US tax plans on outsourcing Companies may not yield results

Apart from IT, the domestic pharma industry is also worried over President Barack Obama’s proposal to end tax breaks for US companies which are expanding their overseas businesses. The pharma industry fears that it could be hit if US pharma biggies cut down on outsourcing to Indian companies focused on contract manufacturing and research services (CRAMS).

Pharma MNCs in US have been increasingly outsourcing manufacturing and research of drugs and raw materials (active pharmaceutical ingredients) to domestic players like Piramal Healthcare, Torrent, Biocon, Jubilant, and to dedicated CRAMS companies like GVK Biosciences and Advinus Therapeutics.

Domestic industry is still waiting for the fine print to finalize their strategy on the issue as few details are known at present. Pharma may be affected on two accounts, analysts say. One US companies (say Pfizer Inc) which have set up overseas subsidiaries in developing markets (like India), will have to pay tax on their earnings earned abroad.

In the second instance, US companies which are outsourcing services to overseas destinations like India will be at a disadvantage as their earnings from these countries will now be treated as income, and they would be liable to pay tax on it, they added. As against this, earlier companies which were outsourcing services earned tax credits on income earned through those services.

In the short term, domestic industry will take a hit, but the impact will be marginal. In the long term however it will be beneficial for domestic industry. Indian companies are likely to benefit in the form of outsourced services (CRAMS) that US companies are likely to resort to in order to cut their costs further as pressure on the margins increase.

Moreover, costs will drive the entire outsourcing game, and domestic companies will start cutting costs to compete within themselves to offer better prices to overseas players to land contracts.

The CRAMS space is getting extremely competitive with 12-13 players either wholly focused on CRAMS or who have CRAMS as a big chunk of their business. There may be a pricing war amongst these players to be competitive. The industry will wait and watch for the details.

The proposed tax changes entail plugging tax leakages that may otherwise be available to US pharma companies having foreign subsidiaries and R&D credits. This is expected to affect the earnings of US pharma companies negatively, especially those having global R&D and sales operations, analysts added.

The proposal looks difficult to implement as of now. The cost competitiveness of US companies will get affected with the proposal so it may face opposition in the US.

Indian cos may not be hit hard: Nasscom

Nasscom reiterated that the tax proposals are not about moving work from the US to India, be it from Buffalo to Bangalore or Boston to Bhubaneshwar. The proposals impact all US investments, and compared to its investments in China and Germany and the UK, India’s share is hardly anything. And if one were to look only at America’s $700 billion outsourcing pie, the share still remains miniscule. Nasscom chairman said the tax reform may change some of the economies for American companies in terms of the profitability of different geographic locations.

The US president’s order may negatively affect US companies and even some medium companies of IT may even have to close down because hiring skilled talent in US may be much costly. Rvrn the companies may try to locate foreign professionals in US who are jobless but still they have to hire them at higher compensation as compared to outsourcing into India or China. The cascading affect is may medium scale companies may have to close down resulting in more unemployment in US itself. The desired policy intention remain far from realizing the objective.