. Thus, UK employees may be sent to the U.S. to better understand the U.S. market without creating a filing requirement.  However, once a U.S. employee is hired, this dependent relationship may not be protected by the tax treaty and, depending on the circumstances, may create a PE; federal and state taxes would then need to be filed and remitted for that activity.  If no entity was proactively created, the activity defaults to a branch of the UK entity. The downside to this structure is that it requires the foreign entity to file in the U.S. and provide information from the foreign parent in the filing, so that the activities are not ring-fenced to a U.S. entity. This is also not the preferred structure from a legal perspective, so this structure and those issues should be vetted through legal counsel. The state tax situation is the same as in case 1.

Case Three: Creation of a separate U.S. legal entity Most companies will want to ring-fence the activities in the US for legal and tax reasons. Therefore, if the activities will be such that a PE will be created, the foreign parent will typically want to create a separate U.S. legal entity and elect to treat it as a corporation for U.S. tax purposes. Since the filing is made for a separate entity, this limits the authority of the U.S. to the records on only the U.S. entity. State filings are also required for states where the U.S. entity has sufficient activity to generate nexus (similar to permanent establishment), which can vary by state. The federal tax rate for corporations is 21% and the state rates vary depending on what states the entity has nexus in, ranging from no corporate income tax to 12%.

In 2018, the U.S. Supreme Court overturned a long standing precedent around nexus creating activities for state sales and use tax purposes. Sales tax is charged on the sale of goods to an end user and then remitted by the seller to taxing jurisdiction. If not collected on the sale but assessed at a later date this can become a liability on the selling entity. Many states have adopted new rules since the case was decided which allow a state to assess sales and use tax once an entity exceeds certain thresholds. These thresholds are normally based on the volume of sales transaction or amount of sales transactions in a state in a given time period. An entity may not have any other activity in a state but they could still be subject to sales and use tax once these thresholds are met. This is an area that entities looking to begin trading with the U.S. should discuss with tax counsel to make sure they are tracking their activity to avoid potential issues.