Wednesday, May 6, 2009

How Obama's tax plan will help IT Companies

India's home grown IT companies actually have something to cheer from Obama's tax plan. The plan, if it goes through, will make the likes of TCS, Infosys and Wipro more price competitive against their US counterparts like IBM, HP and Accenture.


This is because the plan imposes huge new tax burdens on American technology companies. An analysis by The Associated Press estimates that collectively, HP, IBM, Cisco, Microsoft and Google lowered their tax bills by a combined $7.4 billion in their last fiscal years by taking advantage of lower tax rates outside the US.


"Through the years, these five companies have avoided US income taxes and foreign withholding taxes on a combined $72 billion in undistributed earnings from their foreign operations. By reinvesting their earnings overseas, US companies insulate themselves from much higher tax rates had the money been made in their home country," an AP report says.


Google, it says, would have been hit with an effective tax rate of 45.2 per cent instead of 27.8 per cent last year if it hadn't been able to capitalise on lower rates overseas. Without the lower foreign rates, Google's 2008 tax bill would have been $1.02 billion higher.


HP, according to AP, reaped a $1.77 billion benefit in its fiscal 2008 from lower foreign tax rates while Cisco and Microsoft each saw benefits of more than $1.6 billion. IBM's foreign tax advantage last year totaled about $1.3 billion, says AP.


"It would be like an earthquake for high tech," Carl Guardino, chief executive of Silicon Valley Leadership Group, an industry trade association , has been quoted as saying. "On a Richter scale of 1 to 10, this would be a 12."


Analysts say that fresh tax impositions would mean that US IT service providers will per force have to increase their billing rates. And if those rates go up, Indian companies become correspondingly more competitive in any IT project for which they are bidding against American competitors.