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Obama's tax proposal not to impact domestic BPOs: Ernst & young
May, 11th 2009

Domestic Business Process Outsourcing (BPO) units providing services to the American companies will not be affected by the proposed decision of US President Barack Obama to discourage outsourcing by imposing taxes, said global consultancy firm Ernst & young.

"The companies which outsource business to third parties will not be impacted (by the proposed tax move)," said Ernst & Young Tax Director Rajendra Nayak.

However, he added, the US companies which outsource services from their own arms including wholly-owned subsidiaries might face the heat of Mr. Obama's tax proposal, which is yet to be approved by the U.S. Congress.

According to the E&Y expert, the captive outsourcing units of Americans will be impacted by the proposal as it would be required to adhere to the regulations of the home country.

On the other hand, the domestic BPO units provide services to companies from different countries, including America, will primarily be governed by Indian laws and may escape the impact of changes in the US tax laws, Mr. Nayak said.

The step, he said, is directed at encouraging the U.S. companies to do business in the U.S..

However, the success of this objective would depend on comparative advantage that locations like India provide over the loss of revenue because of taxes back home in the U.S., sources in the Central Board of Direct Taxes (CBDT) said.

The U.S. companies would stop giving business to their subsidiaries in India only after evaluating if the benefit they have in India based on lower production costs in the country is higher than the tax to be borne in the US itself, they said.

The U.S. President had proposed removal of tax incentives to companies outsourcing business to other countries, that is expected to generate $210 billion to the U.S. government over the next decade.

Mr. Obama's reference to Bangalore while proposing the move has made Indian firms jittery. Mr. Obama had commented on the existing tax code and said "Its a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York."

Companies like General Electric and Citigroup are being seen among those likely to be affected due to the move.

All three firms have a significant presence in India.

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