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Taxing Times for BPO Industry

Obama’s tax plans could give the outsourcing industry a fresh headache.

     Print Edition: May 31, 2009

On February 26 this year, US President Barack Obama projected higher tax collections totalling $353.5 billion (Rs 17.68 lakh crore) in the next decade.” On May 4, he unveiled plans for raising $210 billion (Rs 10.5 lakh crore) of this amount through changed tax norms.

 What the new plans mean

  • Change in taxation norms would see companies taxed on jobs created overseas
  • Tax burden could increase by 8-10 per cent
  • Cost effectives of captive centres could be under scrutiny
  • American companies undeterred for now, may continue investments
  • Further tax credits could worsen the pain

Currently, if an American company invests and creates jobs overseas through a foreign subsidiary, it does not pay US taxes on its overseas profits, until they are brought back to the US. So, what will change?

“Companies would be able to take a deduction for foreign expenses only when they also bear US tax on their foreign profits. This will impact the immediate costs of doing business outside the US,” points out Rajendra Nayak, Partner, Ernst & Young. While the current rate of corporate tax is 35 per cent, experts believe new norms could see it increase by 8-10 per cent.

 David Cote, Chairman and CEO of Honywell, a $38-billion diversified industrial giant, called this possible increase in taxation “worrisome and detrimental” to global trade during a visit to Bangalore.

Other industry watchers are worried, too. “If we are taxed in the US on non-US profit, it would adversely impact our ability to invest there,” says a spokesperson for Cisco.

Rahul Sachitanand

 

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