Bussines India Article, 06/2009   The Obama tax doctrine – can Buffalo be the next Bangalore?   The interesting feature of this recession in the Western world is that every week presents a new pronouncement that could have major ramifications on the success of companies in our part of the world. The recent announcement by US President Barack Obama on taxes and his rather unfortunate mention of job creation in Bangalore as a trend to be reversed has sent the usual shock waves through India. Though the implementability of the new proposals and the eventual impact on the Indian offshore outsourcing industry may be limited, it is still worth analysing the intent and the impact of this latest Obama doctrine. The primary intent of the proposals is to address the tax rate differentials that exist across the world and if implemented, this would impact American headquartered companies with overseas operations. Current law in the US states that “any income that is earned outside the U.S. is not taxed until such time it is brought back into the U.S.” – the Obama proposal aims to alter that to raise the revenues of the US Government. The press note put out by the White House to support the new intent reveals some data that would surely raise alarm bells in any administration. In the year 2004, US multinational corporations paid about sixteen billion dollars of US taxes on approximately seven hundred billion of foreign active earning – an abysmally low percentage tax collection by any standards. In addition, the US tax system is “rife with opportunities to evade and avoid taxes through offshore tax havens” and a January 2009 report is quoted which cites that eighty three of the hundred largest US corporations have subsidiaries in tax havens with one address in the Cayman Islands housing over eighteen thousand corporations, very few of which have a physical presence in the islands. The foreign tax credit loopholes make it possible for companies to claim these credits for taxes paid on foreign income which provides these companies a competitive advantage over companies that invest in the country. The new proposals intend to eliminate this loophole as well as the current “Check the box” practice which enables some foreign subsidiaries in tax havens to “disappear” at the time of filing returns. The proposal seeks to save over a hundred billion dollars over an eight year period and create a level playing field for the “Buffalo vs Bangalore” companies. While the intent in these provisions is commendable and there are also extensive measures planned against individuals as well as intermediaries through additional teeth provided to the IRS to crackdown on the offenders, the furore that has emanated in the US business community threatens to thwart the progress of the proposals at every stage. Reports emanating from the US have suggested that many tech majors – IBM, HP, Microsoft, Google to name just a few have each reported over a billion dollars of additional profits by using lower tax rates available overseas and the high tech industry has not been the only beneficiary with multinationals like GE and Johnson and Johnson reported to have saved billions of dollars in potential US taxes and lowered their effective tax rates by double digit percentage points. However analysts have argued that the new plan will have little or no impact on the mega trend of having work performed where it makes most sense with the argument that it isn’t the tax code that created the offshore outsourcing industry but the lower cost and availability of highly skilled locations in overseas locations. What would be the likely impact on the IT industry? The proposed tax changes which need to be approved by Congress may affect IT vendors who run subsidiaries in offshore locations by denying deductions for offshore payments including payroll expenses which may provide incentives to create more jobs in the US than overseas though experts argue that the financial benefits may still outweigh the tax imposed. Other nations, especially in Japan and Europe are moving to a territorial system that taxes only corporate profits earned within their borders and the latest US proposals are contrary to the trend. This new tax move may actually end up reducing the competitiveness of US companies with global operations when compared to their European and Japanese counterparts. Business groups in the US have assailed the proposal, arguing that it would subject them to far higher taxes than their foreign competitors must pay and ultimately endanger U.S. jobs. It is important to note that most large American companies have more than 50% of their revenues coming from markets outside the US and would be affected by the new proposals. While the internal opposition may defeat or substantially dilute this intent from becoming law, the moves of the Obama Administration will be tracked by all exporters as a difficult year progresses!.       Back