June 28, 2004 -- When a business based outside of the United States begins to explore entering or expanding their presence in the U.S. marketplace, among the multitude of considerations to be addressed are taxation issues.  These include structuring of the holding companies and operating entities, estimating the effects of operating results on the global income tax rate, and the taxation of employee compensation and benefits, among others.

When a foreign multi-national company acquires U.S. business operations using a foreign parent company or foreign holding company, the structure of the foreign ownership may lead to difficulties that may not have existed prior to the acquisitions.

If a foreign-owned group of companies acquires multiple U.S. operations (whether simultaneously or otherwise), absent the use of a common U.S. parent company, a number of U.S. tax rules require a coordinated effort to assure compliance.  The risk of non-compliance arises due to the application of a number of tax rules on a controlled-group basis rather than on an entity-by-entity basis.  This results in the group having to view previously unrelated entities as though they are one operating company.

Two of the major areas that require attention in this regard are the preferential tax rates, deductions and exemptions available to other than the largest corporations, and employee benefit plans.

U.S. corporations enjoy favorable tax rates on the first $75,000 of taxable income each year.  In addition, there is favorable treatment of fixed asset acquisitions, which allows expensing of up to $100,000 of equipment and other personal property purchases each year.  Also, an exemption is allowed with respect to the Alternative Minimum Tax for corporations with less than $150,000 of Alternative Minimum Taxable income each year.  These favorable tax rules, among others, are allowed to tax-paying corporations on a controlled group basis – that is, the entire U.S. group of companies under common control are required to share such preferences.  Thus, each year, coordination is required in order to maximize the benefits available.

The second area relates to employee benefits plans.  U.S. business operations owned by a foreign entity must comply with applicable U.S. laws, both tax laws and labor laws, in order to avoid sanctions.  Sanctions that can be brought include lawsuits by employees, excise taxes, penalties, and even disqualification of pension and profit sharing plans.  Pension and profit sharing plans are subject to testing requirements concerning discrimination, benefits, coverage and eligibility rules.  Once again, these rules must be tested on a controlled-group basis, often treating the entire U.S. group as a single employer.

The importance of the coordination can be seen in cases where management of one U.S. operating group is not aware of the specifics of another related U.S. operating group.  Many times the common foreign parent becomes aware of these issues only after significant non-compliance has occurred over a number of years.  Having to deal with an accumulated amount of tax, penalties and interest at a later date can result. Potentially worse, substantial non-compliance with the federal laws related to pension and profit sharing plans can result in the accumulation of significant problems, many of which cannot be corrected as easily as paying off prior year taxes, penalty and interest.

Asher & Company, Ltd. is available to assist non-U.S. business operations entering or expanding their presence in the U.S. marketplace, both with operational and tax matters, at the planning stages, and also in the area of implementation of planning. 

Please call Carl Graf at 215-564-1900 for advice on these tax issues.

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