Tax: US and aUStralian tax expertS dan CaSSidy
and theo Sakell Unravel the ComplexitieS of doing
bUSineSS in ameriCa.
ImagIne that a medIum-sIzed the business hope to sell its us which may limit the Doing business in the
software company comes to you with a subsidiary to a us company? does ability of the us US – the challenges
plan to sell its latest application to the it plan to sell it to an australian subsidiary to deduct interest there are definite opportunities and
heavy hitters in silicon Valley or to company? does it plan to sell the paid to a related party. similarly, challenges to doing business in the us.
microsoft. this is the company’s first us entity as part of the australian beware of australia’s thin capitalisation the first challenge, and perhaps the
foray into the us. the owners see huge entity? does it plan to take the us rules, which can permanently deny biggest, is dealing with the complex
potential for sales and profits. entity public? debt deductions for australian us tax laws.
You, on the other hand, see a most businesses that enter the us businesses with controlled offshore the tax differential between australia
complicated us tax system ruled by expect that their business will succeed entities or offshore businesses. the and the us is significant. usually it’s
the heavy-handed Internal Revenue and produce profits. however, there balance between debt and equity needs 10–15 per cent, and in the extreme it
service (IRs), different income tax rates is also the risk it will fail. When to be determined to comply in both can be up to 40 per cent!
in each of the 50 states, countless structuring the business it’s important australia and the us while maintaining the australian perception that the
sales tax rates that differ by to consider what tax relief is available commercial flexibility. It is generally IRs is a serious organisation that
municipality, estate taxes and gift if the business does fail. the best preferable to equity-fund the us vigorously enforces us tax laws is
taxes. however, you also see the structure that assumes the business subsidiary to avoid creating a problem accurate. us taxes are perhaps the
opportunity to help the client through will be profitable may not be the best in the us under earning stripping rules highest in the world and enforcement
the tax challenges in a way that will structure to claim losses if the business and to limit any adverse australian thin is strict, much stricter than in many
help them bring home maximum fails. Often it is best to create a capitalisation impacts. You should regions such as asia. the IRs is
allowable profits, and avoid IRs structure for losses or significant determine the maximum level of debt especially strict in administering
scrutiny. appreciation, or one that’s flexible funding permitted to attain utmost transfer pricing policies and any
enough to get benefits on both sides, flexibility on repayments and charging attempt to strip profits out of the
Get advice and choose but not necessarily the maximum interest. also be aware of us interest us back to australia through
the appropriate benefit on either side. withholding taxes of up to 10 per transactions and charges. Businesses
structure another question is how the business cent of gross interest paid or credited. will have to navigate around transfer
many businesses interested in doing will be funded. Will the business be australian entities doing business in pricing rules in both countries.
work in the us make the mistake of capitalised with debt or equity? Be the us must also be aware of american tax rates differ significantly. an
waiting until they have established their aware of us earning stripping rules, employment taxes and employee australian businessperson will typically
business there before getting advice. tax rules. In general, it’s better for pay a flat 30 per cent income tax rate
this could cost them significantly in australians to work in the us under via a company, although this would not
the long run. It’s imperative to choose in general, it’s better a visa rather than a green card. Look be a final tax. that number could be
the right structure from the beginning. for australians to after australian employees to make much higher in the us, where the
should the business be structured as work in the US under sure they’re complying with IRs rules – federal income tax rate is up to 35 per
a branch or subsidiary? If the wrong and that they file us tax returns. cent. australian businesses will also be
structure is chosen it is often too a visa rather than a australians working in the us must liable for a us dividend withholding tax
expensive to restructure. as the type green card have the appropriate visa, know how to get money back to australia from the
of structure is contemplated, the much time they can stay and work, us via dividends. depending on how
business should also consider its exit and understand the tax impact of their the australian business is structured
strategy from the very beginning. does employment package. going into the us, there could be
I N T H E BL AC K AU G U S T 2 0 0 9 47
additional taxes. If the australian conduct businesses in the us. Businesses
business’s us business is structured as a should consider some alternative structures
C Corp and holds more than 10 per cent via to reduce their effective tax rates.
an australian company, it will pay an In addition to income and sales taxes,
additional 5 per cent tax. Otherwise, the us australian individuals with us business
dividend withholding tax could be as high as interests could be subject to us estate taxes
15 per cent. add that up and it could be upon death. us estate taxes are based on
greater than 50 per cent of every dollar the fair market value of the assets held at
spent on us taxes. death, with rates as high as 45 per cent.
not all australian companies are aware
that many us states have their own income The opportunities
taxes. the rates vary from state to state and to try to nullify the big challenges of doing
in some cases come close to 10 per cent. business in the us, there are many solutions
Furthermore, the individual states are not for how to structure a business. In the us a
parties to international income tax treaties. business can be structured as a Limited
this means that protections australians may Liability Company (LLC) or a Limited Liability
assume they have under the australian Partnership (LLP). the way in which existing
united states Income tax treaty may not business is structured in australia may
protect them from state taxes. In particular, allow the business to adopt more
australian businesses that are exempt from transparent tax outcomes in the us as well.
us taxes because their activities do not rise the business structure may allow the
to the level of a permanent establishment in australian business to get full foreign
the us may still be subject to significant income tax offsets for us taxes. however,
state income taxes. such structuring is complex particularly from
most individual states also have a sales a us tax perspective. It requires an
tax. unlike australia’s gst, not all sales taxes australian individual or trust to be the
are automatically passed on to consumers member of the LLC or partner of the LLP
and aren’t easily tracked. australian and for such australian individuals or entities
companies must learn about the intricacies to file us tax returns and pay us income
of the us sales tax system and understand taxes.
how to apply the taxes to goods and services no doubt, us taxes are significant and the
sold in a way that they can be recouped. tax code is complicated. But it’s the land of
another major issue for privately held many opportunities. For the australian
australian companies is how the us tax laws company intent on taking advantage of
impact the personal taxes owed by the these, early planning and expert execution
owners of these companies on eventual could lead to successes with high profit
repatriation of us profits to these owners. potential. n
as the us has one of the highest personal
individual tax rates in the world, this is
especially important to australian owners
who are seeking to maximise after-tax dan Cassidy is tax principal international tax with
returns from their offshore operations. a Clark nuber in Seattle, Washington. he has
extensive experience assisting inbound and
fundamental flaw in australia’s international
outbound companies navigate the US tax system.
tax rules is the general inability to obtain reach him at email@example.com.
foreign business income tax offsets in theo Sakell is partner and executive director in
australia for us federal and state income the tax consulting division of pitcher partners,
taxes paid on profits generated in the us. an independent member firm of baker tilly
international, in melbourne, australia. he heads the
typically, maximum effective tax rates of up
firm’s international tax specialisation and advises
to 70 per cent can be incurred. these on the structuring and financing of inbound and
challenges are further compounded by the outbound transitions and inpatriate and expatriate
practical inability to use australian trusts to planning. reach him at firstname.lastname@example.org.