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5/4/2009
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Obama's Offshore Tax Plan Costly For Tech Industry

Vendors with significant overseas operations could be hit with a higher tax bill if deferrals are eliminated.

President Obama's plan to eliminate a loophole through which U.S. companies can avoid paying taxes on profits earned overseas could cost the tech industry millions of dollars in additional levies given its growing dependence on offshore operations and labor.

At the White House on Monday, Obama said his tax plan aims to reward companies that create domestic jobs while reining in offshoring.

"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," Obama said. "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."

At the root of Obama's plan is a provision that would eliminate a practice that allows companies to defer paying taxes on income earned abroad until that income is repatriated.

That could be bad news for major tech vendors, who in recent years have boosted their presence in hot offshore markets such as India and China in an effort to secure low-cost labor and to establish bigger footprints in areas expected to enjoy increased tech spending over the next several years.

IBM now has more than 70,000 employees in India. Those workers are engaged in everything from developing business applications for Fortune 500 companies to providing IT services for indigenous Indian companies. About 58% of IBM's revenue now derives from outside the Americas.

Rival Accenture, meanwhile, now has more employees in India than it does in the United States. Others, such as Microsoft, Oracle, and Hewlett-Packard, also are aggressively building their overseas workforces.

The upshot: Obama's tax plan could create millions of dollars in new tax liabilities for U.S.-based IT vendors and possibly lead to higher prices for tech goods and services. The U.S. Chamber of Commerce has slammed a similar version of the plan that's sitting in Congress.

"Ending deferral would be detrimental to U.S. companies operating in a global marketplace," wrote Bruce Josten, executive VP for government affairs at the Chamber of Commerce, in a March 23 letter to key leaders on Capitol Hill.

"This would be an increased expense for U.S. companies, thus making U.S. companies less competitive against foreign competitors who are only subject to one level of tax," wrote Josten, who noted that U.S.-based companies typically must pay taxes in the foreign countries in which they operate.

Obama on Monday said the plan is a matter of restoring "fairness and balance to our tax code."

InformationWeek Analytics has published an independent analysis of government IT priorities. Download the report here (registration required).

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