US president, Obama, in order to save $210Bn has announced a plan to clamp down on US companies who outsource overseas.
We believe in a level playing field. Unfortunately, we have a tax code that gives businesses that invest and create jobs overseas a competitive advantage over those who invest and create jobs at home.
Payments by US companies who create jobs overseas are treated as normal expenditures – but the new law (if passed by both Houses of Congress) will entail companies to pay tax on these expenditures as well (increase of almost 50%).
Cisco, which had north of $30 billion in cash at last count, earned $5.6 billion overseas in 2008. By deferring taxes on those earnings, it enjoyed a 16 percent reduction in its U.S. tax rate, according to a Wall Street Journal analysis of SEC filings. Google got a 17.4 percent break thanks to tax deferrals on $7.7 billion of overseas earnings. HP, which reported a net profit of $1.8 billion in its last quarter, can defer taxes on $12.9 billion worth of foreign earnings, – source
To simplify, if a company sets up shop overseas, it will pay 35% tax on it’s profits from US (+ X% on overseas profit, X is determined by the jurisdiction of geography)– while a company running it’s operations only in US will have to pay 35% tax on corporate profit.
To put things in perspective, HP/Google/Microsoft/Cisco and IBM saved $7.4Bn (in total) by taking advantage of lower tax rates.
While the attempt is to promote companies to not outsource, Obama is missing few points that will hurt American companies in the long run.
Loss of Competitive Advantage
Owing to the tax burden, companies like IBM will have to increase their hourly rate in order to maintain the same profit margin. If the new law makes through both the houses, Indian IT companies will have the last laugh – their American counterpart will struggle over finding a cost competitiveness.
One needs to realize that many of these US companies have built competitive advantage by understanding diff. geographies (by building global org/investing in global products) – wiping this out will hurt US in the long run.
Is US the world?
Emerging markets are the next big source of revenue and is expected to account for 45% of world’s GDP by 2010.
The more US companies are restricted over tax laws, lesser would be the flexibility/risk taking to try out newer geographies – to build ‘global’ products.
Data points:
- The number of US companies in Top 100 InfoTech Companies Worldwide has been declining at a constant rate.
- Also, most of the large American companies have more than 50 percent of their revenues coming from markets outside the US and would be affected by the proposed tax reforms.
Outsourcing was never about Tax structure
Outsourcing boom was all about better quality at lower cost – US still won’t be able to match the two factors.
Most of the big companies save 75% of their cost by outsourcing and the number goes higher for high-end BPOs.
Is Obama doing anything increase the quality (and maintain costs) in US?
Constraint like these will make US companies far lesser competitive as compared to their foreign competition.
What’s your opinion? Is Obama punishing few companies for their global vision?
Will this short-term vision hurt US companies in the long run?
The decision is more political. I am sure they very well know that such a move will hurt American business much more than anyone.
As for Bangalore, this will give them an opportunity to focus more on the rest of the world and decouple their risk as much from American companies.
i don’t think he is such a j**k to do this
“better quality at lower cost” – I strongly disagree. It’s all about quarterly results, top line and bottom line. And tax has a direct bearing on that and Obama surely knows how to play his cards.
I’d say he is more against the greedy corporate executives who find ways (outsourcing happened to be just one of them) to increase the stock price.
I’m glad he is doing this
The moot question is how you define a US co.
IBM/Cisco/MS/Google are transnationals which happen to be historically incorporated in US. Nothing prevents them from getting incorporated in some other country if it is more advantageous to do so. Or we would see the rise of new transnationals incorporated outside US.
US should actually fine $1bn on Indian companies like TCS, Infosys , Wipro etc for heavily misusing the L-1 Visa.
The main thing we Indians do not understand.
1. China is a major exporter of mfg products manufactured in china using low cost labour and not high end technology which helps them keep employing their own people in their homeland.
They export surplus capacity after serving their homeland.
2. While we Indians send their own people out of the country and serve US client from within the country. But we do not take up projects to serve local clients. IBM, HP do instead. TCS is the only co that takes major Indian projects. Neither are we diversify our client base to include Russia, Canada, more of Europe, Japan, Asia-Pac and Gulf.
The % of highend services is also very less most of which is doen in US.
% of Soft Products and Application Services Providers are very less.
You cant restrict these, all the companies are dependent on these. It has become a basic necessity to run any world class organization.
We invest in edu but we do not invest in R&D.
We were fools to sell brands like hotmail and iflex to americans which we build with our own blood and brians.
3. Where as US and Japanese economies are neither driven by cheap products nor cheap labour. They invest in edu, R&D, and utilize the same for developing high end products in defence, medicine, financial products, software products like oracle, ibm, ms, google. The innovations revolutionalize the way we look and thing or we do things.
Its a global economy if not free but less restricted movement of goods, services and people. So its cost vs innovation.
Only industries which stop inovating or inovate too fast for thins to be kept tracked are failing in the US for e.g. FI developed risky mortgage backed securities and derivatives which created a ballon that was difficult to track and regulate and finally bursted. Auto mfg cos like GM, Ford and Chrysler stopped investing in inovation compared to their counter parts like Toyota, Hond.
Until and unless we stop just relying just on cost of services and products to be competitive and invest in R&D to develope world class innovations and products we can’t truly lead. Its easily for Obama to play his cards as he has lot to play.
If we had Oracle, SAP, MS, IBM, HP, Google, Apple, Mac of our own it would have been impossible for him to do anything when half of the world is using ur product which is world class and no other tom dick and harry can develop it in days or years but instead we just look for quick and cheap money.
“We were fools to sell brands like hotmail and iflex to americans which we build with our own blood and brians.”
I stopped reading your comment after this.
Don’t want to heart any sentiments.
But I think Infy, TCS, Wipro, HCL, L&T InfoTech or even Reliance are big enough to buy Yahoo or Sun or companies like ebay by tying up with some banks like SBI or LIC
TCS/Wipro + SBI + LIC together could have easily bought iFlex or Sun
It would have changed the market dynamics
They are avialable at a low price in recession
Oracle made a very smart move buying peoplesoft, seibel, iflex, sun
It captured finance, crm, hrms, sun hardware + software, java , mysql
This is muscle flexing in the market.
You cant do much against a company or country which has such brands.
They cant be down played in any ways.
Hope my message went accross well
The truth is its not that the jobs that can done by a US citizen goes to India.
It’s that there is more technical work than what the U.S Citizens can handle. This is due to the pace in which technology is growing.
U.S has 300 million people and how many of them do you think know how to program?
India has 1 billion people and pretty much everyone in the 18-40 age category can write a computer program and deliver professional results.
When a computer breaks they call India to fix it. May be the U.S citizens will pay $30 per call on top of the warranty to get a live person who is in the U.S. Companies cannot afford to outsource to India.
Also I have a feeling some sort of reverse outsourcing will happen where Indian companies lead the technology world. They will outsource some of the task to U.S companies such as marketing to sell to the U.S audience and send the money back to India.