Nearly 2,220 foreign businesses operated in Rhode Island in 2017, according to data from the R.I. Secretary of State’s Office.
But after the federal tax Cuts overhaul’s passage late that year, the number of foreign-owned ventures in the Ocean State jumped to 2,399 in 2018, and to 2,502 in 2019.
While the legislation reduced the federal tax rate for foreign-owned businesses, local tax professionals say they aren’t sure the Trump administration’s tax changes are what’s drawing international entrepreneurs to Rhode Island.
“Our practice was seeing a growth in foreign companies coming into the U.S. market even before the [tax overhaul] was signed into law,” said Paul Oliveira, a tax partner at Kahn, Litwin, Renza & Co. Ltd., an accounting firm with offices in Providence and Massachusetts. “That’s probably a testament to the market that we have in the U.S. more than the tax situation. The driver has been the market that they want to exploit in the U.S.”
Kevin Papa, a partner at Piccerelli, Gilstein & Co. LLP in Providence, said it may still be too early to tell what the tax overhaul’s impact is likely to be.
“Some of the [foreign-business work] I had predated 2017 and a little bit of it is new, so it’s really hard to say. Generally from talking with [foreign-business owners], I understand that they are more inclined to look here because the tax cost is lower,” Papa said.
A drop in the federal corporate income tax rate from 35% to 21% may well be an incentive, but Oliveira pointed to two other factors helping to boost the state’s appeal to overseas businesses.
Overall, markets are stronger in the U.S. than in Europe, and Rhode Island’s position as an emerging star in the wind-energy sector has drawn attention from overseas, particularly those in the European Union and the United Kingdom.
In early 2019, Oliveira said, a U.K.-based company with a market-ready type of wind-energy technology came to his firm. The company was eyeing Rhode Island as a base for developing sustainable energy projects along the East Coast.
‘[Foreign businesses] are more inclined to look here because the tax cost is lower.’
KEVIN PAPA, Piccerelli, Gilstein & Co. LLP partner
Ultimately, the plans were put on hold, but such interest is becoming more frequent.
“In the United Kingdom and in Europe they’re much farther down the road in terms of adopting wind energy or technology than we have been in the U.S.,” Oliveira said. “You’re seeing a lot of foreign companies who play in that space, and I think Rhode Island is a good spot for them to land.”
Another change enacted in the tax overhaul requires U.S. residents to pay a tax on money earned overseas, and that has had at least a small impact in Rhode Island, Papa said. He cited one instance of a non-U.S. citizen living in the state who had foreign investments. Knowing that this person was required to repatriate those earnings and pay tax, he moved the money to Rhode Island.
He “started investing in real estate, making improvements to decrepit properties, doing things that other folks weren’t doing because of these overseas profits that they were able to bring back,” Papa said. “I thought this was really interesting; a non-U.S. [citizen] would typically never have done this, but the tax law made it happen.”
Papa, who estimates that foreign businesses work makes up about 2.5% of his business, said companies from Germany, Switzerland and other European countries tend to have the largest presence in the state.
Oliveira, meanwhile, said about 5% of his firm’s work currently comes from foreign companies, with a noticeable increase over the past five years.
“We’ve seen it grow, in part through our own marketing efforts, but we’re also seeing more foreign investments than I’ve seen earlier in my career,” he said.
In addition to businesses focusing on renewable energy, he’s finding that more technology-based and life sciences companies are making their way to Rhode Island and the Northeast as well.
And now, with a tax rate that’s more comparable to rates in Europe, increased revenue is possible for established businesses.
“They could be benefitting if they’re profitable out of the gate here in the U.S.,” Oliveira said.
Other recent tax shifts at the state level that extend to both foreign and domestic companies may cause a jolt for overseas operators who haven’t kept up with changes.
As technology evolves, definitions of what is taxable or subject to tax are fluid as well.
On top of that, laws defining economic nexus, or a company’s sales totals in a state regardless of whether it has a physical presence there, are now requiring tax filings once a certain sales threshold is reached.
New requirements gained national attention in 2018 when the U.S. Supreme Court ruled in favor of South Dakota after the state sued for tax revenue from online furniture and home goods retailer Wayfair.
“We find that area really takes foreign companies that are coming into the U.S. more by surprise than anything else,” Oliveira said.
Elizabeth Graham is a PBN staff writer. Contact her at Graham@PBN.com.
