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Taxes Just One Consideration for Offshore Operations

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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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