Can President Obama alter offshore outsourcing for US companies?

June 18, 2009

President Obama’s new tax proposal has been widely discussed topic in the offshore outsource industry for the past month or so.  The global recession that started a year back has made Obama to campaign against companies that are laying-off US workers  and sending jobs to India, China, Philippians, etc. The real question is can Obama change the tax breaks for US multinationals that has offices in offshore locations?

It is true that US multinationals do not pay tax to US government for the profit they earned in offshore locations until they bring back the money to US. If Obama’s new tax proposal goes into law then  two types of US multinationals will be affected:

  • 1. US Companies like GE, Target, American Express, etc, that has captive units in offshore locations to provide services to their own customers. Generally these captive units are cost center that exist to provide services to other parts of the business that exist for profit centers
  • 2. US companies like IBM, Oracle, Microsoft, Caterpillar, etc, have fully-owned subsidiaries that provide services to their own customers and to other customers. All these subsidiaries exist to make profit for their US companies

Can non-us based offshore vendors be affected?
Non-US based Offshore vendors like TCS, Infosys, Wipro, etc, (not Congnizant which has headquarters in US) will not be affected by the Obam’s tax changes. At this time no one knows the exact details of the new tax proposals. If Obama’s administration wants to include non-us based offshore IT vendors then it would be very difficult to enforce it. Do they include only IT companies or all the Chinese manufacturing companies that exports goods to US companies? One thing for sure is, it is impossible to include non-us companies and even if it gets included then their will be a trade-war between US and rest of the developing nations.  So  non-us offshore vendors will not be affected in the new offshore tax changes.

Is Globalization Reversible

Impact on US multinationals
US multinationals that have captive centers may sell their captive centers in offshore locations to other non-us based companies and start working with them in a typical offshore outsource relationship. But not sure how US companies can solve issues like Intellectual protection, customer confidentiality, etc if they sell their captive units to non-us based vendors.

US multinationals that fall in the second category has a difficult problem to solve. They are providing services to customers both in US and in other countries. These US companies might consider moving the entire subsidiaries or part of it from India, China, Philippians, Taiwan, etc, to Mexico and Canada that are part of NAFTA that allows US companies to import goods and services without any taxes. Moving manufacturing type services to Mexico might be easy but I am not sure how other higher-end BPO and KPO services can be moved to Mexico and Canada. US corporations will have to manage various issues like skill availability, cost, etc. Also if Caterpillar sells its heavy equipments and provide services to the booming construction industry in India it makes sense for them to be in India where their customers are located.

As I said earlier no one knows what will be the new tax proposals from the white house and how it will be changed by the congress before President Obama signs it into law. We have to wait and watch.


Comments

10 Responses to “Can President Obama alter offshore outsourcing for US companies?”

  1. Mike Harmon on June 18th, 2009 8:30 am

    Thanks for posting the article, was certainly a great read!

  2. Diego on June 18th, 2009 10:48 am

    Check out this Forbes Mag. link http://www.forbes.com/feeds/ap/2009/06/18/ap6559211.html

    Even India is outsourcing!

  3. Sam on June 18th, 2009 11:48 am

    Not sure how for this report is true? But it is an interesting study
    http://profit.ndtv.com/2009/06/18204540/India-Inc-created-3-lakh-jobs.html

  4. Glowtouch on June 19th, 2009 8:55 am

    I’ll wholeheartedly respect the new government’s stance on off shoring. Outsourcing has offered a lot of value in terms of revenue to the US thus the tax reforms shouldn’t be aimed only at safeguarding US jobs.

  5. PlugIM.com on June 21st, 2009 1:00 pm

    Can President Obama really alter offshore outsourcing for US companies? | Outsource Portfolio…

    Find out the impact of President Obama’s new offshore outsource tax proposal on US multinationals and on non-us companies….

  6. Business Process Outsourcing on June 21st, 2009 11:18 pm

    I agree with you. A protectionist stance will drive US businesses elsewhere, to places where they can have more freedom to experiment on how they can grow their business. Although, outsourcing destinations should also be wary of being too open to the point that their countries, the environment and the people can easily be exploited.

  7. Globalization on July 2nd, 2009 5:40 pm

    Outsourcing which is part of Globalization can’t be stoppable. In free economy goods and services will move where it can be manufactured and delivered for less price. Now it is China (for manufacturing) and India (for services). In future it may go to different countries.

  8. Magdalena Szarafin on July 25th, 2009 2:23 am

    Don’t like Barack Obama taking offshored jobs back to the US? – Vote for Hillary Clinton!

    Well, we actually do not have presidential election in the US now. We could follow the US presidential battle a few months ago. And I am also not going to make a campaign here. I just want to tell you something (really!) important regarding both of them: Obama and Clinton. And let me tell you something about offshore outsourcing, too

    How has it all begun?

    We could read such headlines in the newspapers just a few months ago:

    Will Obama really take back outsourced jobs? *** Can the US survive globalization? *** Obama Stimulus Tax Cuts Begin April 1st *** India: Worries Grow About Obama Outsourcing Policies

    During his speech to Congress on 24 Feb 2009, president Obama said the administration will eliminate “incentives for companies that ship jobs overseas”. And the whole world has been concerned about that. What will come as the next? What does it mean for us?, many people asked.

    A few days ago Hillary Clinton visited India. She expressed the opinion that outsourcing is a concern for many and asserted that the US rejects protectionism. (…)

    For reading more click here:

    Don’t like Barack Obama taking offshored jobs back to the US? – Vote for Hillary Clinton!

  9. Vidya Devaiah on October 27th, 2010 4:16 am

    The proposed curbs and restrictions on outsourcing are no more than political rhetoric. We addressed the issue of curbs on outsourcing on our blog two years ago during the run up to President Obama’s election: “The popular misconception is that outsourcing always means job loss and a windfall profit for the company doing the outsourcing. Although no one should discount the hardship and uncertainty faced by an individual who has lost his or her job, nothing is that black and white. A more accurate perspective is that for companies, it is often a matter of staying afloat or struggling to grow, not getting windfalls, and with regard to jobs – when economies are not stifled by protectionism – job losses and gains tend to balance out.” http://bit.ly/dBYc4O Nothing has changed in the interim.
    At our off-shore legal outsourcing company / LPO (http://www.sddglobal.com), we’ve seen how legal outsourcing actually creates more legal jobs in the West, rather than cutting them. Every time a deal is done, or a litigation is waged, because legal services are suddenly affordable, it means more work for the Western lawyers involved in supervision, editing, negotiating, and/or appearing in court.
    Vidya Devaiah
    http://www.sddglobal.com
    high-end legal outsourcing

  10. CFO Survey: Outsourcing Declines In U.S. | Outsource Portfolio on June 13th, 2011 8:08 am

    […] survey by BDO USA, a consultant, reveals that outsourcing has declined among US […]

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