Politics, like fashion, is all about the “here” and the “now”. In Washington, the current spotlight is on American jobs or the lack thereof and rightfully so. But what will be its impact — on Indian companies and US multinationals?
During the recent State of the Union address, President Barack Obama fired a few shots across the bows of American companies that he felt were hiring people overseas to the detriment of job-seekers in the US.
In early 2009, the president had promised to remove the so-called tax breaks that led businesses to favour Bangalore over Buffalo. Never mind the two places are as disparate as they come but the catchy headline did generate plenty of questions and debate in both geographies when the remarks first surfaced.
Now that the issue is on the front burner again, let’s try to separate the economic realities from the politics. Is President Obama targeting Indian businesses or US companies?
Based on what we know today, the tax proposals are generally aimed at US multinational corporations operating overseas. These changes will have minimal impact on India-based corporations or, for that matter, other non-US headquartered businesses.
The issue, then, is: what about US multinationals with Indian operations? Will they stop hiring in India because of the tax law changes? A key executive of a US company with a large workforce in India had the following comment to make, which one can assume will be similar to those of other US chief executives.
Here goes: “Whenever we decide to invest overseas, we look at overall economics of the opportunity, including market potential, availability of a skilled and preferably lower-cost workforce and the ability to leverage time zone differences. Sure, taxes are important but they are only one of several factors.”
Enough said!
So, what is the connection between US tax rules and offshore jobs? Current US tax rules allow US multinationals to defer paying US tax on foreign profits until they are repatriated home.
The Obama administration feels the deferral has become “permanent” resulting in offshore profits being recycled to make further investments offshore, whether they are in plants or people. The proposed changes to the tax rules will take away some of the benefits of this deferral through tweaks to the US expense allocation, foreign tax credit and entity classification rules.
But will the rules do what the Obama administration wants them to do? Tax policy is all about behaviour modification. While more US tax revenues will be collected, the proposed rules may generate unanticipated outcomes.
Here are two:
– First, the changes to the US expense allocation rules may actually prompt some businesses to consider shifting certain US overhead costs overseas in order to prevent those expenses from being deferred on their US tax returns.
– Second, just when US businesses need to find additional growth opportunities elsewhere to lower their reliance on a fatigued US customer, these rules will increase the cost of doing business overseas.
Clearly, this will make US firms less nimble against competitors based in countries with more favourable tax regimes.
(31.01.2010- The author is a US international tax partner with Deloitte currently on secondment in India. His comments are personal. He can be reached at barajaraman@deloitte.com)
