American outsourcers with significant Indian operations could be hit with a higher 35% US tax bill if deferrals are eliminated, they add.
President Barack Obama’s aggressive bid to revive the stagnant US job market may be bad news for India’s expanding IT-BPO sector.
Obama, fighting to recharge his presidency faced with a steadily declining approval rate, vowed at his first state of the union address to get jobless millions back to work and crack down on tax laws that encourage US corporations to send jobs overseas. This should sound warning notes in India as half of the Indian IT-BPO industry’s $71.7 billion revenue comes from the US.
Obama pledged on Wednesday to push forward with his tax plan — first announced in May 2009 — to curb overseas tax advantages enjoyed by US firms. Obama urged the Senate to approve new laws to close international tax loopholes that could produce $210 billion in tax revenues over the next 10 years.
“The house has passed a jobs bill that includes some of these steps. As the first order of business this year, I urge the Senate to do the same, and I know they will. They will. People are out of work. They’re hurting. They need our help. And I want a jobs bill on my desk without delay,” he said.
The Obama administration argues that in 2004, US multinationals paid approximately $16 billion in US taxes on $700 billion of foreign active earnings — an effective US tax rate of 2.3%. The administration estimates it will eliminate $103.1 billion in tax advantages for investing overseas.
These savings will come from reforming corporate tax deferral rules so that companies cannot defer paying US taxes on the profits from overseas investments while taking immediate deductions for expenses from those investments.
Analysts say Obama’s tax changes are likely to take effect in 2011. American outsourcers with significant Indian operations could be hit with a higher 35% US tax bill if deferrals are eliminated, they add.
“You don’t create economic prosperity in the US by destroying the global competitiveness of American companies,” Rajiv Khanna, president of the India-America Chamber of Commerce, told DNA.
“I think the concerns we have is about indirect protectionism. I don’t think the tax break issue is... important for us,” the Indian software services industry body Nasscom’s vice-president, Ameet Nivsarker, said.
“The whole issue about taxing companies, which were shipping jobs overseas and taking away tax breaks, actually does not relate to the work that is done out of India or other locations. That is really about US subsidiaries which have set up plants overseas,” Nivsarker added. The move will affect American companies more than the Indian IT services industry, he said.
US Chamber of Commerce chief economist Marty Regalia noted, “Deferral has been mischaracterised as a “tax break” but is actually a vital mechanism providing relief for American businesses from double taxation.”
US companies with subsidiaries abroad can currently defer paying US taxes on the profits of those subsidiaries until the money is repatriated to the US. If US companies leave the money overseas, where corporate tax rates are lower, they can avoid US taxes on those profits indefinitely. If the money is brought to the US, corporations can deduct foreign taxes already paid.
—With PTI inputs
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