US international tax code reforms = BPOs' demise?

Late last year, then presidential aspirant Barack Obama promised to create more jobs in the United States of America (USA) if he wins in the presidential election. Then, he vowed to stop rewarding companies that send jobs and money overseas. Definitely moving in such direction, just last Monday, he called for “eliminating various loopholes that benefit offshore tax havens and ratcheting up overseas enforcement, which he said could save $210 billion over a decade and encourage more job creation at home.” 

Today, he is poised to make good his promise. Early this week, he announced that the US international tax code shall be reviewed and revisions shall be made with the intention of cracking down tax havens and reducing incentives on companies that create jobs overseas (such as, business process outsourcing activities). Obviously, incentives will shift to companies in the USA that shall not outsource their activities abroad. 

In these reforms, the White House emphasized that they will be running after companies that are taking advantage of the law’s loopholes that create tax avoidance opportunities. Also, significantly, such reforms will also emphasize measures to fend-off the more abused scheme by wealthy individuals who vandalized the law by creating hidden accounts overseas.

In these tax measures, President Obama and Treasury Secretary Timothy Geithner plan to raise billions of dollars the next decade by removing tax advantages on companies for investing overseas. They also hope to raise over US$9 billion dollars annually by tearing down the shields on overseas tax havens.

To prove Obama administration’s seriousness, it announced that the International Revenue Service (IRS, the country’s BIR counterpart) shall hire about 800 new employees. They shall all devote their efforts in cracking down US companies that have alleged tax abuses overseas.

Primarily, the tax issue in question is the provision in which U.S. firms are allowed to defer paying taxes on profits earned overseas if they plow those profits back into their foreign subsidiaries. Proponents of the tax reforms emphasized that such provision encourages companies to outsource most of their business activities to foreign subsidiaries instead of creating jobs in the USA.

To prove their point, recently, the White House revealed three (3) very significant facts. First, that the effective U.S. tax rate on U.S. multinational corporations as of 2004, the most recent year for data, was 2.3 percent. Secondly, that eighty-three of the 100 largest U.S. corporations had subsidiaries in tax havens, according to the Government Accountability Office. Lastly, that Bermuda, the Netherlands and Ireland (all small, low-tax countries) claimed nearly a third of all foreign profits reported in 2003 by U.S. corporations.These proposed revisions, however, is facing a very strong resistance from the business giants with foreign subsidiaries and the U.S. Chamber of Commerce. These companies (including Pfizer, Oracle, Microsoft Corp Johnson & Johnson and General Electric Co as well as the Business Roundtable and the U.S. Chamber of Commerce) claimed that deleting the so-called deferral provision will make U.S. businesses less competitive. They further claimed that “the firms would not be on a level playing field with international rivals, many of which are not required to pay taxes at home on overseas entities”. More importantly, these businesses and associations have found some allies in the senate, notably, among the republicans.

With all the lobbying and oppositions to these proposed tax reforms, these measures will never sail through the US senate easily. Certainly, it will be a long and hard battle. 

In the meantime, however, while waiting for the smoke to clear, let us look into the reforms’ impact on the country and country’s business process outsourcing (BPO) activities.

 As a tax haven, the country is never known to be such. We don’t have reliable banks or financial institutions that the US giant companies or wealthy individuals can rely to hide their billions of dollars. Our financial institutions do not have the sophistication that is necessary in hiding amounts of this magnitude surreptitiously. We never have a financial institution as big and stable as the Swiss banking giant-UBS AG. It can be recalled that just last February, UBS AG acknowledged that “it helped U.S. clients conceal assets from their government.” Under severe pressure, it agreed to pay a US$780 million fine and has since identified about 320 of its American clients.

Determined to squeeze the bank for more information, the U.S. government is now suing UBS in a civil case to reveal the identities of 52,000 Americans suspected of using accounts at the bank to hide about $14.8 billion of assets and evade U.S. taxes.

Definitely, not a tax haven, what is worth looking into is the White House move to take back the jobs that the US citizens lost to companies operating outside its territories like the Philippines. This is definitely not a tax issue. This is a job security concern. 

 It is a fact that foreign-owned BPOs are pricing their services based on certain “transfer pricing schemes”. Prevalently, it is a “cost-plus” arrangement. Considering that the labor cost in the country is several knots lower than that of the US, the service costs of the US-based companies (the customers-normally the mother company) operating here are very much cheaper. 

Logically, therefore, assuming that it is a straightforward “cost-plus” agreement, the US-based company shall have bigger profits. Therefore, aside from being globally competitive, they shall pay bigger taxes in the US for their net earnings. 

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