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Obama Proposes Offshore Tax Policy

President Obama believes that Indian and other non-US based outsourcing companies have been beneficiaries of U.S. tax policies and the new President has proposed new tax laws to change that. According to Obama, the U.S. has created "a tax policy that says you should pay lower taxes if you create a job in Bangalore, India, than if you create a job in Buffalo, N.Y." Current US tax laws provide companies that create jobs in other countries the opportunity to claim expense deductions "when they do not pay any American taxes on their profits," he added.

However in contrast to that point of view, many analysts, industry leaders and tax professionals counter that the U.S. federal tax policy changes proposed by President Obama will not curb the outsourcing growth or satisfy his goal of convincing U.S. companies to reduce their expansions to offshore destinations. The proposed tax policies, which still have yet to be approved by the Congress, will affect U.S. companies that operate abroad by disallowing expense deductions for various offshore business items, including payroll, said Alan Appel, a tax attorney at law firm Bryan Cave in New York. "By denying the payroll expense deduction, the hope is that it will be more expensive to operate offshore and it will give incentives to create jobs in the U.S.," Appel commented.

However, Peter Bendor Samuel, CEO of Dallas-based outsourcing consultancy Everest Group, reminds that the most significant factor in transferring work abroad is the big difference among compensation plans in the U.S. and most other countries. Technology jobs in locations such as India may cost only one-sixth or less than those comparable positions in the United States, Bendor-Samuel said. Siddharth Pai, an executive at Houston-based outsourcing consultancy Technology Partners International, added that U.S. employers also establish software and technology operations in countries like India because it can be easier to find higher numbers of technical workers in shorter timeframe's. He added that India has a young population, where the U.S. has an older population, which is another item that aids India when companies are determining whether to expand operations beyond the U.S.

Obama Proposes Offshore Tax Policy

"If there is a tax factor consequence in the decision making criteria, it is de minimis to the overall decision impact" of offshore outsourcing, Bendor-Samuel said. In any case, "this idea that people are doing outsourcing to avoid tax liabilities is simply wrong." Obama did not comment on the disparity in wages in announcing his tax proposal, but he argued that the U.S. tax code has played a part in the growth of offshoring, including the outsourcing of jobs for highly skilled technical professionals.

The proposed tax code bill is the first outsourcing related initiative delivered by the White House. The U.S. administration has not yet addressed the controversial H-1B visa program, which is heavily occupied by outsourcing companies based in India, and permits foreign workers to work in the U.S. Public policy advocates suggest that it is too early to speculate how or when Obama will approach the H-1B Visa issue.

Sang Kim, a partner in the East Palo Alto, California based international tax practice of DLA Piper, commented that the tax law changes may result in unintended consequences that could actually increase the transfer of U.S. technology jobs to overseas offshore destinations. A foreign state could, for example, entice American employers to create jobs abroad by providing financial subsidies that would offset the impact of changes to the U.S. tax code, he said. "The argument is that it should stem the flow of jobs leaving the US, but the reality is I do not think the jobs are moving outside the US because of the tax policy," Kim said. In response to the Obama tax code changes, the National Association of Software and Services companies, based in India, suggested that American companies with global delivery would compete less favorable with their European and Japanese counterparts as a consequence of the tax policy changes.


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