Can Obama curb offshoring with tax code?

President Obama unveiled tax code changes Monday he said could curb offshoring, but analysts and tax experts believe the plan will have little to no impact on the megatrend that threatens as many as one-in-four IT jobs at large companies.

The criticism boils down to this: It isn't the tax code that created the offshore outsourcing industry over the last decade; it's the low cost of highly skilled labor.

President Obama didn't address the wage gap today, but he is arguing that the tax code has played a contributing role in the growth of offshoring, and that includes high-skilled outsourcing.

In his remarks, he cited a major Indian IT outsourcing center, Bangalore, as one of the places that has benefited from tax loopholes. 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, New York," Obama said.

These tax loopholes 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 said.

The proposed tax changes, which must be approved by Congress, may affect IT vendors that run subsidiaries overseas by denying deductions for offshore payments on things like payroll expenses, said Alan Appel, a tax attorney at Bryan Cave LLP in New York.

"By denying the 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," Cave said.

The proposed tax code changes is about as close as the White House has come to addressing the issue of IT offshoring. Whether the administration ties the use of the H-1B visa, which is heavily used by Indian offshore firms, is still a question mark.

Alan Greenspan, the former chairman of the Federal Reserve, said last week that the U.S. should increase the supply of foreign workers and said the H-1B cap is keeping wages high, protecting workers from global competition and creating a "privileged elite" in the U.S.

The major motivation for moving work overseas is the difference between salaries in the U. S. and overseas. A job that pays US$100,000 here may only cost one-sixth that in India, said Peter Bendor-Samuel, CEO of the Everest Group, a outsourcing consultancy in Dallas.

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

Sang Kim, a partner in the international tax practice at DLA Piper, also said he doubts that the legislation will impact outsourcing. "The argument is that it should stem the flow of jobs leaving the U.S. but the reality is I don't think the jobs are moving outside the U.S because of tax policy," Kim said.

If anything, the tax code changes could accelerate the flow of jobs overseas to offset the larger tax bite, he said.

Kim said there could be unforeseen consequences to the tax changes. A foreign country could, for instance, could offer subsidies to U.S. firms to create jobs as a way of mitigating any tax impact, he said.

The Hackett Group, whose clients include many multinational firms, reviewed data collected from 200 companies to find that at companies with revenues of at least $5 billion, as many as one quarter of IT jobs will be moved offshore by 2010.

Copyright © 2009 IDG Communications, Inc.

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