TCS US unit posts 93% dip in revenue for FY19, looks to tap smart booking

Tata Consultancy Services (TCS) US subsidiary’s revenue was reduced by 93 per cent last financial year, demonstrating a drastic shift in revenue booking through the American unit, according to details shared in the company’s annual report. 

Analysts are of the opinion that such a fall in its US unit’s revenue is a successful tax management initiative in terms of reducing total tax outgo in the largest market. 

This is following introduction of the Base Erosion and Anti-abuse Tax (BEAT) by the US government. 
 

To limit profit shifting by multinational companies in the country, the US had introduced BEAT in 2017.  Under the norms, large multinational enterprises with gross receipts of more than $500 million on an average for the previous three years are covered under this tax. 

Under BEAT, tax on normal profit is around 20 per cent and 10 per cent on adjusted profit, after disallowing payments like interest, management fees and royalties. Companies pay the higher of the two. For instance, if a company has a regular tax liability of $20 million and tax liability under BEAT comes around $30 million, then it has to pay $30 million as tax ($20 million plus difference between the BEAT and regular tax amount).

TCS’s annual report revealed that the company reported growth across all verticals in FY19 led by the UK and Continental Europe, which grew 22 per cent and 17.8 per cent, respectively. North America, its largest market, which accounted for 51 per cent of the revenue, grew 8.3 per cent (compared to 3.7 per cent in the previous year). Asia Pacific went up 11.8 per cent and other markets — Latin America, India and Middle East and Africa — collectively grew 4.3 per cent. 

Yet, a look at the subsidiary’s performances showed that TCS’ US revenue have actually gone down. This suggests an almost complete rotation of revenue booking away from the US subsidiary (ies) to ‘branch model’ (Indian parent) within 12 months. 

“What we find striking is how in order to reduce tax in the US, TCS has virtually revamped the structure of its contracting through its US entities in a space of just one year – reflected in the near-full collapse of its US subsidiary revenue,” wrote Viju K George, research analyst, JP Morgan in a note. 

Sources privy to the company’s contractual provisions have confirmed that TCS now routes its client contracts through the parent company, based in India, rather than the US subsidiary. TCS spokespersons didn’t comment on queries about the change in the revenue-booking format. Taking FY19 growth of the US operations into account, the estimated TCS FY19 US revenues (from TCS’s America subsidiary), according to the FY18 format, would have been $9.1 billion compared to $0.6 billion actually recorded, wrote George.

In FY19, Americas contributed to Rs 77,562 crore revenue compared to Rs 66,145 crore in FY18. No single customer represented 10 per cent or more of TCS’ total revenue during the past two financial years.

According to experts, this was a massive US-centric exercise designed to reduce taxes to beat the BEAT, which is indicative of the extreme agility for a massive company like TCS. This kind of turnaround has not yet been demonstrated by any other peer of TCS. 

A recent CRISIL Research expects Indian IT sector revenues to grow by 7-8 per cent in dollar terms in FY20, helped by double-digit growth in digital services. However, operating margin is expected to decline by 30-80 basis points as companies step up local hiring to fill onsite jobs. For this, they will have to shell out at least 20-30 per cent more as compared to sending an H-1B visa worker from India, it added.

For the year ended FY19, TCS reported Rs 31,472 crore in net profit, an increase of 21.9 per cent over the previous fiscal while revenue at Rs 1,46,463 crore was 19 per cent higher than FY18. 

For the first time, TCS also crossed $20 billion in its dollar revenue posting $20.91 billion in top line in FY19, a growth of 9.6 per cent over the previous fiscal.