Global Economics

In India, New Worries Obama Tax Plan Will Hit Outsourcing


The President's jab at companies creating jobs in India rather than the U.S. is latest sign Indian companies have a fight on their hands

BANGALORE | NEW DELHI | MUMBAI: A day after President Barack Obama said his administration would end tax breaks for American companies expanding their overseas operations, several U.S. multinational firms and Indian outsourcing companies expressed concerns about any potential legislation aimed at curbing offshoring of IT and back-office projects to countries such as India.

While companies such as TCS, Wipro and Infosys are preparing to cope with anti-offshoring sentiment gaining momentum in the U.S., the world's biggest market for software services, executives at large U.S. firms having captive operations said ending tax-deferral could impact their expansion plans.

India's second-biggest software exporter Infosys, which serves customers such as American Express and Bank of America, said it is monitoring the situation. "Right now, I do not see any impact on our business," Infosys CEO S Gopalakrishnan told ET on Tuesday.

But President Obama's reference to Bangalore in his speech has made the IT industry nervous. Obama said on Monday that his administration wanted to fix the loopholes in the country's tax systems. "It's 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, New York," Mr Obama said.

A top executive of an Indian IT company said the U.S. president's utterances will impact sentiment and "vitiate the atmosphere." Obama's statement on Monday is the latest in a series of remarks he has made opposing outsourcing and job losses in the U.S. from the time he began his presidential campaign almost two years ago.

U.S. companies have to pay almost 35% corporate tax on income generated in the country. "Under the current law, firms don't pay taxes to the U.S. government on income earned abroad until they bring the money back to the United States. Obama wants to reform this part of the law (which is called 'deferral')," Rosanne Altshuler, a Rutgers University economist specializing in international taxation, told ET in an interview last month. Ms Altshuler argued that by investing abroad, U.S. multinationals are not necessarily cutting jobs in the U.S.

"Recent economic research suggests that investing abroad leads to more investment and employee compensation in the United States," she said.

With the U.S. accounting for over half of India's software exports, any initiative to curb offshoring will make things worse for Infosys and other Indian IT companies which are already struggling to cope with lower demand for services because of the ongoing recession.

Large U.S. multinationals such as GE, Caterpillar, Procter & Gamble, apart from some of the biggest American banks, including Bank of America, JPMorgan and Goldman Sachs, have established their captive back-office and engineering centers in Indian cities of Bangalore, Chennai and Delhi, as they seek to lower their operational costs and take advantage of available skilled professionals here. According to research firm Everest Group, these captive organizations exported back-office projects worth $4.8 billion from India last year.

"It is wrong to assume that we are outsourcing for evading taxes - we continue to hire more workers here because traditionally, it's been very difficult to find professionals with adequate skills in the U.S.," said a senior executive at one of the captive centers. He did not wish to be identified because his company does not allow media interviews. "Cost is surely one of the drivers, and we will have to see if cost benefits still outweigh the tax breaks," he added.

U.S. companies such as Accenture, which employs around 45,000 professionals in India, said they never chose India for tax benefits. "India was chosen because of better skill pool available in large numbers," said a Bangalore-based Accenture official, who did not want to be quoted.

IBM - which employs over 70,000 professionals in India - serving customers such as Fidelity, continues to expand its development centers outside the U.S. When contacted by ET on Tuesday, an IBM spokesperson declined to offer any comments on whether his company would be affected by removal of tax-deferral.

If the new legislation comes into effect, many American companies having development centers and captive operations in overseas markets such as India will need to analyze if outsourcing benefits outweigh the tax benefits.

"While I do not see this becoming a reality, whenever that happens, it will be a tough call, and a very complex task to determine the road ahead," said a senior executive at one of the U.S.-headquartered companies. He requested anonymity because his company is currently evaluating the possible implications.

"Most companies have high growth rates outside of the U.S., which is why more than 50% of their revenues come from other geographies and not the U.S. So, it is only fair to assume that these companies will keep their revenues in these countries," said NASSCOM president Som Mittal.

In financial services, Citigroup in 2007 generated 52% of its revenues outside the U.S., and over 60% of its workforce operated from abroad, as its banking business spanned 100 countries. Citigroup's international revenue streams kept pace through 2008, despite the financial crisis, and amounted to a whopping 74% of the total revenues. JPMorgan Chase generates nearly 27% of its total revenues internationally and has stationed over 10% of its total workforce in Asia.

Some experts say any protectionist initiative by the U.S. government could delay an economic recovery.

"Protectionist measures taken by the U.S. could be as harmful as the Smoot-Hawley Tariff Act imposed in 1930, which had increased tariff on U.S. imported goods to record levels and is regarded to be one of the factors that deepened the Great Depression," said Duke University professor and Harvard senior research associate Vivek Wadhwa.

Politicians such as Senator Chuck Grassley said the Congress will need to analyze if the new tax legislation would make American companies less competitive.

"Congress needs to look at whether these tax increases are fair, whether American workers will lose their jobs, and whether U.S. companies will fall behind foreign competition and even become more vulnerable to foreign acquisition," Mr Grassley said in a statement.

However, with international markets contributing over half of many U.S. companies' total revenues, any proposal to end tax-deferral is bound to face resistance from the U.S. Chamber of Commerce.

"We are working with the Chamber of Commerce, and hope that this legislation will not see light, given its 'anti-trade' nature," said another executive at a U.S.-headquartered firm on condition of anonymity.


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