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Taxing times for outsourcing

President Obama’s call for a major overhaul of the U.S. tax code is intended for the domestic audience and is meant to assuage public anger over the disproportionately low taxes paid by large U.S.-based multinational corporations despite earning large profits. The attempt to plug loop holes that have enabled tax avoidance on a large scale also makes sound fiscal sense especially in the context of soaring budget deficits. One of the proposals is to delay tax deductions against overseas profits until those profits are brought back to the U.S. Another will make it much harder for U.S. companies to abuse foreign tax credit. At present under double taxation avoidance agreements, companies are allowed to claim credit in the U.S. for taxes paid in another country. It is also proposed to shift profits from overseas subsidiaries to tax havens. The tax reform proposal is thus mainly directed at curbing offshore tax havens and corporate tax breaks and collecting billions of dollars more from large multinational corporations and wealthy individuals. According to official estimates, the changes in tax laws if enacted as envisaged would raise $210 billion in revenue over the next decade.

Obviously, given the high level of globalisation, such major changes in the tax laws of the world’s largest economy will have wider repercussions that go well beyond their impact on the domestic economy. Secondly, complex arrangements such as outsourcing of business processes need to be better understood even from a tax angle. Over the years, these have conferred benefits all round and ought not to be viewed as mere tax-dodging devices. India, China and a number of other countries who have benefited from the outsourcing boom have reasons to be concerned, but not so much because of the immediate fall out of the tax proposals. The U.S. President was probably hinting at more overt protectionist measures when he sought to redeem his campaign promise to end tax breaks for “companies that ship jobs overseas.” For now however the U.S multinationals that have set up large bases in India and other countries are likely to feel the pinch. However, even for them the benefits of outsourcing are expected to more than offset the possible rise in tax liability and most of these companies might still find it worthwhile to continue and even expand their Indian operations. India’s strengths in the IT industry are no longer confined to low-cost skilled personnel engaged in relatively low-end jobs. Subsidiaries of multinationals and many Indian companies have moved up the value chain and are far less likely to be affected by changes in the U.S. tax laws.

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