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Obama Offshore Outsourcing Tax Policy

According to U.S. President Barack Obama, Indian IT outsourcing companies such as those in Bangalore have been a significant beneficiary of U.S. tax laws and the American President aims to change that. The U.S. has created "a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y.," Obama said. Current U.S. tax policy gives companies that create jobs overseas the capability to take deductions on expenses "when they do not pay any American taxes on their profits," he added.

However, most analysts, industry practitioners and tax advisors suggest that federal tax policy changes proposed by Obama may not curb the outsourcing trend or achieve his goal of persuading IT companies to reduce their expansions to offshore locations. The newly proposed tax laws, which still must be approved by Congress, would affect IT entities that operate operations abroad by disallowing deductions for various offshore business expenses, including payroll, said Alan Appel, a tax attorney at law firm Bryan Cave in New York. "By denying the payroll deduction, the hope is that it will be more costly to operate offshore and it will give incentives to create jobs in the U.S.," Appel commented.

However, Peter Bendor-Samuel, CEO of Everest Group, a Dallas based outsourcing consultancy, suggested that the most significant motivation to transfer work abroad is the large difference among salaries in the U.S. and many other countries. Technology jobs in locations such as India or China may cost only one-sixth that amount when compared to the United States, Bendor-Samuel said. Siddharth Pai, an executive at outsourcing consultancy Technology Partners International in Houston, added that IT suppliers also establish software and services programs in countries like India because it's easier to find sufficient numbers of technical workers in short order. He added that India has a young population, where the U.S. has an older population, which is another factor that helps India's when companies are evaluating whether to expand operations abroad.

"If there is a tax consequence in the decision making criteria, it is de minimis to the overall impact" of offshore outsourcing, Bendor-Samuel said. In any case, "this idea that people are doing outsourcing to avoid taxes is simply wrong." Obama didn't address the wage gap in announcing the tax proposal, but he argued that the tax code has played a role in the growth of offshoring, including the outsourcing of jobs for highly skilled professionals.

The proposed tax law change is possibly the first initiative proposed by the White House to address the controversial issue of IT outsourcing to offshore locations. The Obama administration has not yet addressed the H-1B visa program, which is heavily leveraged by Indian-based outsourcing companies to bring foreign workers to the U.S. Public policy experts say it is still to early to speculate how or whether Obama will tackle the H-1B issue.

Sang Kim, a partner in the international tax practice in the East Palo Alto, California., office of law firm DLA Piper, actually suggested that the tax code changes could incur unintended consequences that may actually accelerate the transfer of U.S. technology jobs to overseas locations. A foreign country could, for instance, encourage U.S. employers to create jobs abroad by offering subsidies that would mitigate the financial impact of changes to the U.S. tax code, he said. "The argument is that it should stem the flow of jobs leaving the U.S., but the reality is I don't think the jobs are moving outside the U.S. because of tax policy," Kim said. In response to the Obama tax changes, the Indian based National Association of Software and Services companies suggested that U.S. businesses with global operations would compete less effectively with their European Union and Japanese counterparts as a result of the tax policy changes.