In this four-part series, Antoine Guillaud, President of International Management Solutions (IMS) and Advisor to the French Ministry of Foreign Commerce, shares key tax and HR issues related to expansion into the United States.
- State vs. Federal Taxation
- Use of Independent Contractors and Employee Transfers
- Setting up a Legal Entity
- Business Models and Transfer Pricing
Use of Independent Contractors
Retaining independent contractors is a popular approach for putting boots on the ground with minimum administrative overhead. However, the rules about classifying personnel in the “gig” economy are evolving; and regulators and the courts are creating tougher standards for “independence”. For example, the California State Supreme Court in Dynamex Operations West, Inc. v. Superior Court (April 2018), ruled that an independent contractor classification must meet the following test:
Importantly, a salesperson working as an independent contractor with your company would not pass the test, because they would not pass the second provision.
And getting it wrong has costs. The recharacterization by a taxing authority of the status of an independent contractor as an employee is potentially costly, especially for a foreign corporation. In addition to social costs and probable penalties, the revelation of misclassification would likely imply that a company has a permanent establishment in the US and nexus in the state. As a result, a company would be required to file prior years’ income tax returns.
However, getting it right has challenges too. With the latest US tax legislation, it has become more attractive, from an income tax perspective, for US individuals to operate as independent contractors. For this reason, companies may find it harder to convince a person who they cannot legally classify as an independent contractor to become an employee. And keep in mind that independent contractors themselves may not be conversant in the rules; relying on legal entities such as “C” corporations or LLCs, though they might truly function as “employees”. Certainly, their lack of awareness and their legal “shield” may not protect you.
“The debates over-classification will continue. It is almost inevitable that rules for independent contractor status will become more restrictive. While the penalties for misclassification assessed faster and more harshly. In short, conditions will change; and it is important to keep abreast of developments.”
Transferring employees from a parent company to a US subsidiary is key to success in the US market. This is because a transferred employee is likely to embody the culture of the parent company. As well as possess a deep knowledge of the products and services offered, and can enhance the credibility of a new entrant in the US. Moreover, it is likely they will maintain an easier level of communication that draws on relationships with colleagues in their home country.
It is important to note, successful employee transfers are planned and prepared well in advance of a physical transfer. In addition to addressing sometimes complex visa requirements, a potential transfer needs to address three core considerations:
Typically, all money given to an employee in the US should be considered salary or they will be taxed as fringe benefits. This includes lodging, most moving expenses, company car, tuition fees for children, plane tickets for a spouse and children.
Unquestionably a detailed analysis of the full costs of salaries, benefits and taxes usually bring the pros, cons and trade-offs of a potential transfer into focus. As a result, allowing problem areas to become obvious.
Find out More
To find out more, you can meet Antoine and his team at one of GTM’s FREE USA Expansion Workshops. These are held on a regular basis. Forthcoming events are shown below. Please note, if there are no upcoming events, you can contact us here or visit our events page here to view the latest schedule.