In the 2012 election year after nearly four years of global recession, U.S. businesses continue to face challenges arising from globalizing.  In a global economy, the ability to plan and implement a global workforce is essential to developing new products and services, supporting local sales in target markets and gaining market share in mature economies and emerging markets.  Legislators and policy makers conflict on whether to regulate more to protect domestic labor or to promote new U.S. global enterprises adaptive to global demographics and individual market conditions.

For startups and global U.S.-based entrepreneurs, several legal and regulatory frameworks are under consideration in this Presidential election year.  As a planning framework for our clients and colleagues, we offer the following summary of some significant draft U.S. legislation relating to global entrepreneurship, tech startups, private equity and the U.S. regulation of business generally.  Several new opportunities for American job growth through entrepreneurship could support new businesses that are purely local but also that “go global” rapidly.

• Small Business “Crowdfunding”: On April 5, 2012, President Obama was scheduled to sign the “Jumpstart our Business Startups” (JOBS) Act.   This new law will provide easier access to investment capital by angel investors and other private equity investors.  For an extensive article, click here.

• Tax Spending: New tax exemptions and credits for U.S. startups and their investors are under discussion.  See, e.g., Startup Act of 2011, S. 1965, 112^th Cong., 1^st Sess. (introduced Dec. 18, 2011), which would amend the Internal Revenue Code to: (1) provide a permanent full tax exclusion on gain from the sale or exchange of “qualified small business stock” held for more than five years, (2) repeal the minimum tax preference and the 28% capital gains rate on such stock, and (3) provide a limited tax credit for certain startup small businesses.  Such legislation is unlikely to be addressed before the Presidential election because of the JOBS Act.

• Tax Sparing: Internet taxation would be eased under possible new tax rules that would prohibit a state or local jurisdiction from imposing multiple or discriminatory taxes on or with respect to the sale or use of digital goods or services delivered or transferred electronically to a customer, where an exclusion would apply for such taxes on “digital service” telecommunications service, Internet access service, or audio or video programming service.  See draft Digital Goods and Services Tax Fairness Act of 2011, S.971 (and H.R. 1860), 112^th Cong., 1^st Sess. (introduced May 12, 2011).   This draft law would restrict taxation of digital goods and services to the retail sale of such goods and services and by the jurisdiction encompassing a customer’s tax address.  It would also prohibit the use of existing regulations or administrative rulings relating to the taxation of tangible personal property or other services to impose any tax on the sale or use of digital goods or services.  While not binding, this draft law would also encourage each state, in accordance with the “sense of Congress”, to take reasonable steps to prevent multiple taxation of digital goods and services where a foreign country has imposed a tax on such goods and services.

• Regulatory Reduction: Regulatory compliance burdens on small business generally are the target of many draft laws.
  • Easing of regulatory burdens could include, for example, the right for small businesses to go public and elect not to comply with the “audit and control” rules of Section 404(b) of the Sarbanes-Oxley Act of 2002.  See, e.g., Startup Act of 2001, S. 1965, supra, which would direct the Comptroller General to assess the costs and benefits to prospective investors, shareholders, and securities markets of allowing smaller stock issuers to opt out of company regulatory requirements of the Sarbanes-Oxley Act of 2002.  More broadly, this would requires the head of any federal or independent regulatory agency, before issuing a notice of rulemaking in connection with the issuance of a proposed major rule, to complete a review that, among other things, analyzes the problem that the rule intends to address, and identifies and analyzes the rule’s expected impact on state, local, and tribal governments, as well as on the ability of new businesses to form and expand.   Such draft law would require a rule cost-benefit analysis for all proposed regulations.
  • More generally, as a manifesto for the Republican Party, 2008 Presidential candidate Senator John McCain has proposed a Jobs Through Growth Act, S. 1720, 112^th Cong., 1^st Sess..  This would (1) repeal “ObamaCare” (the Patient Protection and Affordable Care Act) and  the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which regulates the financial sector, (2) require congressional review of executive branch rulemaking for “major” rules and, subject to Presidential declaration as to national security or national emergency, prevent enactment of such rules unless approved by Congress, (3) require a moratorium on new major rulemaking so long as the unemployment rate is 7.7% or more, and (4) enact a new Freedom from Restrictive Excessive Executive Demands and Onerous Mandates Act of 2011 to amend the Regulatory Flexibility Act (RFA) to revise the regulatory process (rulemaking) with respect to small entities (e.g., small businesses, small organizations, and small governmental jurisdictions) in order to require an assessment of the economic impact on SMB’s, and (5) amend the Small Business Regulatory Enforcement Fairness Act of 1996 to require each agency to review on a periodic basis the civil penalties it imposes on small entities for violations of statutory or regulatory requirements.
  • Immigrant Entrepreneur Visas: Foreigners are recognized as a source of good U.S. jobs, and the loss of foreigners trained in the U.S. to foreign startups represents a brain-drain.   There is a proposed “Startup Visa” or “Alien Entrepreneur Visa” as special immigration regimes for foreign graduate students in science, technology, engineering and mathematics (“STEM” disciplines) to encourage them to remain in the U.S. after graduation from U.S. universities.   See, e.g., Startup Act of 2011, supra, which would amends the Immigration and Nationality Act to authorize the Secretary of Homeland Security to: (1) adjust to conditional permanent resident the status of up to 50,000 aliens who have earned a master’s or doctorate degree in a science, technology, engineering, or mathematics field (STEM); and (2) issue a conditional immigrant visa to up to 75,000 qualified alien entrepreneurs.  See also, an Act to Amend the Immigration and Nationality Act to Promote Innovation, Investment and Research in the United States, H.R. 2161, 112^th Cong., 1^st Sess. (introduced June 14, 2011), which would also reform the H1-B and L visa programs “to protect American workers” and to promote foreign investment in the U.S. economy.  Such latter legislation would establish an immigrant visa category for venture-capital backed alien startup entrepreneurs and self-sponsored startup entrepreneurs.
  • Commercialization of University-Developed Technologies: Bridging university technology with commercial benefits, through “commercialization acceleration grants,” “collaborative commercialization grants” and limited program support for the commercialization and expedited transfer of university-based research and resultant technology.  See. e.g., Startup Act of 2011, Sec. 7, supra. To institutionalize this commercialization process, the draft law would establish a 15-member Committee on Research Commercialization Improvement that would include qualified venture capitalists (running a “VCOC” under 20 CFR 2510.3-101(d)) having a majority of U.S.-citizen partners and an accredited investor who is a “qualified Angel Investor,” to administer grant-making programs.
  • Freedom for Employers to Transfer Jobs within the United States: Legislative prohibition on the National Labor Relations Board’s authority to order any employer to close, relocate, or transfer employment under any circumstance, including orders “to an employer (or seek an order against an employer) to restore or reinstate any work, product, production line, or equipment, to rescind any relocation, transfer, subcontracting, outsourcing, or other change regarding the location, entity, or employer who shall be engaged in production or other business operations, or to require any employer to make an initial or additional investment at a particular plant, facility, or location.”  Draft Protecting Jobs From Government Interference Act, S. 1523, 112^th Cong., 1^st Sess., (introduced in Senate on Sept. 8, 2011 and in House of Representatives on Sept. 16, 2011, 112^th Cong., 1^st Sess., Sec. 2 (Sept. 16, 2011); see also draft Jobs Through Growth Act, supra.
  • Export Promotion: Trade agreements cannot be sent to Congress for a “yes or no” vote without “fast track” rules.  Congress is considering a law to enable the President to enter into trade agreements with foreign countries regarding tariff and non-tariff trade issues for “fast track” voting (up or down) by Congress.  See draft Jobs Creation through Growth Act, supra.
  • Reciprocal Market Access. For international trade in goods, a pending law would expand the tools for trade negotiations by allowing trade-offs between tariff and non-tariff concessions in bilateral and regional trade agreements.  See Reciprocal Market Access Act of 2011, H.R. 1749, 112^th Cong., 1^st Sess. (introduced May 5, 2011).  However, the bigger issue, trade-offs between goods and services markets, remains disconnected under U.S. international trade law and the WTO system.  In short, outsourcing of services will continue to be governed by different rules from outsourcing of manufacture (purchase of goods).

  Conversely, other legislators have proposed protectionist laws to promote local U.S. businesses and penalize those that source goods and services abroad:

  • Tax Penalties for Offshoring Non-Compliance: Increased tax penalties for tax fraud where a U.S. company’s foreign affiliates in a “corporate tax haven” generate foreign-source revenues.   See, e.g., the draft Stop Outsourcing and Create American Jobs Act of 2011, H.R. 3338, 112^th Cong., 1^st Sess. (introduced Nov. 3, 2011), which would require the  Secretary of the Treasury to identify “corporate tax havens” by adopting any criteria, including:

  (1) Tax rate in the country.
  (2) Lack of effective exchange of information between governments.
  (3) Lack of transparency in financial services sector.
  (4) Lack of requirements of substantial economic activity.
  (5) Incentives which may encourage a United States corporation to invest abroad rather than domestically.
  (6) Other factors deemed relevant by the Secretary.

  This draft law would expose American companies to higher tax penalties for understatement of U.S. taxes when, in respect of any transaction that originates, terminates or otherwise occurs in a “tax haven country,” they fail to comply with U.S. tax laws (notably Subpart F on offshore related company transactions and Section 482 on recharacterization to prevent tax abuses from artificial transactions lacking economic substance).   Such a regime would increase the uncertainty of tax liability in situations where intercompany transactions could be subject to dispute, upon audit, as to whether the taxpayer had made a correct judgment as to the fair value of intercompany sales, licenses and services.   As to such transactions, existing IRS regulations are complex and have been under evolution in the last thirty years.  In short, rather than prohibit transactions, or define clearly how transactions must be accounted for, the new law would simply create a bigger bludgeon where a sizeable bludgeon already exists.

  • Discrimination against Companies that Transfer Jobs outside the United States: Preferences in the awards of procurement contracts by U.S. federal agencies to bidders that are not engaged in “outsourcing” (defined as “the laying off of a United States worker from a job, and the hiring or contracting for the same job to be performed in a foreign country.”  Id., Sec. 4(c)  Firing American workers and hiring foreign workers), and debarment of U.S. bidders for two years that do engage in “outsourcing” and who make false statements.   See., e.g., draft Stop Outsourcing and Create American Jobs Act of 2011, supra.
  • Shaming American Companies to Disclose their Workforce Allocations. The proposed Outsourcing Accountability Act of 2012, H.R. 3875, 112^th Cong., 2^nd Sess. (introduced Feb. 1, 2012), would amend the Securities and Exchange Act of 1934 to require each reporting issuer (whether foreign-owned or U.S. owned) disclose annually to the SEC and to shareholders–

  (A) the total number of employees of the issuer and each consolidated subsidiary of the issuer who are domiciled in the United States and listed by number in each State;
  (B) the total number of such employees physically working in and domiciled in any country other than the United States, listed by number in each country; and
  (C) the percentage increase or decrease in the numbers required under subparagraphs (A) and (B) from the previous reporting year.

  The only exemptions would apply to newly listed companies that have been required to file reports with the SEC for not more than five years and smaller companies, having less than US $1 billion in annual revenues.

  This legislation, and the policy framework behind it, will set the stage for the November Presidential election in the U.S.   If you have any questions or wish to address legislative policymaking, please contact us.