Indian outsourcers unfazed by Obama's disincentives to US firms

07 May 2009


In keeping with his frequently-stated intentions, US President Barak Obama on Tuesday reiterated his decision to end tax breaks for American companies that outsource jobs overseas to countries like India. Instead, the incentives would now go to those creating jobs inside the US.

"For years, we've talked about ending tax breaks for companies that ship jobs overseas and giving tax breaks to companies that create jobs here in America. That's what our budget will finally do," Obama said at the White House announcing the international tax policy reform.

"We will stop letting American companies that create jobs overseas take deductions on their expenses when they do not pay any American taxes on their profits," he said, adding that his administration will use the savings to give tax cuts to companies that are investing in research and development in the country to jump start job creation, foster innovation, and enhance America's competitiveness.

In a similar vein, he also proposed to crack down on wealthy corporations who avoid tax by moving their money out of the country. He announced proposed changes in tax law that would end much of this and could raise about $21 billion each year.

In line with new action against Switzerland and other slush money havens proposed by the Group of 20 economically influential nations, the changes will also clamp down on wealthy Americans who mask their money in foreign bank accounts.

The plans still have to get through Congress, but the president said he was determined to close offshore tax loopholes. "On the campaign, I used to talk about the outrage of a building in the Cayman Islands that had over 12,000 businesses claim it as their headquarters. Either this is the largest building in the world or the largest tax scam in the world. And I think the American people know which it is."

The current law in the US states that ''any income that is earned outside the US is not taxed until such time it is brought back into the US''. The Obama proposal aims to alter that to raise the revenues of the US government. Obama said removal of tax deductions to firms that earned profits in countries with low tax rates and closing other loopholes would net $210 billion in additional tax collections over the next decade.

Indian IT service providers generally do not appear perturbed over the proposal to eliminate a loophole that allows US firms to avoid paying tax on profits earned overseas. They say that the proposal will primarily impact US-headquartered companies like IBM, Hewlett Packard, Microsoft and Oracle that have overseas operations in countries like India.

For instance, IBM has over 70,000 employees in India and more than 55 per cent of its revenue comes from outside the US. So too for Hewlett Packard, which has 30,500 employees in India.

Intel, the world's largest chip maker, counts emerging markets as the next growth area. And as part of increasing their hold in these markets, all US IT firms have invested both in terms of finance and people.

The view in India
The overriding view in India is that the Obama tax plan will hit US firms harder than the Indian outsourcing industry. ''Most large American companies have more than 50 per cent of their revenues coming from markets outside the US and would be affected by the proposed tax reforms if implemented,'' said the National Association of Software and Service Companies.

However, American corporations may be forced to slash jobs at their Indian operations in the long run. ''If US companies lose business globally, there are bound to be job cuts in India,'' said Nasscom president Som Mittal.

''The current proposal, as we understand, is to close corporate tax loopholes for US multinational corporations. We do not believe it has anything to do with IT outsourcing done by US corporations,'' India's second-largest IT services provider, Infosys Technologies, said in a statement.

The tax reforms (announced yesterday) have only been proposed and there will be an extended debate on these before they can be implemented, as they require existing laws to be changed, according to Nasscom.

As far as India goes, global companies that earn profits here are subject to a tax rate of 33.9 per cent (including surcharge and cess) and the impact of the proposed reforms on them would be marginal.

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