Tax Planning for Foreign Investors in the United States

154 Pages·1983·3.041 MB·English

by  Paul Brundage, Adam Starchild (auth.)

Tax Planning for
Foreign Investors
in the United States
Tax Planning for
Foreign Investors
in the United States
by
PAUL BRUNDAGE
and
ADAM ST ARCHILD
SPRINGER SCIENCE+BUSINESS MEDIA, LLC
Distribution in USA and Canada
Kluwer Law and Taxation
190 Old Derby Street
Hingham MA 02043
USA
Cover design: Bert Arts
ISBN 978-94-017-4474-4 ISBN 978-94-017-4472-0 (eBook)
DOI 10.1007/978-94-017-4472-0
© 1983 Springer Science+Business Media New York
Originally published by Kluwer, Deventer, The Netherlands in 1983
Softcover reprint ofthe hardcover 1s t edition 1983
AII rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted in any form by any means, electronic, mechanical, photocopying,
recording or otherwise, without the prior permission of the publisher.
Table of Contents
1. Introduction
2. Federal income tax law 13
3. Real estate investments 27
4. Investments in stocks, securities and
commodities and deposits in banks and
similar institutions 77
5. Engaging in a U.S. trade or business 91
6. Income tax treaties, tax havens, and
the foreign tax credit 109
7. Federal estate and gift taxes 127
8. State taxation 139
Source of tables and illustrations 151
V
Chapter 1
Introduction
If you arenot a citizen or resident of the United States (U.S.) and you are
contemplating either making or expanding an investment in the U .S., either
for yourself as an individual or for a business, you arenot alone. The U.S. is
the country of first choice for many foreign investors. This is due to the fact
that the U.S. offers foreign investors many advantages, some ofwhich are in
short supply in today's world.
The primary advantage that the U.S. affords foreign investorsisthat it
endorses the economic concept of free enterprise. While it is true that the
Federal and state governments have interfered with the private economy to
some extent, the prevailing economic philosophy in the U .S. remains laissez
faire. History has taught the U.S. that the market place allocates the finite
resources ofa country betterthan the government, and the advantagesoftbis
philosophy have not been overlooked by foreign investors.
Another attractive feature of the U .S. as an investment site is its political
stability. The present form of constitutional government has presided for
over 200 years, and this history provides foreign investors with a measure of
security which is absent elsewhere.
The availability of raw materialssuch as oil, timher, natural gas, coal, and
uranium is an important inducement for many kinds ofinvestments. While
the government has occasionally regulated the prices of some of these,
President Reagan has indicated that during his administration the market
place will be the sole regulator of the prices for these commodities. This is
perhaps the best guarantee of the continued availability of these resources.
Often foreign investors are forced to raise capital in the U.S. because of
exchange controls in their own countries. The expansive capital markets of
the U.S. can be utilised by these investors to finance the establishment or the
expansion of business ventures. The capital can be raised in numerous ways
such as direct loans from commercial banks or the issuing of stocks and
bonds. It should be noted that the absence of exchange controls in the U.S.
allows these same investors to repatriate profits or to reinvest them in
another country without difficulty.
The avoidance of tariffs isanother reason why foreign investors enter the
U .S. While this country imposes tariffs on products that are brought here for
sale, these tariffs do not apply to goods which are produced inside the U .S. By
z~0 c:: (") ::l 0 z
Index u.s. 100 = 100 89 28 58 II 135 97 123 92 125 66 126 71 duction worker y since 1978.
on pro om
1-1 TABLE Compensation of Production Workers in Manufacturing Estimated Hour1y 13 Countries, Mid-Year 1980 (Provisional Estimates) Hourly CompensatiExchange RateAverage Ratio of 1 hourly additional compen-earnings National U.S. National in sation Country National currency Dollars currency currency national to units per currency hourly unit U.S. Dollar earnings 9.89 9.89 7.25 Dollar 36.4 United States -10.26 8.81 1.164 1U4 26.0 Dollar Canada 64.26 2.80 22.91 48.17 33.4 Peso Mexico 1,320 5.71 20.0' 231.1 1,100 Yen Japan 662' 1.10 603.0" Won 563 15-20 Korea' 13.39 385.0 72.4 28.75 223.3 Franc Belgium 40.04 9.63 4.159 22.17 80.6 France Franc 21.77 12.19 Germany Mark 1.786 13.33 63.3 9.07 7,615 3,885 96.0 Italy Lira 839.3 24.17 12.34 73.6' 1.958 13.92 Netherlands Guilder 460 6.57 329' 70.07 40.0 Peseta Spain 52.39 12.46 32.20 62.7 4.200 Krona Sweden 306.1 7.06 29.7 United Kingdom Pence 43.37 236.0 --------·--- January-September average except for Korea. I. 2. All employees. 3. Earnings for production workers estimated on the basis of average hourly earnings for all emp1oyees adjusted for the relative Ievel of to all employee earnings in 1977. earnings 4. June exchange rate. 5. Mid-point of estimated average compensation range. 6. Earnings are estimated on the basis of 1978 manufacturing earnings and the average earnings trend in the total private non-farm econ Department of Labor, Bureau of Labor Statistics, Office of Productivity and Technology, November 1980. U.S. Prepared by:
N
INTRODUCTION
avoiding these tariffs, foreign investors are able to remain competitive in the
U.S. market place.
In addition, foreigners who are contemplating a business venture discover
that the market place in the United States requires a vast array of goods and
services which range from basic elements (e.g. copper, magnesium, etc.) to
the most sophisticated electronics. Besides the common desire for these
goods and services, the U.S. also possesses the uncommon ability to pay for
them.
The U.S. work force has been attractive to foreign investors because
it is !arge, diverse, and highly skilled, but it has also been unattractive
because of the high wages it commanded. In fact, the high wage rates
impeded foreign investment during the decades of the 1950s and 1960s
because investors were reluctant- and often unable- to pay them. However,
statistics gathered as recently as 1980 by the U.S. Department ofLabor show
that the average total compensation of U.S. production workers is below
that of production workers in Belgium, Germany, Netherlands, and
Sweden. When one also considers that labour unions in the U.S. are less
demanding than in many European countries, the U.S. becomes very
appealing for investments that require numerous employees for their
success.
As indicated in Table 1-2, foreign investors have found the rates of
return in the U.S. attractive. During 1979, foreign investments generated a
return of 13.1 per cent., and by 1980 the combined rate of return on foreign
investments in the U.S. had increased to 15.6 per cent.
Because of all these advantages, foreign investment in the United States
has increased dramatically in recent years. As indicated in Table 1-3, total
foreign assets in the U.S. increased from $263.4 billion in 1976 to
approximately $481 billion by 1980.
Of the $65.483 billion o(so-called 'direct foreign investments' (i.e. direct
or indirect foreign ownership of 10 per cent. or more ofthe voting securities
or the equivalent) which existed in 1980, Table 1-4 indicates their dispersion
among various industrial categories and their sources by country or other
geographical identification.
37 per cent. of the investmentswerein manufacturing with approximately
20 per cent. each in trade and petroleum, 8 per cent. in insurance, and 16 per
cent. in other industries. While real estate, which was included in other
industries, represented approximately 4 per cent. of the investments, this
estimate did not accurately reflect the total asset value of land owned by
foreign investors. The $2.429 billion listed included only direct investments in
real estate made by concerns in the real estate industry. Direct investments in
other industries, which may also have included ownership of real estate ( e.g.
petroleum industry), were classified as part of those other industries.
Just eight countries accounted for almost 90 per cent. of the total direct
investments. The Netherlands represented 25 per cent., United Kingdom 17
per cent., Canada 15 per cent., Germany, Japan, Switzerland, and the
3
z,_, ;<:> 0 0 c (") ::::! 0 z
I Rate of return 1 I 15.6 29.6 11. 0 11.0 17.5 15. 2 21.2 13.2 30.7 6. 6 7. I 13. I 13. 9 30.3 5. 4 9. 8 18. I 13. I 12.2 45.9 6. 8 12.9 21.0 12.8
Rein-vested arnings 6, 190 2,671 1, 576 959 424 559 I, 567 101 1,320 60 -2 89 3,400 2, 212 135 382 355 316 701 7 188 209 196 102
e
1980 Income Interest, dividends, and earnings of unincorporated affi.liates Earnings I I Divi-of unin-IrrterTeostt al decnordsp o-rated affiliates I I 834,2 147 I, 311 993 ! 14 529 67 I 610 VOl 519 -264 09 430 1S7 185 88 382 15 299 68 824 138 121 565 228 66 52 109 36 5 I 30 25 18 1 6 7 8 (') 1 28 (') (') 28 37 131 78 16 528,8 223 1,144 491 (D) 2 49(6 D) 282 642 -243 84 245 437 140 53 332 (D) 10 (D) 49 315 195 71 147 590 248 195 -6 (D) (5 D) 76 23 -6 59 222 (D) (D) 14~ I 21(7 D) (D) -14 69 74 9
80 I I
1-2 TABLE me and Rate of Return, 1979- (Millions of dollars, or per cent.) I I nings of es Rate of return I I 1 Rein-Earnings vested Total of earnings unin-~ I corpo-rated afllliates I 812 13. I 3, 955 9, 336 I I 34 ' 1, 645 3, 281 I 23. 1 I -5 1, 005 8. 9 2, 478 111 628 10. 3 l, 389 290 240 17. 3 805 381 438 14. I I, 383 99 399 9. 0 I, 795 1 13.4 79 137 2 5. 8 163 1,345 1 41 68 5. 8 74 1 236 0.7 21 115 2191 2. 8 374 2, 721 13.2 5,622 22 1, 376 23.4 2, 708 -26 8. 668 g 776 60 290 10.3 819 20! 15.7 180 687 114 208 6311 0.8 193 366 9. 7 >.H> (D) (D) (') 12 -1 221 9. 6 264 13 11.7 138 431 128 102 17.0 412 (D) (D) 54 171
Inco 1979 Incorne Interest, dividends, and earunincorporated affiliat Divi-I I Total deIrnrdtse rest 2,402 594 : 996 30 392 328 I 693 416 282 439 103 225 359 10 59 519 102 36 200 55 46 2 33 30 24 35 !l 11 8 2 74 (') (') 45 12 1J I, 658 849 435 332 22 289 249 476 253 424 166 198 268 7 57 -9! 58 53 478 182 103 13 12 I 94 33 62 (D) (D) 170 (D) (D) 177 -41 25 12
Total I 6, 3571 2, 037 1, 69\l 1, 056 599 956 599 112 198 52 75 1621 4, 379 1, 708 1. 144 713 448 366 844 I (D) 315 30S 279 (D)
+;..
z..., ::0 0 Cl c: ..., (') ö z
Rate of return t 14.5 30.2 4.8 7. 7 14.9 13.2 18,8 (D) 5. 7 23.3 (D) (D) 16.6 (D) 10.9 2. 7 (D) (D)
Rein-vested arnings 2,699 2, 206 -54 172 159 214 636 (D) 12 545 (D) 76 587 (D) 109 -27 (D) 79
e
1980 Income Interest, dividends, and earnings of unincorporated affi.liates Earnings Divi-of unin-dends Total Irrterest corpo-rated affiliates 1,633 949 244 I 441 491 472 10 2.Sg S66 -18 326 (D) (D) 215 103 (D) (D) 116 8 245 62 62 121 89 -75 57 108 (D) -2 (D) 9 31 15 9 7 -77 -100 -2 24 (D) (D) 11 0 11 116 13 92 284 607 264 59 69 3 56 10 201 -10 20i 10 62 5 21 36 5 10 2 3 262 41 21 200 I
-
Total I 4, 331 2,697 ,S\2 388 275 460 725 (D) 43 468 (D) 192 I, 194 (D) 313 34 (D) 341 I -
NUED Rate of return 1 14.4 (D) R.7 9. 4 13. 9 (D) 18.2 (D) 12. 6 14.5 (D) 29.2 15.0 (D) 12. 8 7. 2 (D) 15.6
I
T 1-2-ABLE CONT ---------- 1979 Income Interest, dividends, and earnings of unincorporated affiliates Rein-Total Earnings vested earnings ofuniDinv-i· Total Irrterest dends corpo-rated affiliates 1, 180 332 3,534 667 180 2,355 (D) 22 (D)3 19 10 288 382 829 216 -25 191 447 (D) (D) 4C5 253 48 152 (D) (D) 170 77 91 78 (D) 134 (D) 33 41 60 107 -54 569 38 123 462 -(*1) 38 1 0 38 12 21 74 1 8 53 -7-25 3 238 18 1 291 1(1 *) 9 9 0 1 6 12 20191 2 130 79 809 168 215 436 54 373 17R 27 7 12 8 152 283 161 130 13 18 122 58 63 1 8 49 5 65 2 3 2 8 58 220 184 26 23 134 36 ppressed to avoid disclosure of data of individual companies. e beginning-and end-of-year direct investment positions.
uh
Europe excluding United Kingdom ....... Petroleum ........ Manufacturing .... ....... .. .. .. . ....... Trade. lnsurance . Other. .. ..................... 1pan . Petroleum ............................................... Manufacturing .... .. .. .. .. .. .. .. ..... . ........ Trade ........... lnsurance . . ··························· Other. ..................... 0 th. er Petroleum ...................................... Manufacturing ..... Trade ... .. ........ Insurance ......................... Other ..... •Less than $500,000 ( n S±). 1. Income divided by the average of t Ut