Taxes Just One Consideration for Offshore Operations

Ann All

President Barack Obama's announcement that he hoped to end some popular tax breaks employed by multinationals, including tech giants like Cisco, IBM and Microsoft, cerrtainly touched a nerve. Some say this move is long overdue, should boost U.S. tax coffers and may give companies a greater incentive to keep jobs in the U.S. Others say it will simply put U.S. companies at a competitive disadvantage against multinational competitors based in countries with lower corporate tax rates.


There were plenty of both sentiments in a comment string following my blog post about it from earlier this week. Some excellent points were made. One of them, that merits repeating: The elimination of these tax loopholes likely won't be enough to prompt multinationals to scale back on overseas operations in favor of locating more jobs in the U.S. A couple of commenters suggested offering multinationals some carrots along with the stick, by providing investment incentives for U.S. job creation and/or lowering the corporate tax rate, which is one of the highest in the world.


The truth is, companies locate operations overseas for a variety of reasons. As a reader called SydFella pointed out:


The U.S. multinationals stand to earn a lot more from the markets outside the U.S. than in the U.S. because of the rise of India and China.


Hackett Group Chief Research Officer Michel Janssen and analyst Erik Dorr, who co-authored a report titled, "Companies Accelerate Globalization of G&A Processes in the Face of Economic Crisis," made the same point when I interviewed them in February. Said Janssen:

GDP (gross domestic product) in the U.S. for the third quarter was down a half percent. The estimates for fourth quarter are negative 5 percent, which is huge. We haven't seen anything like that in a long time. In China and India right now, they're having recessions too. But their growth is going to go from 10 percent or 11 percent down to 7 percent or 8 percent. So those economies are still expanding. We haven't touched that kind of growth (in the U.S.) for a long time. The point we are trying to make here is that the growth for businesses is going to come in the global sphere. We're saying that globalization is what will drive America out of its recession if we take it seriously. If we try to get protectionist, we will lose jobs over the long term.


Booming populations and improved standards of living are making emerging economies like China and India very attractive markets indeed for multinationals. But taxation policies and the ability to tap into new markets aren't the only considerations for multinationals. They also weigh currency fluctuations, access to resources that may be scarce in the U.S., labor supply and, of course, the wages earned by overseas workers.


Despite the opinions of experts like Peter Allen, partner and managing director for Global Practices at TPI, whom I interviewed last month and who told me, "the runway for labor arbitrage benefits is just about gone," it's hard to discount the fact that companies pay overseas employees far, far less than what employees with equivalent skills would get in the U.S. An example: According to PayScale, a software engineer in India with five to nine years of experience is paid an average of 607,000 rupees a year, which is about $12,300 in U.S. dollars.

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May 13, 2009 4:01 AM Private2 Private2  says: in response to Private

Well, ladies and gentlemen.. I do not live in the US, I live in Russia. But the situation that you are disussing here is very similar to what we experience nationwide. I absolutely agree with these posts. I believe that profit optimization for corporations does not have to undercut income level, living standards, higher education values and personal motivation. Otherwise.. yeah.. we can end up selling fried potatoes and cola. Just wondering as if the Fortune-100 decision makers ever come to read blogs.. Regards,

May 13, 2009 4:25 AM webmonkey webmonkey  says: in response to Private2

I think some people in our government agree - something needs to be done.  The problem is, they want to do it by concessions and persuasion with chump change.  What needs to happen is the government needs to lay down the law.

And, I don't agree with parts of the article.  Many us companies' primary target consumers are united states customers.  It may make sense to outsource some work to other countries, but NOT ALL OF IT.  These dummies are taking money out of the hands of their own customers - how are they supposed to purchase their products?  This is proven right now with so many companies struggling in the US - if China and India has growth and we outsource our jobs to them, but are going under - the argument to take advantage of that market is void. 

The way to capitalize on growing markets is to make products and sell it to them, not the other way around. 

The current problem reeks of greed, and this is where the government needs to do what it should - make laws - not spend the working class' tax dollars we don't have (face it - we're not getting that money back and taxpayers are funding it - look at GM)  Pumping good money into bad companies makes no sense except for the case of banks.

May 13, 2009 7:02 AM Sydfella Sydfella  says: in response to user655826

Cant agree with you more user655826   

It's very interesting topic and obviously a very sensitive one as well. I agree what Obama is doing is actually going to make things harder for multinationals like IBM/Cisco/Microsoft and taking the competitive advantage away from them. Whilst the US has enjoyed continuous rise in the decades gone by, the tables have turned massively because of the growth of India and China. In the simplest possible words its not India or China that need the US; it's the US that needs them now to grow ( hard fact to swallow but it is what it is ), and it will get bigger in the years to come.

What Obama needs to understand is that while in the short run it seems that the jobs are being lost , in the long run as the standard of living in pushed upwards in India and China the demand for high end products will start to increase and that's when the going goes great again. In a way it's already started happening with all the big Auto Makers selling their products in countries like India and China.

One thing that most people elude themselves with ( especially in the US ) , is the fact that the money that is being saved by the US cooperates by the outsourcing is actually being reinvested back into the US economy. The media never talks about this because such stories don't sell, it's easier to touch a sensitive nerve and increase circulations. Whilst I am not against that but media and critics have an obligation towards the community and that is to give a neutral view after reviewing all sides of the story. The media should also talk about the amount of additional work, jobs created that is being created in the US because of the money saved to put things into perspective. This obviously has meant the masses to train themselves in the new skills

And guys stop calling India and China as third world countries because they are not third world anymore.

May 13, 2009 11:33 AM user655826 user655826  says:

I just had this discussion with a colleague this morning.  Obama's thought process that his will somehow dissuade multinational corporations from off shoring jobs to third world countries and China is just nave.  The reaction to closing the tax loophole in most of these corporations will be to go through a RIF and move even more jobs off shore where more profit potential lies.  Being part of the consulting world, this is especially true of implementation services for application tools sold in the US.  Many implementation service tasks are off shored not only to make the corporation competitive in the US market, but because the Professional Services organization can get vastly improved margins on those services.  Raising a tax rate will not solve that issue and save US jobs.  In fact it will likely cause the loss of more US jobs.

May 13, 2009 11:59 AM Private Private  says:

This is ridiculous. If we continue to barter for 'pay' and try to move jobs out then EVENTUALLY the USA will be no better than all the other 3rd world countries.  We are not fixing anything by trying to hang the same job over two peoples head..."we'll only give you $12000 because that's what we'll pay if we move it off shore, and we don't care that you have a masters degree".  You can go to a fast food place and make more!!!! 

So what is the sense of an american even going to college to get a degree and pay $100K then get out to find only a job making $12K, he might as well go to a fast food restaurant and quit school altogether. 

Our level of standard will be completely reduced to that of other poor countries.  So essentially we reduce our level of standard because we increase the fight for jobs not internal to the U.S. but now a person has to fight China and India for a job not just my neighbor. 

And then if a person accepts a $12000 he can't afford to live in the U.S. then goes on welfare, utility assistance and food stamps.  What goes around comes around Why don't you people wake up!!  Its only making a few people rich and everyone else poorer.

May 14, 2009 7:42 AM Already Fighting Back Already Fighting Back  says:

I was disappointed when the India Business Machine company (IBM) let me go recently but now I realize that this is for the better.

I have started my own company and offer my services for a bit less than what IBM payed me - but that price model is WAY less that what IBM charged for my expertise.

Since I don't have to support SAM and cronies, I make good money, I keep the work in the US and I can offer the exact same expertise that IBM offered to my customers for much, much less than what IBM charges. SAM and his India based company can go to India or Russia for all I and my customers care.

Oh - and as added value, I do speak American English, I provide excellent service in a US time zone and I am fair and honest - UNLIKE the IBM company...

All good in the end!

May 18, 2009 10:53 AM I'm no longer a prostitute for IBM I'm no longer a prostitute for IBM  says: in response to Already Fighting Back

I'm totally with "Already Fighting Back".

IBM lost the re-bid @ American Express and HP got the contract. Naturally we all applied with HP. I got an interview and an job offer which I declined because that wanted to cut my annual salary by 37%. The hiring manager was shocked that I turned him down, twice.

I'm simply tired of being a whore to the Corporate American Outsourcing Greed Machine, that will eventually make the land I love a third-world country.

The answer is simple:

Lose the greed attitude. For God's sake, how much money is enough? Sam and his club will eventually pay for what they're doing, along with all the other worthless CEOs that suck the life out of their employees.


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