Indian elections are finally over....Phew!! While most of my previous posts were related to elections, I thought of taking a break from the ever enthralling and interesting Indian politics and move over to the charismatic world of business.A few months ago, Barack Obama created ripples in the outsourcing industry worldwide by proposing to tweak the US tax law by eliminating the tax breaks provided to companies sending the jobs away from US and rather providing it to the companies which create jobs at home. I agree with Mr. Obama that in these hard times of recession when nearly 5 million Americans have filed for unemployment benefits and another 1.7 million are working as part-timers, he as a President needs to ensure that Americans don't loose jobs to other countries. The aim of the proposal, however, seems to be two-pronged - to create jobs which will boost the confidence of a common American and result in an increase in money flow in the market and sustain recession, and to curb tax evasion (companies who derive profits from overseas operations and are not giving it back to the US). If the US tax pundits are to believed, any such legislation will make the US treasury richer by a whopping $60 billion between 2011-2019.
However, in the current economic downturn when companies are applying different cost-cutting measures to survive & grow, and outsourcing being among the tested one, how feasible will it be for Obama & Co. to push companies to do something which is not in their best economic interests. As rightly pointed by the vice-president of one of the outsourcing firms based in Nashville,TN that "Even if the government amends the US tax policy on companies doing work offshore, the changes wouldn't be large enough to compete with the 20-30 % benefit companies get in lower labor costs. With the world economy like an inter-connected web and inter-dependent, the obvious question that comes to mind is - Is this tax proposal anywhere close to becoming a reality or is it just a mere post-election rhetoric ?
First of all there is no such thing as tax breaks awarded to US companies creating job overseas. What the US tax law has is a provision or 'loop-hole' that allows American companies to defer income tax payments on offshore profits until they are repatriated back home in the form of investments & dividends, and this is what Mr. Obama wants to eliminate (probably). Moreover, this move towards protectionism to create jobs at home lacks credibility, because US started loosing jobs long before the economic crisis to countries like Japan & China in automobile and manufacturing sectors respectively, pertaining to their lack of competitiveness and efficiency. Obama & Co. will also be answerable to the multinational companies and the hopefuls who plan to become MNCs? Why would the companies invest overseas if they don't get any incentives to do so? Protectionist measures such as these will not only dent the competitiveness and quality but also aggravate the economic crisis due to the increased costs and hinder the revival of world economy.
There's still a lot of smoke around that if implemented, which companies will be at the receiving end of this tax code change. Will it be the companies such as Wipro, Infosys who provide IT services to American companies ---- probably No, because most of these companies are working in India through a third party. So, who will be affected? As far as my understanding goes, multinationals like IBM, HP, P&G, GM, Accenture with their own offshore centres & operations will be hurt most by the proposed tax code change. So, the next question which comes up is --- Can Barack Obama get the Congress backing to pass this bill ? With the American populace favouring him and wanting to keep the jobs at home, may be he can. But history has proven how much clout does the US multinationals and lobbyists have on the Capitol Hill and with all these grumbling MNCs leaving no stone unturned to make sure that this proposal die a premature death, it won't be a cakewalk for the Obama administration to implement the tax code. Secondly, it is highly unlikely that rest of the world will be indifferent towards this protectionist tax policy.
To summarize, Obama's stringent tax and immigrant laws may turn good for the US in short term, but in long term once the economy is back on the path of recovery, US will certainly need the services of immigrants & foreigners. After all nearly half of start-ups in Silicon Valley were started by immigrants and a quarter of US global patent applications are from foreigners (according to an independent study conducted by Harvard Law School). Importantly, even the implementation of tax code doesn't guarnatee that jobs will stay in US, because it will be in the hands of the businesses to decide what is best for their survival & growth.
-Kartavya Jain
However, in the current economic downturn when companies are applying different cost-cutting measures to survive & grow, and outsourcing being among the tested one, how feasible will it be for Obama & Co. to push companies to do something which is not in their best economic interests. As rightly pointed by the vice-president of one of the outsourcing firms based in Nashville,TN that "Even if the government amends the US tax policy on companies doing work offshore, the changes wouldn't be large enough to compete with the 20-30 % benefit companies get in lower labor costs. With the world economy like an inter-connected web and inter-dependent, the obvious question that comes to mind is - Is this tax proposal anywhere close to becoming a reality or is it just a mere post-election rhetoric ?
First of all there is no such thing as tax breaks awarded to US companies creating job overseas. What the US tax law has is a provision or 'loop-hole' that allows American companies to defer income tax payments on offshore profits until they are repatriated back home in the form of investments & dividends, and this is what Mr. Obama wants to eliminate (probably). Moreover, this move towards protectionism to create jobs at home lacks credibility, because US started loosing jobs long before the economic crisis to countries like Japan & China in automobile and manufacturing sectors respectively, pertaining to their lack of competitiveness and efficiency. Obama & Co. will also be answerable to the multinational companies and the hopefuls who plan to become MNCs? Why would the companies invest overseas if they don't get any incentives to do so? Protectionist measures such as these will not only dent the competitiveness and quality but also aggravate the economic crisis due to the increased costs and hinder the revival of world economy.
There's still a lot of smoke around that if implemented, which companies will be at the receiving end of this tax code change. Will it be the companies such as Wipro, Infosys who provide IT services to American companies ---- probably No, because most of these companies are working in India through a third party. So, who will be affected? As far as my understanding goes, multinationals like IBM, HP, P&G, GM, Accenture with their own offshore centres & operations will be hurt most by the proposed tax code change. So, the next question which comes up is --- Can Barack Obama get the Congress backing to pass this bill ? With the American populace favouring him and wanting to keep the jobs at home, may be he can. But history has proven how much clout does the US multinationals and lobbyists have on the Capitol Hill and with all these grumbling MNCs leaving no stone unturned to make sure that this proposal die a premature death, it won't be a cakewalk for the Obama administration to implement the tax code. Secondly, it is highly unlikely that rest of the world will be indifferent towards this protectionist tax policy.
To summarize, Obama's stringent tax and immigrant laws may turn good for the US in short term, but in long term once the economy is back on the path of recovery, US will certainly need the services of immigrants & foreigners. After all nearly half of start-ups in Silicon Valley were started by immigrants and a quarter of US global patent applications are from foreigners (according to an independent study conducted by Harvard Law School). Importantly, even the implementation of tax code doesn't guarnatee that jobs will stay in US, because it will be in the hands of the businesses to decide what is best for their survival & growth.
-Kartavya Jain
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