What Obama’s tax plan means for US, Indian firms

US president Barack Obama is proposing to raise about $210 billion over the next decade by outlawing offshore tax avoidance techniques used by American companies. He is also planning to put curbs on Americans stashing money in tax havens.
Infosys CFO V Balakrishnan said the US president is trying to bring in proposals that will help garner greater taxes for the country by plugging loopholes in tax collection. “While Indian IT companies pay full taxes in the US, several multinational IT companies in the US find ways and means to save taxes by floating subsidiaries,” he said.
“US multinationals float subsidiaries outside their country to avoid paying taxes. The only time they pay tax is when they have to pay dividends. But Obama’s new proposal will put an end to this by deducting taxes when they register profits and not just when they declare dividends,” he added. “Obama will also have to find a way to put an end to companies gaining from tax havens.”

KPMG executive director and head (US Gaap) Jamil Khatri said companies such as Microsoft, IBM and Accenture pay taxes in India out of their revenues generated from here. “But they are protected from double taxation and hence do not need to pay taxes in the US. Obama’s proposal may well look into this aspect as well,” he said.

Harish H V, partner at Grant Thorton, said US firms don’t enjoy any specific tax benefits in India other than the ones offered to Indian firms. For instance, US software companies enjoy same benefits as the Indian IT providers including the 100 per cent tax exemption on exports under STPI scheme (valid till 2009-10) and SEZ policy. However, IT companies are paying taxes for the STPI units that they had set up 10 or more years ago.

Under the Indian income tax rules, income is taxed at a flat rate of 30 per cent for Indian companies, with a 10 per cent surcharge applied on the tax paid by companies with gross turnover over Rs 1 crore. Foreign companies pay 40 per cent. An education cess of 3 per cent (on both the tax and the surcharge) is payable yielding effective tax rates of 33.99 per cent for domestic companies and 41.2 per cent for foreign companies.

On the other hand, in the US, Indian companies pay almost full taxes.

Akila Krishnakumar, CEO of US IT major Sungard in India, said, “Obama’s intent is honorable. He is trying to abolish tax havens and ensure that money flows back into the US.”
Spokespersons from IBM and Oracle said they have no comments to make.