Obama Tax Plan Won't Curb Offshoring, Experts Say

Computerworld — Analysts and tax experts contend that federal tax-code changes proposed by President Barack Obama last week likely won't meet his goal of persuading IT vendors to curb plans for opening and expanding offshore facilities.

The proposed tax changes, which must be approved by Congress, would affect IT vendors that run various operations overseas by disallowing deductions for various offshore expenses, including payroll, said Alan Appel, a tax attorney at Bryan Cave LLP in New York.

"By denying the [payroll] deduction, the hope is that it will be more expensive to operate offshore and it will give incentives to create jobs in the U.S.," Appel said.

However, Peter Bendor-Samuel, CEO of Everest Group, an outsourcing consultancy in Dallas, noted that the major motivation for IT vendors to move work overseas is the wide gap between salaries in the U.S. and those in many other countries. A job that pays $100,000 in the U.S. may cost only one-sixth that amount in India, Bendor-Samuel said.

Siddharth Pai, a partner at outsourcing consultancy Technology Partners International in Houston, said that IT vendors also establish software and services operations in countries like India because it's easier to find talented technical workers in sufficient numbers there. He added that India has a young population, where as the U.S.'s is older—demographics that work in India's favor when companies are debating whether to expand overseas operations.

"If there is a tax consequence, it's de minimis to the overall impact" of outsourcing, Bendor-Samuel said. In any case, "this idea that people are doing outsourcing to avoid taxes is simply wrong."

Obama didn't address the wage gap in announcing the tax proposal, but he argued that the tax code has played a role in the growth of offshoring, including the outsourcing of jobs for highly skilled professionals.

In his remarks, he said that major Indian IT outsourcing center Bangalore has been a strong beneficiary of current U.S. tax laws. The U.S. has developed "a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y.," Obama said. Current tax laws give companies that create jobs overseas the ability to take deductions on expenses "when they do not pay any American taxes on their profits," he added.

Several top U.S. IT vendors, including Cisco, Dell, IBM, Hewlett-Packard and Microsoft, run software development and services subsidiaries in India.

Continue Reading