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Other Policies Related to Offshoring

Consumer Right-to-Know Protections

A key factor that helps make offshoring profitable for U.S. companies is that consumers are typically unaware of where the work is being done. Sen. John Kerry (D-MA) has proposed legislation to require workers at call centers to reveal the location from which they are working.The Communication Workers of America (CWA) has called for similar disclosure laws in several states and bills have been introduced in Colorado, Georgia, Hawaii, New Jersey, Tennessee and Washington.

Other reports indicate the complicity of government agencies in maintaining the secrecy that often surrounds offshoring. In Michigan, for example, one source reported that much of the work on a $25.2 million contract to upgrade the computer system used by the state employee retirement system would be done overseas, but the state “won’t allow the company to release any details about the workload.”This kind of secrecy regarding how taxpayer dollars are spent is unacceptable. Legislation or regulations requiring that state and federal governments track and publish statistics regarding the use of foreign-based subcontractors is a vital step in understanding the amount of government work that is being sent overseas and in permitting taxpayers to hold their elected representatives accountable for such policies. The federal government already tracks contracts that are awarded to foreign contractors, but there is no tracking or disclosure requirement on where the work is being done on contracts awarded to notorious outsourcers such as IBM, Boeing and Dell, Inc.

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Tax Policy Proposals

Concern is growing over the fact that the U.S. tax code strongly encourages U.S. companies to create new jobs or move existing positions overseas. U.S.-controlled corporations can defer tax payments on income earned abroad until such earning are “repatriated” to the United States. Currently, by establishing more foreign “subsidiaries” a U.S.-controlled company can avoid paying U.S. taxes on a greater proportion of its earnings. A sizeable majority of U.S.-based corporations pay zero U.S. taxes and the deferral option is one of the rules that help them maintain this remarkable record. Not surprisingly, most of these funds never return to the United States and thus, are never taxed. Instead, they are used to expand or otherwise invest in overseas operations, or they are “parked” in a holding company set up to avoid U.S. taxes in such offshore havens as Bermuda, Luxembourg or the Cayman Islands. Two years ago, the Treasury Department promised to issue new regulations to address some of the loopholes that permit this activity, but to date, even draft changes have not been forthcoming.

Under the deferral rule, companies are permitted to accumulate untaxed foreign earnings indefinitely. Hewlett-Packard’s 2003 SEC filings show the company has “indefinitely” deferred taxation on $14.4 billion of foreign earnings. Intel Corp.’s showed $7 billion, and pharmaceutical giant Merck & Co.’s filings reported $18 billion. In total, it is estimated that U.S. companies have amassed some $639 billion in untaxed foreign earnings. From 1995-2001, U.S. multinationals increased their employment overseas by 39 percent, while expanding domestic payrolls by only 10 percent.

The presumptive Democratic presidential nominee, Sen. Kerry has proposed a plan under which U.S.-controlled companies would be required to pay taxes on all profits earned overseas that are not taxed by another country. The Kerry proposal still would allow corporations that produce for foreign markets to defer taxes. Deferral would not be permitted, however, for U.S.-controlled companies that are producing goods overseas for the U.S. market. Further, the Kerry plan includes a one-year 10 percent “tax holiday” rate to encourage companies to repatriate their overseas profits, and a cut in the corporate tax rate from 35 to 33.25 percent.

A number of bills pending in Congress that propose other tax policy changes intended to combat offshoring. While the number and range of these proposals extend well beyond the scope of this report, the most prominent include a 10 percent tax cut for U.S. manufacturing companies that have retained production facilities in the United States and a proposal to make permanent the current research and development tax credit that is intended to help ensure that U.S. companies create the next wave of technological innovation and the job creation attached to it.

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