Kerry tax talk has BPO firms in cold sweat

That ‘‘loophole’’ is a law in the US Corporate Tax Code, benefitting mostly manufacturers, which allows for tax deferment on all money made in offshore subsidiaries until it returns to the US in the form of dividends.

Opponents of the law say US companies effectively go untaxed on large portions of revenue, as dividends are returned to offshore subsidiaries instead. Kerry said: ‘‘Today, if you’re an American business, you actually get a benefit for going overseas… And when I’m President, we’re going to shut that loophole in a nanosecond.’’

This, he said, will ‘‘level the playing field’’.

Adding fuel to that rhetoric are recent reports claiming that US corporations have saved $30-$70 bn a year through tax sheltering and moving offshore. There have also been reports that corporate tax payments have declined substantially over three years—a sore point with the middle classes.

What’s worse, a significant number of corporations considered to have paid lesser—or no taxes at all—have moved jobs overseas to India.

But closing this ‘‘loophole’’ will not make Indian BPO firms happy: it could kill a substantial chunk of the cost advantage that helped them flourish in the first place. But it won’t make American firms happy either, since they save $4 on every $1 invested offshore (as per McKinsey in 2003).

Financial experts call Kerry’s use of the word ‘‘loophole’’ a misnomer that implies a flaw in the current system. ‘‘Some people would say the current corporate tax law is a good regime because it actually encourages businesses to go worldwide,’’ said Mark Sellner, a certified public accountant and corporate tax attorney with Larson, Allen, Weishair & Co., LLP, in Minneapolis, Minnesota, US.

Sellner said the current corporate tax structure, set up in the 1960s under President John F Kennedy’s administration, was designed to help manufacturers compete globally. In a world obviously even more globalised than 40 years ago, said Sellner, American companies coming to India have not done so for tax savings, but for the overall cost savings of doing business in an extremely competitive global market. Whatever happens to the US Corporate Tax Code in the future, BPO firms here say it’s unlikely to impact business. The economic logic behind outsourcing is far too strong, they argue.

‘‘Businessmen simply do not hold themselves hostage to political thinking on this topic,’’ said Sudip Banerjee, president (Enterprise Solutions) at Wipro Technologies. That’s because, Banerjee pointed out, it’s really the economic climate that drives business practices, not tax codes or political rhetoric.

However, the National Association of Software and Services Companies (NASSCOM), is not pleased.

Said NASSCOM president Kiran Karnik: ‘‘Now that the peak of election campaigning is over, Kerry has said he will not ban offshoring. But this is not to say there is a sense of complacency—our American partners have informed us that some issues in taxation will come up, which may have a marginal impact.’’

And so, the BPO industry waits with bated breath for November 2.