There’s talk in the United States of an additional 10 percent tax on the profits of companies that outsource offshore. What does this mean for outsourcing companies when the new administration of President-elect Joe Biden takes office in January 2021?
First, it’s perfectly understandable that governments worldwide are looking for ways to raise the resources they’ll need to revive economies and keep people safe.
A well-calibrated taxation plan will ensure there’s money to be reinvested in the country, so that’s wise. It’s money that will supply frontline workers and hospitals with the protective equipment they need, perhaps pay for COVID-19 vaccines to be made available for free, and cover additional stimulus checks for families and small businesses in need.
Second, even with a 10% surtax, the cost savings available to U.S. businesses that outsource would remain large. The reality is that plenty of tasks can be done by highly skilled virtual assistants in other countries like the Philippines for about 30 percent of what salaries onshore would cost.
So a 10% tax is not really something that’s going to hinder a decision when it comes to hiring team members offshore.
Here’s what we know so far: The proposed Biden Offshoring Tax Penalty is 10% on top of a corporate tax rate of 28% on the profits of American companies that offshore manufacturing and service jobs abroad, then sell goods or services back to the American market.
Also part of Biden’s Made in America plan is a 10% tax credit for businesses that “reshore” or bring production and service jobs back to the U.S.
There are, however, a host of other factors at play.
There’s the US dollar’s strength relative to most Asian currencies and the incentives being offered in destination countries for outsourcing, which continue to make it a wise choice for some businesses. In the Philippines, where GO-VA is based, lawmakers are weighing a proposal (promoted by the national executive branch) to lower the corporate tax rate from 30% to 20% over 10 years.
Let’s also remember that like all legislative proposals, the Biden-Harris Offshoring Tax Penalty still has to go through Congress. No one knows yet what form it will finally take.
So, there’s no immediate threat to the U.S. businesses that outsource offshore and to the outsourcing industry in the Philippines as a result of that, except for the first mental reaction that people have to it. (Doubt, worry, fear.) Once you actually get to the logical phase of your brain, you realize the impact will most likely be not as bad as you had first thought.
The change may even create new opportunities.
For U.S. businesses that face higher taxes as a result of outsourcing, this is an opportune time to ramp up automation, for example.
A time to look closely at business processes and find out where they can automate steps that would typically be done onshore or offshore so that the business executes on its growth strategy faster and more precisely.
More jobs, not fewer
This is precisely why a core part of GO-VA’s new offering is all about finding the process engineers and automation software engineers whose skills and experiences can serve any business (whether in the U.S. or any other country, actually) that is committed to growing beyond this pandemic.
GO-VA’s approach to outsourcing and offshoring has never been about replacing jobs in our clients’ home countries. Rather, it’s about augmenting the work that businesses do, whether through automation or outsourcing, so that they can scale faster and create more jobs at home.
Our clients’ experience suggests that the net effect of outsourcing offshore has been the creation of more jobs in their home cities, mainly as a result of the growth that outsourcing has sped up.
This is not a unique observation.
“Economists see outsourcing as simply a new form of international trade, which as usual creates winners and losers but involves gains to overall productivity and incomes,” wrote N. Gregory Mankiw of Harvard University and Phillip Swagel of the American Enterprise Institute. Mankiw served as chairman while Swagel was chief of staff of the Council of Economic Advisers during the U.S. presidential campaign of 2004 when the heated debate over offshore outsourcing was a big part of the election.
Here’s what they found out: “The empirical evidence, while still tentative, suggests that increased employment in the overseas affiliates of U.S. multinationals is associated with more employment in the U.S. parent rather than less.”
Automation is increasingly going to do portions of the work for individuals, who can then get their head out of repetitive work and into more strategic, more high value-add, connecting types of work. That, plus outsourcing certain tasks offshore, is how businesses can deliver three times their desired output, every three years.
Elections lead to change in many facets of public life. Yet fundamental economic realities, like the fact that outsourcing as a form of trade is almost always a win/win proposition, remain unchanged.
GO-VA is a managed operations business based in Cebu City in the Philippines. In November, the Asia Corporate Excellence and Sustainability Awards chose us as one of Asia’s Most Promising SMEs. Our virtual assistants support growth-stage businesses in Australia, the United States, the United Kingdom, Singapore, and Canada, among other countries. We are driven to help businesses scale and be a catalyst for people to exceed.
PH Phone: (+63) 32 410 7523
9th Floor, i1 Bldg, Jose Maria del Mar Street, IT Park
Cebu City, Philippines 6000