Obama's tax proposal to hit US companies rather than Indian IT sector

Business groups in the US have assailed the proposal.

Indian IT services providers do not appear perturbed over the proposal of US President Obama to eliminate a loophole that allows US firms to avoid paying tax on profits earned overseas.

They say that the proposal will primarily impact US-headquartered companies like IBM, Hewlett Packard, Microsoft and Oracle that have overseas operations in countries like India.

Most large American companies earn more than 50 per cent of their revenues from markets outside the US and will be affected by the proposed tax reforms.

For instance, IBM has over 70,000 employees in India and more than 55 per cent of its revenue comes from outside the US. So, too, for Hewlett Packard, which has 30,500 employees in India.

Intel, the world’s largest chip maker, counts emerging markets as the next growth area. And as part of increasing their hold in these markets, all US IT firms have invested both in terms of finance and people.

“The current proposal, as we understand, is to close corporate tax loopholes for US multinational corporations. We do not believe it has anything to do with IT outsourcing done by US corporations,” India's second-largest IT services provider, Infosys Technologies, said in a statement.

Raman Roy, founder of Quatrro BPO Solutions, said: “These new tax proposals will generate incremental revenue for the US government because it will be taxing the profits of overseas companies. Captives will benefit from this move. However, these benefits will be short-term. In the long run, it might make us less competitive.”

“For Indian IT firms, there is no immediate impact in the light of the recurring protectionist voice coming from the US. But the tax reforms that are being talked about have more to do with the global operations of US firms,” said Ganesh Natarajan, CEO and MD, Zensar.

The current law in the US states that “any income that is earned outside the US is not taxed until such time it is brought back into the US”. The Obama proposal aims to alter that to raise the revenues of the US government. Obama said removal of tax deductions to firms that earned profits in countries with low tax rates and closing other loopholes would net $210 billion in additional tax collections over the next decade.

The tax reforms (announced yesterday) have only been proposed and there will be an extended debate on these before they can be implemented, as they require existing laws to be changed, according to software body Nasscom.

Business groups in the US had assailed the proposal, arguing that it would subject them to far higher taxes than their foreign competitors must pay and ultimately endanger US jobs, it added.

As far as India goes, global companies that earn profits here are subject to a tax rate of 33.9 per cent (including surcharge and cess) and the impact of the proposed reforms on them would be marginal.

Analyst firm Zinnov said the proposed revision in tax breaks was counter-intuitive to organisations who were looking at India strategically for long-term growth.

“If the Obama government thinks that outsourcing is a ‘reversible phenomenon’ and cutting tax breaks will help create jobs in the US, then the thought process is quite short-sighted and needs lot more clarity. Consequences of such a policy spanning across different countries and verticals can be unimaginable. Its complexity and implications can be much larger than the current recessionary scenario that we are dealing with,” said Chandramouli, director, Advisory Services, Zinnov.

Others, especially in Japan and Europe, are moving to a territorial system that taxes only corporate profits earned within their borders and the latest US proposals are contrary to the trend, notes Nasscom. This might actually end up reducing competitiveness of US companies with global operations when compared to their European and Japanese counterparts, it concluded.