Obama Alert for US MNCs, not Indian IT Cos

by Tabrez Khan    May 06, 2009

US president Barack Obama has finally started acting on the protectionist threats he issued to the world during his election campaign that had perhaps delighted parts of his constituency who may have believed that outsourcing hurt jobs creation in the US. I would not go as far as saying that Obama won the elections on that plank as such a statement would be grossly inaccurate; he seemed the best man in the fray, regardless of his stand on outsourcing. 

His latest move however is targeted at more than just companies that outsource some of their functions overseas. He proposes to do away with tax deferrals that allowed US companies to take credits for expenses incurred on their overseas operations and tax their income derived from subsidiaries in foreign countries when such income is brought back to the US. Hitherto such income enjoyed tax exemptions. This move is likely to hurt US multinationals more than Indian outsourcing companies, as the overseas operations of these multinationals will provide smaller margins with taxes being applied to such income from now on.

Companies that outsource their IT operations on the other hand do so not to evade tax but for cost benefits derived out of such outsourcing. Obama s proposed legislative changes will therefore hurt US headquartered companies rather than Indian IT companies that provide IT services to US Inc. The tax proposals have nothing to do with Indian IT services outsourcing companies that service US companies from their centers in India. US companies that maintain captive BPOs in India and elsewhere to do their outsourced work could get affected however, as their expenses on these BPOs would not enjoy tax credits back home.

More than the substance of these proposals, its style seems to have provoked reactions because in essence it is just a tax reform, although its logic remains questionable. If through these proposals the US administration intends to target outsourced manufacturing, it is questioning the basic premise of capitalism; which is free market and the most efficient allocation of resources.

US multinationals that invest elsewhere do so not with the intention of creating jobs overseas but with the intention of taking advantage of emerging overseas markets such as India. Economic growth in US and Europe has reached a plateau and opportunities for US companies to expand exist in emerging economies such as Brazil, Russia, China and India. To discourage such expansion through tax reform would seem counterproductive to the interests of corporate America.

However, tax reform is the US’ internal matter and had it been shorn of the seemingly anti-outsourcing rhetoric that accompanied its announcement, it would have gone uncommented from the overseas and Indian media. But Indian IT companies for whom US remains the number one market for IT services need to be cautious, as rhetoric could possibly turn into reality albeit not in the near future.

Remember former British Prime Minister Tony Blair’s statement in another context, "History will judge harshly those who saw a coming danger and failed to act." Just replace the word history with market.