The inauguration on January 20, 2017 of U.S. President Donald Trump has ushered in a new, unpredictable era for many, including businesses around the world. The first couple of weeks of President Trump’s administration has witnessed numerous actions, many of which depart from long-standing U.S. traditions of administrations on either side of the political spectrum. In addition, the Republican blueprint for major tax reform suggests significant changes to long-standing rules, regulations and practices that affect international commerce. For foreign businesses dealing with the United States, sending personnel or importing goods or services to the country, the changing landscape is particularly significant. Business practices and commercial activities should be reviewed carefully in light of the new administration’s orders and pronouncements. Below we consider two significant areas on which there has been focus by the new President, both during his political campaign and in new regulatory action: foreigners’ entry into the United States and import, export and taxation regulations.
I. Business Travel to the United States
The President signed an Executive Order titled “Protecting the Nation from Foreign Terrorist Entry into the United State” on January 27, 2017 (the “Executive Order”), which has the potential to affect foreign travelers, business or otherwise, entering the United States. The Executive Order prompted widespread protests at airports across the United States. Several organizations filed or threatened lawsuits against the Trump administration and the Department of Homeland Security, and the effect, legality and lasting influence of the Executive Order remains unclear. One such challenge resulted in a Seattle Federal judge issuing on February 3, 2017 a temporary restraining order which applies nation-wide against the travel ban and key provisions in the only week old Executive Order (the “Court Order”), and thereby put a temporary halt on their implementation. As a result of the Court Order, the Department of Homeland Security announced that it suspended its enforcement of the travel ban and the relevant provisions of the Executive Order, and that the policies and procedures that applied before the Executive Order was enacted will be reinstated. Accordingly, holders of valid entry visas from the listed states should now be permitted to enter the United States at this time, unless and until the Court Order is overturned. An initial appeal for an emergency stay by the Department of Justice was dismissed in Federal court on February 4, 2017. However, the administration is likely to continue to contest the Court Order. At the time of writing, no change has been made to the Court Order. It is likely that this area will remain unclear and there will be continued petitions by various parties and rulings by various courts around the United States. Despite this uncertainty, foreign businesses with plans to send personnel to the United States should consider the potential implications of the Executive Order for employees. Below is a summary of certain provisions of the Executive Order and possible implications for such businesses.
- The Executive Order bars citizens of seven countries – Iran, Iraq, Libya, Somalia, Sudan, Syria and Yemen – from entering the United States for a period of 90 days, and halts all refugee arrivals for 120 days, from January 27, 2017.1 Individuals from the seven listed countries who are entering on diplomatic visas, NATO visas, C-2 visas for travel to the United Nations and G-1, G-2-, G-3 and G-4 visas are excluded from the ban. Foreign businesses with employees who are citizens of any of the seven countries (even if they are also citizens of other countries) should be advised that those employees will not be permitted to travel to the United States, even if they are in possession of a valid visa (other than one of the excluded visas). However, as noted above, this ban was lifted on February 3 pursuant to the Court Order, although the administration announced that it will challenge that Court Order to have it stayed. The U.S. Embassy in Israel has clarified, in a statement issued on January 31, that the travel ban will have no effect on Israeli citizens who were born in or are dual nationals of the seven countries listed above.
- The Executive Order states that the Secretary of Homeland Security, Secretary of State and Director of National Intelligence will conduct a review of “information needed … to adjudicate any visa, admission, or other benefit [applications]” with a report due 30 days from the date of the Executive Order.2Requests will then be made to foreign governments for the information identified in the report. If the government of any foreign country fails to comply with the request within 60 days of receipt, that country may be included on an additional list of countries whose citizens are barred from entry into the United States submitted to the President by either Secretary. Foreign businesses with employees who intend to travel to the United States at any time should evaluate at the relevant time whether the countries of which they are citizens are likely to be included in any such submission. It should be noted that the President has publicly stated that his intent was to enact a “Muslim ban”, and that as such any Muslim-majority country is particularly at risk of being considered for inclusion on any additional list.
- As noted above, several legal challenges have been lodged against the Executive Order, which have resulted in temporary restraining orders against aspects of the Executive Order issued by several Federal courts.3 Numerous large U.S. companies including Google, Microsoft and Uber have issued statements condemning the Executive Order. In a formal letter to the Secretary of Homeland Security and Secretary of State issued on February 2, 2017, Microsoft proposed an exemption program for U.S. visa holders otherwise affected by the Executive Order.4 Amazon and Expedia each filed an amicus brief in support of an action by Washington state challenging the Executive Order. Although it is unclear at present what lasting effect, if any, these private actions will have on the administration’s policies, such support from important U.S. businesses for a more relaxed approach – especially to immigrants and entrants coming to the United States for business reasons – may suggest that an accommodation of some kind may be forthcoming. Foreign businesses should monitor developments of private actions and any Department of Homeland Security guidance in response.
- The Executive Order allows the Secretary of Homeland Security and the Secretary of State to issue visas to citizens of the listed countries on a case-by-case basis “when in the national interest”.5 No further guidance has been issued regarding how such cases will be evaluated. A possible outcome of such guidance is that foreign businesses may be permitted or required to submit renewed visa applications on behalf of employees who are citizens of the listed countries.
- The ban on entry of nationals from the seven countries initially purported to apply to lawful permanent residents. Under guidance dated January 27, 2017, the Department of Homeland Security indicated that it expected “swift entry” for such lawful permanent residents, “subject to national security checks”. The Secretary of Homeland Security clarified on January 29, 2017 that, absent security reasons, lawful permanent residents from the seven listed countries would not be prevented from returning to the United States. It now appears that returning lawful permanent residents who are citizens of the listed countries, although they may expect additional delays at airport security, may be allowed to return.
The Executive Order is uncertain in many respects and its implications are likely to evolve rapidly. In addition, the Court Order and various other challenges to the Executive Order create greater uncertainties as to the state of the laws and regulations. Accordingly, businesses and their personnel who intend to travel to the United States should continue to monitor developments and confirm the applicability and effect of the Executive Order at relevant times.
Also potentially significant for international business – and particularly for the Israeli high-tech industry – is a draft executive order, titled “Protecting American Jobs and Workers by Strengthening the Integrity of Foreign Worker Visa Programs”, widely reported to have been prepared by the new administration (the “Draft Order”)6. Although the Draft Order has not yet been signed or formally made available to the public, a leaked draft can be found online.7 Most significantly, the Draft Order calls for a review of the visa categories H-1B (allowing American employers to recruit and employ highly-skilled foreign workers), L-1 (allowing for the relocation of foreign workers to work at the U.S. branch of an international corporation) and B-1 (allowing for short-term business travel to the United States). Such review is aimed at “[providing] the President an initial report … on the actual or potential injury to U.S. workers caused, directly or indirectly, by work performed by nonimmigrant workers” in the aforementioned visa categories.
If the review period leads to an overhaul of these visa programs, particularly one geared towards alleviating “injury to U.S. workers” – presumably by introducing new limits on the numbers of eligible foreign workers, and potentially irksome criteria aimed at limiting eligibility to only the most highly qualified potential employees – this may have serious ramifications for corporations based both inside and outside the United States. American companies often seek to recruit the best and the brightest professionals from across the globe (sometimes from their own foreign subsidiaries). Also, companies headquartered outside the United States that are looking to establish a corporate presence there often depend, at least in part, on the relocation of some non-American workers. For example, Israeli workers are common beneficiaries of both forms of relocation, with Israelis holding approximately 4,000 H-1B visas and 7,000 L-1 visas.
Similar to the Executive Order, many aspects of the Draft Order remain unclear at this point. If and when it is enacted, it will no doubt incur the ire of large U.S. companies. Although the immediate effects of the Draft Order are likely to be less drastic than those of the Executive Order (due to the initial review period), companies and employees alike would be wise to examine it closely and take the necessary steps to mitigate its potential harm.
II. Import, Export and Taxation Issues
Although the actual implementation of any major tax reform under the Trump administration remains largely speculative, there are various proposals that have received significant attention. In particular, the Republican blueprint for major tax reform is likely to be a useful projection of certain significant changes to U.S. tax law that may occur under the new administration. However, certain aspects of this blueprint are inconsistent with proposals that have been made by the Trump camp itself. Nonetheless, taken together, the Republican blueprint and other Trump statements provide useful guidance on potential changes to the U.S. tax system. Certain important potential changes to the U.S. tax system for foreign businesses are described below.
- Destination-Basis Tax System: The Republican blueprint concomitantly proposes that domestic and foreign businesses would only be taxed on revenue from sales in the United States, not on sales outside the United States. Thus, products exported outside the United States would not be taxed regardless of where such products were produced, while products imported into the country would be taxed regardless of the situs of production.
- Border Adjustments: Although lacking in specificity, the Republican blueprint contemplates that deductions would only be available for property acquired in the United States, not for property imported into the United States (including services and intangibles). This is likely to apply to both the cost of goods sold and the immediate expensing of capital assets (another proposal in the blueprint).
- Planning: If this becomes law, businesses with substantial U.S. sales might be incentivized to move intellectual property and other production to the United States so that they can deduct those expenses (e.g., royalties and other costs of goods sold).
- Example: A business’s costs for manufacturing widgets is $20 of U.S. components and $15 of foreign components. The business sells a widget in the United States for $100, which is subject to U.S. tax. The company will be treated as recognizing taxable income of $80 because it is only permitted to deduct the $20 cost of U.S. components from the income realized on the sale. Hence, the United States would be effectively taxing the $15 cost attributable to foreign imports into the country.
- Note: If the company sells widgets abroad, none of the proceeds from those sales would be subject to U.S. tax. This is true even if the company is organized in the United States (as described below).
- Territorial Taxation of U.S. Companies: Under the current U.S. system of taxation, U.S. companies generally are taxed on worldwide income, regardless of the jurisdiction in which the income is earned. The Republican blueprint proposal would cause U.S. companies to be taxed only on U.S.-source income.
- However, a post-election statement of tax principles released by Trump contained a stated goal of ending the deferral of corporate income earned abroad, which would imply the continued operation of a worldwide income taxation system.
Planning: If the Republican blueprint’s territorial taxation system is ultimately implemented, its enactment would reduce the risk foreign companies face of becoming subject to U.S. tax on global operations when setting up U.S. subsidiaries. In connection with the proposal described above, this could have the result of encouraging foreign companies to establish U.S. subsidiaries for relevant businesses.