According a report issued by the Office of National Statistics on 2 December 2020, the US had the largest positive impact on the underlying total trade balance and was the largest trading partner by underlying total trade in goods in the first half of 2020. The UK also maintained the largest trade surplus with the US in the first half of 2020 accounting for 15.5% of all UK goods exported.
The UK government has set out its objectives for a trade deal with the US in a 167-page document from the Department for International Trade.
The United States Chamber of Commerce, claims that the UK is the 2nd largest recipient of US investment worldwide, the 7th largest trading partner of the US, and the 5th largest export destination for US goods and services. From a global mobility perspective, the two countries also share strong links, with British companies employing a large number of US citizens, and vice versa.
The ‘special relationship’ shared between the US and the UK is well publicised by both countries. The UK is hoping for a swift new trade deal with the US post Brexit and although the appointment of Joe Biden and the COVID-19 pandemic has slowed progress as the president wants to invest in the US and help it out of the COVID-19 induced problems, it seems likely that both countries will want to continue as significant trading partners.
In addition to the size of the potential market and the ‘special relationship’ between the two countries, the US also has relatively low regulatory barriers, few language barriers, an established rule of law and an ability for money to be moved freely between the countries.
The Department for International Trade (DIT) also provides free international export sales leads from its worldwide network to help UK companies find export opportunities in the US.
Therefore, there seems to be strong reasons for UK companies to trade with the US, whether through importing, exporting or expanding into the US through a subsidiary or branch. But what should you consider beforehand?
Methods of accessing the US can range from using a local representative, through to setting up a new company in the US or acquiring an existing US 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 US
This can be the easiest and quickest way to access the US initially. Direct sales through local representation involves collaboration with a US 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 US lawyer who should also be involved in drafting agreements and contracts.
2. Sales through a local branch or subsidiary in the US
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 US market
A US 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 US
You can sell your products and services over the internet through your own website which will need to be adapted to support US electronic payments/credit cards, US 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 US
You could choose to license your technology in the US but this comes with specific risks, to avoid this:
In the US, it is essential to get a US lawyer involved who understands federal and state legislation.
6. Own office with own staff or partner’s staff in the US
You can put your own managers and staff on the ground in the US 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 US
You can get market share by acquiring a competitor or supplier that is already in the US. This gives you instant presence, market intelligence, access to customers and infrastructure, but again requires strong due diligence.
Opening a bank account in the US can be challenging as you won’t have a US 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 US should make the process easier and may be a good first port of call.
Getting paid in the US 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 US legal system for resolution. This generally takes place in the US 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 US 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.
If the only activity the foreign company has in the US 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.
The income tax treaty with the US protects activities which are preparatory or auxiliary in nature from creating a filing requirement in the US. Thus, UK employees may be sent to the US to better understand the US market without creating a filing requirement.
However, once a US 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 US and provide information from the foreign parent in the filing, so that the activities are not ring-fenced to a US 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.
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 US 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 US to the records on only the US entity. State filings are also required for states where the US 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%.