Obama's Tax On Outsourcing
Stephanie Overby has written an article for CIO.com entitled “The Truth About Obama’s “Tax on Outsourcing” in an attempt to clear up all the questions that were raised when the President attacked the Tax Code for creating loopholes if a company creates a job overseas. Overby freely admits that she can’t clear up all the mistaken beliefs because the White House may not have been as clear about its objectives as was needed. In addition to identifying the five (5) misconceptions that are circulating, she also provides some necessary definitions of terms which help the reader to better understand the issues and the real targets of any proposed legislation. Those five areas in question are as follows:
I. Is “Outsourcing” the same as “Offshoring”?
a. Outsourcing means contracting to any third party. This could be to a third party within the US.
b. Offshoring means a NON-US location.
c. The distinction to be made is: work being done at the US company’s own foreign facility called a “Captive Center”, versus offshore work being done by a third party, in essence offshore outsourcing.
II. Will the tax apply to “Offshore Outsourcing”?
a. This was the point that was not made clear initially by the administration. Overby helps us out and states that the Obama plan will only apply to US companies with “Captive Centers”.
b. So this will affect the IT Vendors such as IBM Global Services and Accenture AND ALSO Non-IT Vendor companies that maintain a presence abroad.
III. Will India’s IT Services Industry suffer the most from the proposed taxation?
a. No. IT Vendors such as Wipro and Tata will not be affected. The tax is aimed at US Multi-National companies conducting operations in foreign lands.
IV. Will this taxation create more US jobs?
a. Unlikely.
b. There has been no indication that US companies would lessen their foreign presence due to the tax. In fact “most multi-nationals set up shop overseas to access cheaper labor or new markets”.
c. Such a tax could cause MORE offshoring to offset any increase in taxation. In fact US IT Vendors may chose to relocate entirely overseas.
V. Is this protectionist tax policy certain to pass into law?
a. Daniel Masur, an outsourcing attorney and partner in the Washington, D.C. office of Mayer Brown states, "It would be viewed by the rest of the world as protectionist and would trigger a wave of retaliatory legislation, and it would be bad for American business."
b. Masur continues and states, “However, given Congress's propensity in recent months to write major legislation over a weekend and Congress's preoccupation with populist sound bites, such a provision could be buried in the next stimulus or budget bill".
