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No more tax sops for outsourcing firms: Obama
February 25, 2009 20:41 IST
American firms will no longer get any tax breaks if they move their jobs to India and elsewhere in the world as President Barack Obama has decided to "restore a sense of fairness" to the US Tax Code.
" . . . We will restore a sense of fairness and balance to our tax code by finally ending the tax breaks for corporations that ship our jobs overseas," Obama said in his first address to the joint session of the US Congress.
About 1,000 American firms, which have moved their jobs abroad, are expected to be affected by the proposed move to do away with a particular provision of the country's tax code that allows them to pay lower taxes for profits repatriated from foreign shores.
The opponents of the tax code, mostly comprising of Democrats, have been demanding to abolish this provision for a long time, saying it was encouraging the companies to ship jobs aboard and eliminate the local positions.
According to various estimates by economists, corporate tax code may account for up to 3 million jobs abroad.
Back in 2004, the US Congress had allowed a one-year repatriation tax holiday which reduced the 35 per cent tax rate on foreign earnings of American companies to just 5.25 per cent.
Among the major companies which have shipped jobs to foreign countries such as India include General Electric, Microsoft, Hewlett-Packard, Motorola, Pepsico, Honeywell [Get Quote] and IBM.
Earlier this month, two senators had expressed concern over lobbying by multinational corporations to allow firms with offshore funds to move their money back to the US at a discounted tax rate.
"In 2005, over $300 billion in offshore funds were brought back and were subject to a 5.25 per cent tax rate instead of the normal 35 per cent rate, which means Uncle Sam missed out on billions in needed tax revenues," the Senators had said in a letter.
They also added that "such tax holidays not only reduce US tax revenue in the long run, but create new incentives for US multinationals to send more jobs, funds and facilities offshore".
In their election campaigns, both Obama and Hillary Clinton, who is now the US Secretary of State, had said that tax break was encouraging companies to outsource American jobs to foreign countries.
A recent analysis by the Congressional Research Service showed that out of the 12 top repatriating companies, 10 cut jobs even before the recent economic downturn, the Senators said.
Going by estimates, foreign affiliates of American firms created nearly 1,00,000 jobs on an average in low-cost developing nations during the period from 1992 to 2005.
In 2004, the then Democratic Presidential candidate John Kerry had rallied against companies which were exploiting the tax system to ship jobs to low-wage countries, including India.