Monday, September 10, 2007

Looking for Greater Export Profits? Consider "Onshore" Options in Your Search for an "Offshore" Strategy

Can the formation of "offshore" companies offer tax benefits to an internationalizing US business, and are many companies overlooking the benefits of structures using US "onshore" entities?

The business press has left some of our clients with the sense that they are missing-out on great benefits though "tax haven" structures. Yet, clients often assume that such structures are used mainly by the likes of Tyco and Enron, are complex and risky, and may not be a good way to win friends at the IRS.

Offshore entities can be useful in some situations that have little to do with US tax savings. For example, companies investing in China or India can benefit by holding their local investment through an intermediate company established in Hong Kong (for China) or Mauritius (especially for India but also for China) or some other low-tax jurisdiction. The Hong Kong or Mauritius entity can more easily be sold -- local law restrictions on transfer of ownership may not apply since only the ownership of the "offshore" entity is transferred. The shares of the local Chinese or Indian company do not change hands. Even if the shares of the local company are later sold, the local withholding tax on capital gains may be reduced for a payment made to a jurisdiction like Mauritius than for a payment made directly to the US.

If a US company is not investing or forming an entity in another country but is exporting, licensing or otherwise selling to other countries, offshore entities offer at least the potential of deferring the impact of US tax. It would be difficult to reduce US taxes simply by routing payments though a third jurisdiction such as the Cayman Islands, no matter how attractive its tax laws. This is mainly since the US taxes a US company's or individual's income on a worldwide basis, even if the income source has nothing to do with US activities (this is not true for tax systems of most other countries). Parking income in low-tax country may be possible, though this defers but does not reduce the US tax burden (and will still require current US tax payments on many types of passive "subpart F/controlled foreign corporation" income, even if funds are not actually distributed back to the US).

Too great a focus on "offshore" structures can also cause US companies to overlook the benefits of US "onshore" structures. This can be as simple as the use of a US limited liability company for exporting US goods. Net income would then be taxable to owners of the LLC but would not be subject to the added US corporate tax that would apply to a corporate entity.

US exporters can also continue to achieve significant US tax savings through the formation of a separate US international sales corporation under special IRS rules. This technique is available to certain partnerships, S corporations and LLCs, which establish an export sales corporation and then pay it a commission of up to 50% of the export net income. The commission is deductible by the company paying the commission and is not taxable to the export corporation. The accumulated income in the export corporation is subject to a 15% dividend tax when distributed to the payer of the commission. Though there are a few other wrinkles, a savings of 10% or more off US taxes can easily be achieved so long as a company's exports are of US origin.

Better yet, the set-up costs are modest, and your family and friends won't likely be reading about your IRS troubles in the local business press!


Thursday, June 28, 2007

Enforcement of US Court Judgments in China - Even a Single Example?

As noted in my last posting, we seldom recommend that clients specify US courts as the choice for dispute resolution in cross-border agreements that may need to be enforced in another country. Arbitral awards are simply a better enforcement bet among the many signatory countries to the New York Convention.

Don Clarke, the George Washington Law School professor who moderates an excellent China law discussion group, is reviving his search for even a single example of a US court judgment that has been enforced in China, and I will report back on specific examples. Don's criteria are as follows - a typical scenario wherein the local party challenges the enforceability of the judgment:

"1. I'm talking about judgments, not mediated settlements.

2. I'm not talking about cases where both parties wanted the judgment recognized (e.g., consensual divorce cases). I want cases where one side argued that the judgment should not be recognized and enforced, and lost the argument.

3. I'm talking about cases where the issue was whether or not to enforce the judgment without going into the merits, not where the merits of the matter were litigated (since in that case it wouldn't really be a case of enforcing a US judgment).

4. I really need a specific and independently verifiable reference, not something you heard about from somebody else. This is important because so far, every time I hear about a case that I'm told meets my criteria, when I am able to look at the specifics it turns out that it does not.

Our last discussion failed to uncover any cases meeting the above criteria; are there really none that anyone knows of?"

Friday, June 22, 2007

Online Terms and Conditions - Binding in the US and Internationally?

We have worked with clients to help ensure that online terms and conditions are enforceable, both in the US and in other countries. Apart from online agreements accepted by clicking "I accept," some agreements are signed by parties yet refer to materials posted online as part of the agreement terms. Will such online terms be enforceable?

Not always. In a US court case in Florida, the parties signed a written agreement yet tried to make various online terms binding through the following language:

“This contract is subject to all of X's terms, conditions, user and acceptable use policies located at"

These online terms included an agreement to arbitrate, and the Florida court found that the agreement to arbitrate was not binding. Why? In essence, the incorporation of the online terms needed to be more specific than a simple reference that it is "subject to" the online terms. There was no specific reference in the "offline" written document that is meant to include the online document that contains the arbitration provision, and the web address link apparently did not directly point to the terms containing the arbitration provision.

Such a defect can be devastating in a cross-border context. We often recommend arbitration for international agreements, in part to stay out of unfamiliar local courts and in part due to the greater chances of enforceability in many other countries of an arbitral award as opposed to a foreign court judgment. If a US court is reluctant to enforce online terms which are not clearly meant to be binding by the parties, courts in many other countries may be even less likely to enforce terms, especially if they disadvantage a local party.

The decision is Affinity Internet, Inc., d/b/a SkyNetWeb v. Consolidated Credit Counseling Services, Inc. No. 4D05-1193 (Fla. Dist. Ct. App. 4th Dist., March 1, 2006)

Saturday, June 09, 2007

We Don't Pay Foreign Officials - Why Are We At Risk?

As they expand internationally, our clients want to be good corporate citizens and understand that payments should not be made to foreign officials in order to get business. Yet, many mid-market companies would be surprised to learn that they are at risk for failing to recognize "red flags" and failing to follow even basic corporate compliance practices.

The reason is the Foreign Corrupt Practices Act and the heightened enforcement activity over the past 18 to 24 months - companies are facing the highest level of scrutiny since the Act's introduction in the 1970s.

Are employees on that trip to Beijing handing over fists of cash to ministry officials in order to land new business or obtain approval for a new venture? Perhaps not so likely. What about that recent distributor in New Delhi and its relationship with government officials - is "don't ask, don't tell" good enough? Are you confident that you are not dealing with government officials - have you really explored the ownership of that "private" company in Shanghai or that hospital system in Bahrain?

If a U.S. company is faced with a murky set of facts, it may have sufficient "knowledge" of a possible improper payment to open the door to an investigation and potential fines (or worse). "Red flags" can include the insertion of a local intermediary without a clear business purpose. Due diligence on relationships and transactions is an important part of the response. Contractual language piously prohibiting corrupt payments is advisable, but will not be sufficient without more, including evidence that the company took steps to implement a compliance program and educate employees (something more than "thou shall not hand over bags of cash").

Better a little up-front investment than a front-page Wall Street Journal or Crain's article and a cloud over the international team.

Thursday, March 15, 2007

Abe's Shameless Malarkey Refuted

Do I now have your full attention? Ready to take a break from cross-border legal updates?

Yes, this is in fact a North Korean news headline, in one of those priceless English translations. Here are a few excerpts:

"Abe's Shameless Malarkey Refuted

Pyongyang, March 14 (KCNA) -- Japanese Prime Minister Abe's reckless remarks aimed to throw the past crimes committed by Japan into the limbo of oblivion remind one of the saying that "Leopards don't change their spots," observes a Minju Joson analyst Wednesday.

Noting that he totally negated Japan's past crimes, letting loose a string of rubbish woefully lacking common knowledge, the analyst goes on: . . . . "

The next time I am out of good arguments on a client's behalf, I will simply accuse the other side of spouting "shameless malarkey" and of "letting loose a string of rubbish woefully lacking common knowledge."

By the way, the satellite image of North and South Korea shows in the starkest terms how economic development can turn dark into light. Whatever your political persuasion, many of us can agree that our cross-border efforts and market liberalization can lead to something positive.

Thursday, March 08, 2007

India's Growth - Don't Overlook Manufacturing (and the Consumer Market)

We just received an update from one of our India-based contacts - the Indian economy continues to steam ahead, and note the importance of manufacturing to this growth. This economy has much more in its favor than software and back-office outsourcing.

"Goldman Sachs has projected that India will sustain over 8% growth until 2020 and become the second largest economy in the world ahead of the United States, by 2050. In their words- “…we project India’s potential or sustainable growth rate at about 8% until 2020...”. Standard & Poor’s, the global rating agency, has raised India’s sovereign credit rating to ‘Investment Grade’ (BBB-/A-3).

Recent reports released by the Central Statistical Organisation (“CSO”) and the Reserve Bank of India (“RBI”) further affirm the above facts. According to CSO, real gross domestic product (“GDP”) growth accelerated to 9.2% in the second quarter from 8.9% the preceding quarter and 8.4 % a year ago, led by manufacturing and services sectors. The manufacturing sector with double digit growth of 11.5% maintained its position as key driver of industrial activity, contributing almost 91.2% of the growth in industry. Growth in the services sector accelerated to 10.6 %."

Tuesday, March 06, 2007

Middle Market Companies Go International - A Terrific Conference

How many conferences really focus on the special needs of middle market companies as they expand abroad through acquisition, manufacturing, distribution and otherwise? What about the exploding interest among private equity firms in helping their portfolio companies into new markets and in exploring direct investments in China, India and elsewhere?

I was pleased to be part of a fine group of international committee members who organized ACG Chicago's "Is the World Really Flat? Middle Market Companies Competing in the Global Economy."

The February 28 event drew about 300 participants and featured Fareed Zakaria as our lunch keynote speaker (congratulations on a fine presentation, Fareed) as well as Julie Sell of The Economist and her cross-border dealmaker roundtable with Jay Jordan of The Jordan Company and Steve Pagliuca of Bain Capital (which I thought really went to the heart of many of the middle-market's cross-border challenges).

In addition to working with Julie, Jay and Steve on their panel, I put together and moderated our "Sourcing Cross-Border Deals" session. As described below (click on the images to enlarge), I was joined by senior dealmakers from Illinois Tool Works (a very international Fortune 100 company), Cathay Fortune Corp. (a China-based private equity firm) and S.H. Lang & Co. (Scott Lang, formerly of Brown Gibbons Lang, the mid-market investment banking firm).

Tuesday, February 27, 2007

Our China Roundtable Discussion

InternationalCounsel hosted a China roundtable discussion at our offices on Monday, February 26. We had a good group of attendees, including some manufacturers, consultants, representatives from Illinois and Wisconsin trade organizations and others interested in or already doing business in China.

I spoke on manufacturing and distribution in China, and Shawn He of MeetChinaBiz moderated the discussion.

These roundtable discussions allow participants to voice their special problems and concerns and learn from each other. We are finding something of an oversupply of China events in Chicago and elsewhere - how many more lectures on direct foreign investment in China are you prepared to sit through?

A roundtable format offers a more interactive setting, and most companies entering China are facing contracting, investment and IP issues that are not rocket science but require small teams of experienced advisors.

Thursday, February 15, 2007

Investing in India? Our Recent Article

As part of our cross-border legal advisory services, we work with US companies investing and doing business in India (and also with Indian companies doing business in the US). China is also important to us, but it is seldom "all China, all of the time" for our clients!

Here is my recent article on foreign equity investment in Indian companies - published in the Association for Corporate Growth's Cross-Border Transactions Bulletin (we are active with the international activities of this mid-market-focused dealmakers' association). Click on the images to enlarge.