Total spending on manufacturing construction nationally continues to grow at a double-digit rate, with over 19% year-over-year growth in June 2024, according to the U.S. Census Bureau. A notable driver of this growth is occurring in the Midwest as international companies establish beachheads in key industrial centers. Often overlooked are the small to midsized players that have important but vulnerable positions in major supply chains.
These companies, which have less than $40 million in revenues and employ under 50 workers, are focused on serving global industries spanning automotive, alternative energy, agribusiness and semiconductors, among others. Product categories range from machinery and prototype/quality testing to sensors and software used in autonomous vehicles and complex manufacturing. While their businesses are global in nature, various geopolitical and macroeconomic risks, as well as changes in how they do business with their largest customers, have necessitated the need to establish operations locally.
Similar to the larger players, key drivers of direct foreign investment and inbound manufacturing among these companies include:
Geopolitical: Disruptions from the wars in Ukraine and the Middle East have proven to be longer-lasting than anticipated with no clarity on when the fighting will end. Further, tensions with China and the complexity of tariffs have made it almost necessary to build operations near U.S. customers.
Sales: Despite advances in digital marketing and ecommerce, including order fulfillment and electronic payments, we are seeing a renewed emphasis on face-to-face interaction among sales teams and end-use customers in conjunction with globalization, heightened cybersecurity risks and greater competition domestically.
Supply chain: Volatility across the global supply chain, difficulty in anticipating disruptive events and sourcing cost considerations are all driving an increased emphasis on establishing local resources to serve customers, particularly as demand spikes in major industries. The impact of COVID is still fresh in their minds — they can't afford another major disruption.
Tax incentives and subsidies: From the Chips Act to the Inflation Reduction Act, the U.S. government is spurring investment across multiple industries, including infrastructure and technology, attracting investment from companies across the globe. In addition, multiple states are offering incentives for international companies to build plants locally.
All of these drivers are leading to an increase in manufacturing construction among international companies looking to strengthen their relationships in the U.S. While the potential rewards are attractive, for many of the small to midsized players, there are a host of operational and tax-related implications that need to be addressed. Among the more common mistakes and biggest issues they face:
- Forms 1042 — not filing, not reporting or withholding on payments to foreign persons/companies;
- Transfer pricing not considered;
- Not filing tax returns in all the states required;
- Forms 5471/5472 — not reporting transactions with parent or subsidiaries;
- Tax treaty issues related to permanent establishments or branch taxation;
- Overcapitalization of the company at inception;
- Intercompany accounting not reconciled;
- Incorporating under individual ownership v. foreign parent company;
- Overlooking complex tax issues like Global Intangible Low-Taxed Income and Foreign-Derived Intangible Income;
- Overlooking U.S. tax rules for reporting global income and foreign assets and bank accounts.
This is just a sampling of the many potential oversights these companies face as they navigate the process of establishing manufacturing-related facilities domestically and opening for business. This can be a very complex and arduous process given a myriad of tax implications and laws regarding foreign direct investment. While having the right products, operational processes and sales efforts in place will determine the success of each company, those enterprises that prioritize all of the legal and tax considerations will ultimately be the best positioned to build on their businesses and drive ROI over the long-term.
