Company News

Obama's latest tax measures: Is it a threat to the global offshoring industry?
Manila, Philippines - May 06, 2009

Debate about the merits and/or ills incurred from offshoring continues to grow with the new US administration under Barack Obama. However, offshoring is a manifestation of an ongoing and long-term economic evolution. It will not go away.  It cannot effectively be outlawed.

According to XMG Global research, current economic conditions are creating a significant spike in offshore evaluations and activities in the following regions:  India, the Philippines, China, Malaysia and some Latin American countries. Indeed, we observe most vendors and captives continue to focus on two primary activities:  seeking new ways to reduce  operating costs, even by just a few percentage points; and maximizing productivity levels with the current staff headcount. Globalization, through offshoring, continues to be the trump card for addressing these two ongoing concerns.

The Obama proposal of ending US companies’ ability to defer taxes on profits made overseas will further dampen and squeeze net profitability levels, but not to the point that it becomes the tipping point for repatriating work back to the US or putting the brakes to offshore.  The US scenario of ongoing shortages of highly skilled labour for IT and BPO, an aging workforce and the unavoidable high cost of operating in the US continue to make the offshoring a viable business strategy. The Obama tax plan, much of which rests on dubious grounds, is aimed at all levels of the private sector and will have only a nominal impact at the end.  Unfortunately, those affected unconstructively will be small to medium companies whose offshoring game plan continues to contribute positively to the corporate bottom-line.  In turn, this has a deleterious effect in making progress in improving the US economy.

Although the proposal highlights legitimate issues that need greater attention such as tax abuses, the debate on both sides are long on rhetoric and short on good ideas about how to realistically and better address this critical business issue. Multiple perspectives must be considered when assessing the effectiveness of the Obama tax plan. Chasing after the $210 billion tax revenues and rejuvenating domestic employment would be futile if the Obama administration cannot holistically develop other programs aimed at realistically re-skilling the aging American workforce and creating an even-level playing field for global trade.  It would be shameful to forget that the US have become the world’s largest economy and solidified its national competitiveness on the back of globalization and offshoring.  At the very most, it is highly probable that the new tax mandate just becomes another expensive regulation dictating solutions that enable visibility and transparency into global financial transactions and enhanced reporting requirements.

Assuming the tax plan takes wings and is vigilantly enforced, our research indicates the emergence of a new genre of vendors and captives who will ensure operating offshore still remain profitable.  This will be achieved through effective talent management strategies, maximizing offshore productivity levels, tighter global service delivery models and optimizing investment balance to achieve ROI targets.  Offshoring will continue to become a business strategy as US companies realize they cannot mortgage near-term tax savings for potential long-term losses from marginalized globalization plans.  Anti-offshore and related protectionist activities have not significantly affected offshoring, and we at XMG Global do not expect them to do so in the near term.  This broader trend is not changing anytime soon.

Bottom-line:  To soften the impact of this fuss, offshoring countries with considerable US patrons like India and the Philippines must ensure that their original value proposition of unmatched ‘quality-to-cost’ ratio does not get devalued in the future.

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