Setting up a US entity & expanding into the US market
Are you ready to expand your operations into the US market?
The United States remains the largest market on the planet, as well as one of Israel’s primary export markets. It is therefore no wonder that for many Israeli companies the next stage after achieving success and recognition in Israel is to expand their presence and activities into the United States. However, differences in the taxation environment and financial management between the two countries can lead many companies lacking CFOs and Financial teams experienced in the American regulatory environment to stumble – unless they make use of expert outsourced payroll and financial management services such as those provided by ERB.
What are the key differences in financial management between Israel and the USA?
Israeli Accounting is regulated by the Israeli Law. Accountants in Israel must work solely with the Finance Ministry authorized software to manage bookkeeping and file monthly mandatory reports to the Israeli Tax Authorities (“ITA”). You will be surprised to discover that no matching requirements exist in the US, in fact any software can be used to manage the accounting – including Excel! This seemingly regulation free environment extends to other aspects of accounting as well: invoicing in the USA, unlike in Israel need not be sequential, Reversal can be performed without maintaining full tracking records, original hard copies of invoices need not be kept for 7 years– scanned copies are fine. Furthermore, the IRS, unlike the ITA does not require an audited tax return unlike the ITA which requires audited tax returns of all registered companies.
Where in the 50 states do you pay your taxes?
Unlike Israel, the US accountant must file reports and pay Income tax to three taxation layers – federal, state and city. All Profitable companies should pay the Federal tax, but State and city tax will apply only where a presence/nexus has been established.
Unlike Israel where there is single rate of VAT of 17%, the US has 50 different rates of Sales tax, different rate for each state which applies only if Nexus has been established. The Sales tax Nexus defines the level of connection between your business and various taxing jurisdictions – and until this connection is established, no taxing jurisdiction can impose sales tax on your business. How is this connection established?
Basically, a traditional Nexus is established when:
- The business has a physical location in the state
- The business has resident employees working in the state
- The business has property in the state
- The business has employees solicit business in the state
Recently the scope of the term Nexus has been widened. In South Dakota v. Wayfair, the Supreme Court voided the physical presence requirement within the Commerce Clause. However, physical presence still creates nexus and is the first consideration in determining nexus. Since then many states enacted new types of economic nexus legislation and the process is ongoing, requiring your CFO and other financial managers to be well versed and up to date in the current tax and legal environment.
On top of all the complex tax regime in the US, companies are required to cope with the Transfer Pricing compliance which basically is the international tax rules which applies on related entities under mutual control that operates in two or more different tax areas.
Where do most aspiring multinationals trip up?
The most common stumbling back is improper construction of their tax, financial and payroll infrastructure. Indeed, it is also surprising to see how often Israeli companies operating in the U.S fail to take into account to provide bi-weekly rather than monthly payroll. Many fails to file the proper tax return or mistakenly do no file at all. The lack of a single standard mandatory insurance and compensation plan for employees in the USA also leads many companies to establish the wrong kind of program for their employees and even to start the date of employment before establishing the only mandatory worker compensation insurance.
ERB can provide you with outsourced financial services that will optimize your initial setup – or bail you out of a suboptimal setup before it entangles you even further!