Will Future U.S. Protectionism Hurt IT Onshore, Offshore?

 
 
By Don E. Sears  |  Posted 2010-02-12
 
 
 

President Obama's first official State of the Union address is a few weeks old, but its message to American companies that operate subsidiaries in Asia has some questioning what direction the United States will go with technology workers, tax incentives and H-1B visas. With an economy slowly grinding its way out of recession and a populist air of protecting jobs for American workers, Obama is giving Asian and American business leaders and companies something to chew on.

In the address, Obama attempted to restate his agenda on jobs and jobs growth; some have construed these remarks as "protectionist."

"[T]o encourage these and other businesses to stay within our borders, it is time to finally slash the tax breaks for companies that ship our jobs overseas and give those tax breaks to companies that create jobs right here in the United States of America," Obama said.

What was the reaction in Asia? Well, they are not worried about the tax part.

"The whole issue about taxing companies which were shipping jobs overseas and taking away tax breaks actually does not relate to the work that is done out of India or other locations," Ameet Nivsarkar, vice president of trade organization NASSCOM (National Association of Software and Services Companies), said in The Economic Times Jan. 28. "That is really about U.S. subsidiaries which have set up plants overseas."

But on other subjects, NASSCOM is less than enthused.

"I think the concerns that we have [are] about indirect protectionism," Nivsarkar said. "I don't think [the] tax break issue is really the one which is important for us."

Obama has made comments about trying to reform loopholes in the tax code to help increase tax revenue and thwart what he characterized as bad corporate behavior toward U.S.-based workers-a sentiment he echoed in the State of the Union address. From Obama's May 2009 speech:

"[E]ven as most American citizens and businesses meet these responsibilities, there are others who are shirking theirs. And many are aided and abetted by a broken tax system, written by well-connected lobbyists on behalf of well-heeled interests and individuals. It's a tax code full of corporate loopholes that makes it perfectly legal for companies to avoid paying their fair share. It's a tax code that makes it all too easy for a number-a small number-of individuals and companies to abuse overseas tax havens to avoid paying any taxes at all. And 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.

"Now, understand one of the strengths of our economy is the global reach of our businesses. And I want to see our companies remain the most competitive in the world. But the way to make sure that happens is not to reward our companies for moving jobs off our shores or transferring profits to overseas tax havens. This is something that I've talked about again and again during the course of the campaign."

Reaction from current and former NASSCOM executives to Obama's May speech were a mixed bag of understanding that change may be on its way, but not ultimately believing that many large changes will hurt them. The implications for H-1B visas were not discussed. This was the reaction of two key NASSCOM members, from Thaindian News:

"Admitting that Obama's protectionist measure was a matter of concern for the industry, [NASSCOM President Som] Mittal asserted that Nasscom would study the proposal to assess what impact it would have on outsourcing or off-shoring and do the needful if the bill got drafted ... The US accounts for about 60 percent ($30 billion) of the $50-billion IT export revenue from India. About 70 percent of the export revenue is generated by Indian firms and the remaining by multinational captives or third party vendors in the sub-continent. About endorsing Mittal's views, former Nasscom president and Satyam board chairman Kiran Karnik said he was skeptical about Obama's tax proposal becoming a law.

"It (tax reform bill) is unlikely to become a law as US firms will be the hardest hit. Obama's proposal is of concern because it's a sign of protectionism. In the recent G-20 meeting in London, world leaders said they were against protectionism," Karnik said."

It is not clear yet whether tax code changes will happen.

Protectionism has its opponents in the United States too, including opposition to reforming the H-1B visa program. As HCL America President Shami Khorana pointed out in a recent column for CNBC, conservative think tank The Heritage Foundation does not support H-1B visa reform and warns that reform will cause setbacks. Khorana, an American citizen who came to the United States 40 years ago and studied at Notre Dame, had this to say about protectionism:

"I believe that any form of protectionism is dangerous and [in] this age of globalization, the proposal to abolish or dramatically reduce [H-1B] visas hurts our global economy, not just America's.

Drawing from my personal and professional experience versus a simple or biased opinion, limiting or eliminating imported talent-whether technical or other types-will do nothing to boost our already choppy economic situation, nor will it help to develop the American workforce.

I fear it will do just the opposite."

However, Obama's tax code rhetoric may not have exactly made its way into policy, as CNN Money/Fortune writer Jia Lynn Yang reported Feb. 8:

""We want to help the Administration generate new jobs and expand the manufacturing base domestically," said Intel's vice president and legal and corporate affairs director Peter Cleveland in an email. "To do that, the President's ideas on innovation are spot on...But some of the international tax policies create financial strain for the company and will restrict our ability to grow the business."

Someone seems to be listening to Intel. Last year's budget proposed changes to the international tax code that would've added $210 billion in taxes from multinationals, almost $100 billion more than this year. One major change is the administration has walked away from its proposal to override so-called "check the box rules" relating to how a company classifies its subsidiaries for tax purposes. Critics say the current system makes it easy for corporations to shift income from their foreign affiliates into tax havens."

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