No more tax breaks for US companies to move overseas
Updated
US companies which have created jobs overseas and enjoyed deferred tax payments back home will no longer have that incentive, ansd this coukld impact on countries like India and China which host a number of American companies.
President Barack Obama says the savings made from the removal of such incentives would be given to companies that are investing in research and development at home.
Presenter: Kanaha Sabapathy
Speakers: Professor Bruce McKern, Director of the Business Leadership Program at the United States Studies Centre at University of Sydney; Adit Jain, Chairman International Market Assessments, Asia
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SAPAPATHY: Say no to Bangalore and yes to Buffalo, seems to be one of the ways US President Barack Obama hopes to bring the ailing American economy back on track. Until now, companies that invested overseas were allowed to defer tax on offshore earnings, so long as the money was kept out of the country. According to the Obama Administration, in 2004 US companies operating overseas made some $700 billion in profit, but paid only $16 billion in taxes. Immense savings for the companies at the expense of the US coffers. Driven by the budget deficits which are beginning to pile up to some $2 trillion to $3 trillion, Mr Obama wants to remove this incentive and use the savings to jumpstart job creation, foster innovation and enhance America's competitiveness. Professor Bruce McKern, director of the Business Leadership Program at the United States Studies Centre at the University of Sydney however, is not too sure.
BRUCE McKERN: Most of the companies that are operating overseas are investing their income that they're avoiding paying tax on - they're investing that in operations to expand their business around the world and although of course, some of that provides employment for people in those other countries the fact that they have a bigger operation also creates jobs back in the US. So it's not at all clear that this will really create more jobs as a result of the changes that are proposed.
SAPAPATHY: India is host to many American companies. It's well-educated English speaking labour force and cheap infrastructural establishments are draw factors. So would the changes announced in Washington affect India? Adit Jain is the Chairman of International Market Assessments Asia.
ADIT JAIN: Yes, I think in the short term it might, although I suspect the impact is likely to be cosmetic. These are difficult times in terms of the global economy and Governments have to be seen to act.
SAPAPATHY: Professor McKern also does not believe that this new policy would be a negative impact on countries like India and China.
BRUCE McKERN: The decision as to whether that income is taxed or not I think is a separate question from the question of where you go to get the best combination of quality and cost. And companies have chosen to set up software operations and other in India, they've been sourcing materials in China because mainly that equation is best for them, the combination of cost and quality is best.
SAPAPATHY: It's an argument that Adit Jain backs.
ADIT JAIN: I think it's really on competitive edge, higher productivity that these companies seek to compete as opposed to lower salaries. I think the competitive advantage in the longer term, the bigger leading IT companies wish to develop if higher levels of productivity, much higher level of service offering. And if that were to be the case, then the absence of tax incentives or the creation of barriers will be a dampener but not so much of a dampener so as to detrimentally affect the industry in the longer term.
SAPAPATHY: Adit Jain argues, given the age of global economic interdependence, it would not be beneficial to any country to set up artificial barriers to trade.
ADIT JAIN: If countries start putting artificial barriers on trade ones that has to do with goods or services networks the global network will collapse. And I think if that were to be the case, then the impact on India or India's IT industry is only going to be a small fraction of a much larger problem.
SAPAPATHY: Professor McKern says this new policy is not a return to protectionism. He believes companies would continue to choose to invest overseas so long as those investments meet their conditions of quality and cost.
BRUCE McKERN: US firms, for the most part, although we hear a lot about foreign offshoring and use of low cost labour sources such as India and China, of course that's an important part but much of their operations is actually in developed countries where they go to find markets and those operations, I don't think, will be affected very much. Now if there is an impetus to repatriate funds to the US, there might be some impact on the funds available for expansion but again, I don't think that will make a difference to the company's decision as to whether they set up an operation in Bangalore to handle the call centre or do it back in Bangor, Maine.
