The Obama Administration recently announced proposals for revision of the US Tax Code, including the imposition of tougher regulation for when profits earned abroad by US companies should be taxed in the US.
Currently, a company that offshores a business process from it’s parent in the US to one of its subsidiaries overseas, can claim an immediate tax deduction on the resulting foreign income that is the difference between the foreign country’s corporate tax rate and that of the US. The US combined federal-state statutory corporate tax rate currently sits at 39.3%, second among OECD countries to Japan.
The claim can be made while the company defers paying taxes until later when the income is brought to the US, if ever.
President Obama’s stance is that current law made it possible to “pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y.”
What the proposal seeks to do is rescind the deductions until a company pays its due US taxes. The anticipated outcome is that global firms will find it more financially beneficial to maintain the business process, and jobs, onshore because of the increased tax liability.
(These top companies in the S&P500 that make most of their money overseas and have until now been paying corporate taxes as low as 0.4% on their foreign incomes, will likely be hit the hardest).
What could this mean for outsourcing?
If the measure passes, global companies may begin to see the benefits associated with offshoring, including lower average wages they would pay their overseas workers, wash out because of the increased tax burden. Outsourcing firms on the other hand, may then be the silver lining of this imminent storm of declining income, particularly in emerging markets,.
According to a report from the London School of Economics Outsourcing Unit, emerging markets are presenting themselves as viable offshore outsourcing providers for global clients with available skill pools, infrastructure and enabling regulatory environments, while keeping costs low.
Could these offshore business process outsourcing markets capitalize on the current economic downturn, and now impending increasing tax liability, to increase their marketability as cost-effective alternatives to performing these processes in-house?
Perhaps. But BPO’s should have cautious optimism about this – it may take a while before the these factors approach a tipping point, beginning with whether the Administration can rally support in Congress around this issue which is already facing a headwind from business leaders and the US Chamber of Congress.