President Obama has revealed his first move at reducing the amount US companies offshore. He has proposed a tax revision which will mean that US companies, earning income overseas, will have to pay US corporate tax on that money immediately, rather than deferring payment until the income is returned back to US soil.
Obama complemented this announcement with a comment on how old tax codes have supported job creation in Bangalore, India rather than Buffalo, New York.
We all knew that Obama had his sights set on reducing offshoring, so this latest tax change should come as no surprise to vendors and end users.
However, it is not the blow to offshoring everyone was expecting from the new administration. In fact, the tax change will probably not have any significant effect at all.
The change will undoubtedly mean US organisations who offshore will have to pay more tax.
However, businesses make huge savings from offshoring IT and business processes and unless there are rules put in place that specifically prohibit offshoring then the act of setting up shop in foreign locations will continue.
The outsourcing market is too mature to have its momentum hindered by announcements such as this.
The cost savings associated with having an offshored process are just too good to be ignored. Of course, there are going to be protectionist attitudes towards offshoring, especially during a recession, however we are living in a time where global trade and investment is common place and essential.
If companies are pushed too far by financial penalties, sanctions or unreasonable directives then they will simply move headquarters to a location that is cheaper and easier to work within. If big IT companies (I can think of a few) begin to flirt with the idea of relocating overseas, then the US government will be finding themselves with a significant loss to their GDP and ultimately a worse job market.
It is refreshing to see a government moving forward with election promises and Obama has done this without disrupting the business world, whilst at the same time keeping voters happy. The fact is, US companies will happily take this tax increase on the chin without bringing processes back home. As a Business Week article stated, having 80,000 staff in India perform work for a fifth of the cost of their US counterparts, to the same quality, is simply too attractive a proposition to ignore.
So for now, service providers all over the world can breathe easy. However, we need to keep an eye on what else emerges from the new US administration, I don’t think Obama has finished with offshoring just yet