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                   Tax:      US and aUStralian tax expertS dan CaSSidy
                   and theo Sakell Unravel the ComplexitieS of doing
                   bUSineSS in ameriCa.

                   Complying with
                   Uncle Sam
                   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
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