This chart identifies the percentage change over time with the largest recovery seen the United States market in 2013.
PERFORMANCE IN EXCHANGES
OVERALL ECONOMIC OUTLOOK
The United States investment market has indeed recovered from the crisis of 2008 and 2009. More specifically, many investors in the United States believe that the opportunities have never been better.
Overall increases in key economic indicators do show moderate gains such as in real Gross Domestic Product (GDP) and manufacturing. However, other metrics that are often used to evaluate the investment market has improved can be seen by looking at the major stock exchanges which include the Dow Jones Industrial Average (DOW), the National Association of Securities Dealers Automated Quotations (NASDAQ), and the New York Stock Exchange (NYSE).
DOW JONES INDUSTRIAL AVERAGE (DOW)
The Dow Jones Industrial Average (DOW) consists of a mix of typically the largest 30 stocks traded on the NASDAQ and the NYSE. The DOW has increased by over 62% from just 10,500 in 2009 to the staggering mark 17,000 in August 2014 for the first time in its’ history. No one really knows if the DOW will increase or decrease over the next several years; but the resilience of the DOW when compared to other foreign exchanges is unquestionable.
NATIONAL ASSOCIATION OF SECURITIES DEALERS AUTOMATED QUOTATIONS (NASDAQ)
As you might expect, the NASDAQ has also seen a significant increase over the past few years.
As you might expect, the NASDAQ has also seen a significant increase over the past few years. The NASDAQ has increased by 80% from just 2,500 in 2009 to 4,500 in August 2014. Although a significant part of this increase can be attributed to the initial public offerings (IPO) of technology companies; the NASDAQ is very broad index and helps to illustrate the success of the investor market since 2009.
NEW YORK STOCK EXCHANGE (NYSE)
Overall, the NYSE has increased by 56% from 7,200 in 2009 to just over 11,200 in August 2014. In terms of future opportunities for the NYSE, the number of foreign and domestic investors, including those coming from Brazil, continue to drive demand for companies to be listed on the NYSE.
BOVESPA COMPARISONS TO UNITED STATES EXCHANGES
When compared to the BOVESPA, the public exchanges in the United States from a percent change perspective appear to be fairly consist year over year. However, what is important to note is the recover in the United States that occurred in 2013 has resulted in all the exchanges being at all-time highs. In comparison, BOVESPA has yet to return the 68,000 mark reached in 2009.
02. TYPES OF INVESTMENTS
The number of investment options available in the United States can sometime appear limitless. In turn, this has caused some foreign investors to hesitate getting into the market given the either their lack of experience or the uncertainty of dealing with investments in the United States. As the purpose of this guide is to provide some insight into the processes, our hope is that a better understanding of the types of investments as well as the investments vehicles can be reached thereby helping to reduce barriers to entry.
PUBLIC MARKET INVESTMENTS
The public market can be defined as the opportunity to investment in certain instruments that are traded on public exchanges. The following is a description of these instruments but does not constitute the entire portfolio of instruments that may be available.
Investing in equities provides the investor with broad investment options; they can consist of individual equities, ETFs, mutual funds (Open or Close), options, structured notes, preferred stocks, equity index annuities and different class of stocks. (i.e. growth, value, small cap).
Investments in fixed income vehicles are created by a company or government agencies, who issues instruments or debt as a way to raise funds that are then paid back in the fixed income stream over time. From an investment perspective, the value of the instrument is often associated with two items that are inherently interrelated: the ability of the entity to pay back the bond and the current market interest rates. Companies that may be at a higher risk of repayment often have interest rates that are higher. Investments can consist of United States Treasuries, Municipal bonds, investment grade corporate bonds, high yield bonds, credit default swaps, mortgages, asset backed securities, and variable annuities.
Currently, it is common for foreigners to have expenses in United States dollars such as: mortgages, business expenses, education fees, etc. The foreign exchange market (also known as FX or Forex) allows investors to minimize the exposure to currency risks by hedging such expenses with investments in United States dollars. The FX market can also be used to speculate as well as to realize profit from movements in exchange rates.
The following ways can be used to invest in commodities:
- By purchasing amounts of physical raw commodities, such as coffee or sugar. Another option is the use of futures contracts or exchange traded products (ETPs) that directly track a specific commodity index. These are highly volatile and complex investments that are generally recommended for sophisticated investors only.
- By gaining exposure to commodities through mutual funds that invest in commodity-related businesses (i.e. an oil and gas fund would own stocks issued by companies involved in energy exploration, refining, storage, and distribution).
PRIVATE MARKET INVESTMENTS
Private investments are more focused on investments that are not publically available to everyone. In certain instances, the investor must meet specific investment criteria in order to qualify to invest as the investments are deemed higher risk and require an investor meet the qualifications of a “sophisticated investor”. The types of private market investments available can be categorized as direct investments and/or investment funds.
A direct investment involves the purchase of a controlling interest in a company. Although the percent of interest that must be purchased to gain control can vary, the overall concept remains the same which is the investor has to purchase enough of the company such that control has been achieved. For optimistic investors about the ideas of the company and confident in their ability to monetize such ideas, a direct investment in a company may be a good option.
Investment funds allow investors to disperse their investments across a number of companies or funds in effort to diversify risk. In addition, a fund with multiple investments but a unified management approach may be able to gain some synergies that would benefit the investors as well as the companies within the investment fund portfolio. Within investment funds there are several types of funds, described as follows:
Venture Capital Funds
Venture capital funds are created to assist companies that are in the early growth stage. The funds are often considered higher risk but can also come with higher rewards.
For example, an investment early in a start-up company could result in the start-up going public. As ownership stake in the company was purchased early on, when the valuation was low, by the time the company goes public there will be the potential for significant profits.
Private Equity Funds
Private equity funds can either buy a share in or the entire company to include in their portfolio. These companies are often past the start-up stage but may still have significant upside resulting in the private equity investors being able to sell their portion of the company for more than initially paid.
Hedge funds are privately managed investment vehicles that utilize sophisticated strategies to invest in securities and other instruments in both the international and domestic markets. They are designed to potentially offset losses during a market downturn and often seek to generate returns higher than traditional stock and bond investments.
Hedge Funds’ Investments
Hedge funds invest in a variety of markets by using different investments instruments based on certain industry, risk and return profiles. These are actively managed portfolios which are often available to accredited investors only.
Foreign currency futures and forwards will generate ordinary income sourced according to the residence of the taxpayer. Therefore any trading gains usually are exempt from United States tax. In turn, futures and forward contracts are generally considered capital assets that generate capital gain or potentially a loss.
PRIVATE MARKET INVESTMENT TAXATION
If you are a legal entity or individual in the United States, then it is likely you will need to pay taxes on income generated. Fortunately, for foreign entities and individuals taxes are limited to activity in the United States. The term to describe the income generated from such transactions is Effectively Connected Income.
It is important to note that some legal entities will generate income directly attributed to an individual.
This process is known a pass-through and is common in the United States.
Taxes rates in the United States can range from 25% to as high as 38%. However, the effective tax rate is much lower due to the availability of deductions and credits on returns. For example, taxes paid to states can be deducted on federal tax returns. Some entities in the United States are even able to get there tax rate at or near 0%.
Amounts on subsidiaries that are sent to headquarters are typically subject to a 30% tax. However, there is a permanent residency test that can reduce the rate to as low as 15% based on established parameters.
03. INCOME TAX – WHO HAS TO PAY?
PUBLIC MARKET INVESTMENT TAXATION
For United States non-residents, dividends on stock are subject to a 30 percent United States withholding tax unless a tax treaty has been signed. For dividends to be subject to withholding that are associated with a shareholder of company stock, dividends must be paid by distribution of money out of the company earners (property distributions would also qualify).
American Depository Receipts (“ADRs”) are used to evidence the deposit of ordinary shares in a foreign corporation with a United States depository bank. Since the underlying issuer is a foreign corporation, dividends on ADRs are treated as foreign source income exempt from United States withholding tax.
However, at the same time, it is important to consider the country in which the dividends are being paid because dividends paid to non-residents in such countries may be subject to withholding tax depending on treaties that have been signed.
CAPITAL GAINS (AND LOSSES)
Gains on the sale of stock normally result in a taxable event. However, when a non-resident has capital gains, they are exempt from withholding tax in the United States as long as they have not been present in the United States for more than 183 days during the year. In turn, losses on the sale of stock cannot be deducted against income that is generated in the United States. In short, this capital loss is not deductible for tax purposes in the US.
Stock options give the investor the right to buy (calls) or sell (puts) a stock. Gains on stock options are usually treated as a capital gain and as such are typically nontaxable for non-residents.
FIXED INCOME INSTRUMENTS (SUCH AS DEBT)
Similar to dividends, fixed income instruments such as debt are typically subject to the 30 percent withholding. However, as with many such tax laws, there are certain exemptions which include but are not limited to:
- The obligations are sold or resold only to non-United States persons;
- The Interest on the obligations is payable only outside the United States and its possessions;
- There is a legend on the face of the obligation stating that any United States person holding the bond will be subject to certain limitations.
04. EXIT STRATEGY FOR INVESTMENTS
As part of the initial decision to invest, the exit strategy should also be considered and will vary by investment. For example, for publically traded investments that are readily tradable, the focus may be more on the timing of when to sell. However, for private direct investments and investment funds the questions may be more focused on the pathway to sell such as through acquisition or IPO.
Big picture, for private investments, it is very important to have an overall strategy that includes a team that can execute that strategy. Note that the Jobs Act of 2012 has materially reduced costs and regulatory requirements for IPO’s for companies under USD 1 billion in revenues and particularly for foreign companies. Here are strategic questions to consider:
- Does the Company have a Strong Tone at the Top?
- Is the Management Team diversified?
- Has the Business Model/Plan been proven?
- Does the Company have Unique
- KPIs (Key Performance Indicators)?
- Can this Company be considered a High Growth Asset?
- Is the Company potentially undervalued in the Marketplace?
05. RISKS AND REWARDS OF INVESTING IN THE UNITED STATES
As with any investment there is always an opportunity cost. The advantage of investing in the United States is the economy has a proven track record and the variety of investment options should help mitigate the opportunity cost.
LOSS OF PRINCIPAL AND PROFITS
Venture Capital and Private Equity investments do carry with them the potential to lose the entire principal investment plus any interest. This is why it is important to engage in a proper due diligence process before investing in companies.
RETURN OF INVESTMENTS TO FOREIGN JURISDICTION
For foreign investors, including those from Brazil, it can at times be difficult to establish the investment vehicles that allow investments abroad to be returned to the foreign jurisdiction. Fortunately, legal entities can be established that help to mitigate the risk.
POTENTIAL TAX ISSUES
Along with the legal aspects of investments to/from foreign jurisdiction, there are significant tax implications. As discussed in this guide, it is important the tax consequences of an investment are fully understood before entering into it as the potential tax liabilities may alter your approach.
ACCESS TO THE UNITED STATES MARKET
The United States market is the largest investment market in the world. To help ensure this level of prominence continues, the United States government has setup guidelines that allow flexibility for investors to invest in many investment vehicles.
UNIQUE INVESTMENT OPPORTUNITIES THAT CAN BE CUSTOMIZED TO ADDRESS RISK TOLERANCES
Given all the investment opportunities the United States has to offer, it is important for investors to clearly understand their risk versus reward tolerance. Once this is better understood, investments in the United States can be identified with projected risk tolerances within that range.
POTENTIAL FOR SUCCESSFUL ACQUISITIONS OR IPOs
For successful acquisitions and IPOs in the United States it does at time appear the list could be endless. Despite requiring analysis and good planning, it is a very promising process, and in most cases, very profitable, and also a great way to enter in the US market.
SOPHISTICATED FINANCIAL REPORTING AND DISCLOSURE ENVIRONMENT
Public companies in particular have financial reporting and disclosure requirement that facilitate an investors understanding as to the currently financial position of the company. These disclosures also provide detailed compensation information so it clear who is benefiting the most as the value of a company increases over time.
- International taxation – Companies with operations in the United States must become familiar with the country’s tax legislation before beginning their operations. The complex tax system, severe penalties and non-compliance with accessory obligations have led many companies to seek the help of service providers, such as certified accountants (CPA) and tax lawyers.
American state and federal agencies are extremely rigid when it comes to improper calculation of quarterly estimated income tax applicable in case of profit. Lack of payment or an over 20% underestimation of this amount can lead to serious consequences (including criminal).
06. HIRING SERVICE PROVIDERS, ACCOUNTANTS (CPA) AND LAWYERS
Hiring service providers in the United States is a simple process, though it is advisable to check some aspects beforehand:
- Verification of license and status: service providers are regulated by state of residence;
- Verification of insurance on services and products provided;
- Verification, through the state, of an existing administrative or civil lawsuits; and
- Search for references for service provider.
ACCOUNTING, TAXES AND ACCESSORY OBLIGATIONS
Maintaining accounting records is essential for companies to meet the requirements of state and federal, and in some cases, municipal agencies in the United States.
It is important for foreign investor to understand local accounting standards to minimize investment risk and better assessment of United States assets. Companies located in the United States must maintain accounting records in accordance with the United States Generally Accepted Accounting Principles (USGAAP). US GAAP applies rules based accounting literature whereas BRGAAP (Brazil Accounting Principles) applies a principles based approach found under international reporting standards often referred to as IFRS (International Financial Reporting Standards).
The main accounting impacts from a state and federal agencies perspective are:
- Consolidation – United States subsidiaries, which use the dollar, must be consolidated in the local currency of the controlling company. This consolidation process is complex, since there are exchange requirements in the financial statements of the Subsidiary abroad to the local currency and the accounting norms of the country of origin of the controlling company;
- Transactions between linked parties – The transactions between the controlling company and the subsidiary abroad must be duly supported by contracts signed by the parties. These transactions are monitored closely by the United Sates and Brazilian Federal Revenue Services in order to identify undue profit remittances between Subsidiaries and controlling companies (see the transfer price topic described in detail ahead);
- Transfer Pricing – Establishing a transfer pricing is a very new process for a company that has established a foreign entity for the first time. In addition to the normal requirements of an organization, a multinational company is subject to rules that are complex and very unstable, which affect a company’s global strategy, their subsidiaries and their chain of suppliers. A decision in terms of pricing determines where the profit will be recognized. Obviously, this point is of special interest to governments, since determining a location for recognizing the profit impacts the taxable income. In the last few years, the obligation to document international operations between linked parties for transfer price analysis purposes has become even more critical, since there has been a trend in tax authorities from different countries sharing information;
This guide was prepared with the sole purpose of presenting the general guidelines for some forms of investment in the United States of America. This guide is not, and shall not be interpreted as, an investment advice or an offer to buy any securities. The reader who intends to make an investment in the United States of America must analyze the specific risks involved through the engagement of an adequate professional retained to perform such analysis.
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The content presented herein is provided for informational purposes only and is not intended to be a substitute for obtaining professional accounting, tax, legal or financial advice. The presentation of information is not intended to create a client-accountant or client-attorney relationship. We recommend that the individual accessing the material does not act on this information without the direct assistance of a professional. US tax information displayed here is not intended to be used to avoid sanctions under US law. .