Wednesday, May 6, 2009

What's the impact on IT/ITES sector from Obama's proposed tax reform?

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Obama's Global Tax Raid has made talks all over the world especially in India and in particular Bangalore. President Obama on Monday spelled out his proposals to close corporate tax loopholes on U.S. multinational corporations and crack down on overseas tax havens.

Obama’s statement of "We have 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." His main target was US companies having their off-shore development centre in India.

Tax deferral rules: Among the legislative proposals is a plan to reform the "deferral" rule, which lets U.S.-based multinationals deduct expenses for overseas operations, but defer paying income tax on the profits from those operations. That gets paid only if and when companies bring that money back to the United States.

Now Outsourcing will prove 50% dearer for US companies. American companies could see a 50% rise in the cost of outsourcing business processes to India if President Barack Obama’s new tax proposals is accepted. Even though outsourcing will still make business sense, industry watchers concede the move could act as a dampener.

In the current system expenditure by a US company outside the country will be treated as normal expenditure but from now onwards if Obama’s new tax proposal goes through, the company will not be able to save the $35. So the net outgo will be $100 instead of $65 — or 53.86% more than the present cost.

Obama has again invoked Bangalore to hit out at the US system. His targets are also US corporations with subsidiaries in foreign countries. These firms can defer paying US taxes on the profits of those subsidiaries until the money is transferred back to the US. “It’s 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 at a White House event.

The Obama plan unveiled on Monday would, among other things, prohibit US firms from receiving foreign tax credits on income that is not subject to US taxes. It will also end a provision that lets the firms legally shift income from one foreign subsidiary to another, thus perpetually ducking taxes. As a result, companies such as General Electric, Google, Intel, and Hewlett-Packard, all of which have operations in Bangalore, will lose tax credits and be forced to pony up more tax dollars to Uncle Sam. Whether the multinationals, which get more bang — or Bangalore — for the buck outside the United States in terms of productivity, will take this lying down is another matter. Congress has to approve the plan, and not all lawmakers are in its favor. Past attempts to pass similar laws have failed.


Obama's point, since its corporate tax rate on foreign-owned companies can be as high as 55%. The President's argument is that U.S. tax-deferral rules make it more expensive for American companies to reinvest overseas profits at home than abroad. This, he claims, creates a perverse incentive for companies to "ship jobs overseas" and reduces investment and job creation in the U.S.

This proposed tax regulation spares US based research & experimentation (R&E) companies from his proposals.

Which are the companies likely to be hit by the proposed tax plan?

Agilent
Agro Tech
American Express
Amway
Avaya
Caltex
Caterpillar
CB Richard
Ellis
Cisco
Citigroup
Coca Cola
Cognizant
Colgate Palmolive
CSC
Cummins
Discovery
Dupont
EDS
Eli Lilly
Emerson
Electric
EXL
Federal Express
Ford
Franklin Templeton
GE
General Motors
Gillette
Honeywell India
IBM
Intel
Johnson & Johnson
JPMorgan
Kellogg India
Kimberly
Clark Kodak
McDonalds
Metlife India
Microsoft
Morgan Stanley
New York Life
Ogilvy and Mather
Oracle
Pepsico
Pfizer
Pizza Hut
Sun Microsystems
Texas
Tecumseh
Timex
Tyco
UPS India

Which are the companies likely to be benefited by the proposed tax plan?

All Indian based IT/ITES companies find the detailed list http://www.bpowatchindia.com/outsourcing_company_list.html