U.S. Expansion Playbook – Building a U.S. Presence: Key Accounting and Compliance Issues for Foreign Entities

Missed any of the earlier articles in our U.S. Expansion Playbook series?
Click here to read Part 1, Part 2, Part 3, Part 4 and Part 5. 

There are several operational issues foreign businesses should be aware of when they are considering expanding into the U.S., including:

• Assessing whether the business will have a physical presence in the U.S.,
• Day-to-day business management, such as inventory, online sales, and hiring U.S. employees,
• Determining whether the foreign parent or U.S. subsidiary will handle certain business expenses, and
• Managing any intercompany payments between the two entities.

Another significant aspect to consider is how a foreign business will handle accounting for its U.S. operations. The United States follows Generally Accepted Accounting Principles (GAAP), which may differ from the accounting standards followed in the foreign business’s home jurisdiction. Similarly, if the business chooses to establish a separate U.S. entity, it needs to carefully consider the type of accounting software it will be using, as it is essential to use a software that can effectively report its U.S. operations, which can be done by either adding a U.S. license to its existing system or implementing a U.S.-specific accounting software.

Once the appropriate software is selected, it is essential to ensure the chart of accounts is correctly set up from day one so the U.S. entity can produce the financials required for the tax compliance process. Leveraging the software to also maintain detailed accounting for all sales by state, employee/contractor payments, and intercompany payments is crucial for accurate accounting and year-end tax reporting.

Furthermore, foreign businesses operating in the U.S. via a U.S. subsidiary must monitor all regular and annual compliance reporting requirements, with particular focus on the W-8/W-9 regime, which governs payments to employees, contractors, and vendors. This includes the following:

• S. payroll processes: Establishing U.S. payroll processes and procedures with a specific payroll or Professional Employer Organization (PEO) provider.
• Sales tax compliance: Determining whether services or products are subject to sales tax, ensuring timely filings, and identifying any additional software required to support this process.
• Annual financial reporting: Preparing financial statements required for corporate income tax return filings, including any state returns, depending on the U.S. entity structure (Forms 1120, 1120-F, 1065, 5472, etc.)
• W-8/W-9 collection: Obtaining W-9 forms from U.S. persons and W-8 equivalent forms from non-U.S. persons. When the U.S. entity receives an invoice for services or goods provided to them, the U.S. entity should obtain a completed W-8 or W-9 form from the vendor or supplier prior to making payment.
• Form 1099 Reporting (W-9 received): Reporting payments made by the U.S. entity to U.S. non-corporate contractors providing services to the business.
• Form 1042 reporting (W-8 received): Reporting certain payments made by the U.S. entity to non-U.S. persons or entities, similar to the 1099 regime.
• Transfer pricing agreements: Implementing agreements to track intercompany payments and transactions between the foreign parent and its U.S. subsidiary, which might more generally be disclosed separately to the IRS as part of annual corporate income tax filings.

Typically, a U.S. entity must designate a director, officer, or employee to oversee the day-to-day U.S. operations. This individual serves as the company’s responsible person, whom the IRS requires information about to ensure they can be contacted directly regarding any questions or issues that may arise.

Setting up a U.S. entity involves numerous operational and administrative requirements, many of which are outlined above, making it essential to work with knowledgeable service providers, such as Baker Tilly x Anchin’s International Tax and Client Accounting Advisory Services (CAS) groups, to navigate these requirements effectively.

For more information on operational considerations when establishing a U.S. entity, please reach out to Kevin Brown or Gwayne Lai of Baker Tilly x Anchin or your Baker Tilly x Anchin Relationship Professional. Stay tuned for the next installment of our U.S. Expansion Playbook series, which will explore transfer pricing rules for foreign-owned U.S. entities.