Bangalore to Buffalo: politics or economics?

BANGALORE, INDIA: US President Barack Obama's contention that US-based multinationals shipping jobs to countries like India are getting an unfair tax advantage over domestic rivals is not well received by the companies headquartered in the US. According to the Obama Administration, U.S. multinational companies earned $700 billion in foreign earnings in 2004, but paid just 2.3 per cent in taxes on that income.

"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 on Monday spelling out his proposals to close corporate tax loopholes and crack down on overseas tax havens.

This could definitely be a setback for many US tech vendors who have pumped business into offshore markets like India. And they feel Obama's proposal would affect their business growth.

"If rules are changed on tax deferral and we are taxed in the U.S. on non-U.S. profit, this significant additional U.S. tax cost would adversely impact our ability to invest and grow our business in the U.S.," Cisco Systems Inc spokesman John Earnhardt said.

Investment bank Goldman Sachs feels that Congress would face enough pressure to pay for other priorities this year that it would use these provisions to offset the cost. "Otherwise, these items may not be considered until later this year or next year, in the context of broader corporate and individual tax reform," it said in an investor note.

However, coming to India, Obama's Bangalore–Buffalo remark has not created much of a tension.

According to Indian IT giant Infosys, the new tax proposal has nothing to do with IT outsourcing done by US corporations.

“The current proposal, as we understand, is to close corporate tax loopholes on U.S. multinational corporations and crack down on their overseas tax havens. We do not believe that it has anything to do with IT outsourcing done by US corporations,” Infosys said in a statement.

And NASSCOM, the voice of Indian IT software and services industry, said prima facie the proposals appeared to be aimed at addressing the tax rate differentials that exist across the world and if implemented, this would impact American headquartered companies with overseas operations.

Current law in the US states that “any income that is earned outside the U.S. is not taxed until such time it is brought back into the U.S”. According to NASSCOM, Obama's proposal aims to alter that to raise the revenues of the US Government.

However, NASSCOM pointed out that most large American companies have more than 50 per cent of their revenues coming from markets outside the US and would be affected by the proposed tax reforms, if implemented.

Though Obama said he wanted to see US companies remain the most competitive in the world, his present proposal is seen as politically motivated. After all the anti-outsourcing card also had played a role in his historic electoral win. So it is quite normal to raise the doubt: What is behind Obama's proposal, politics or economics?