MOSL: TECHNOLOGY-US tax reforms – A clause to watch for a section of IOPs-Companies operating via subsidiary model in the US may attract higher tax

​TECHNOLOGY: US tax reforms – A clause to watch for a section of IOPs; Companies operating via subsidiary model in the US may attract higher tax

• Senate Republicans have passed what is said to be an overhaul of the existing US tax code - USD1.5t tax bill over 10 years.
  
• One of the reforms is BEAT (Base Erosion Anti-Abuse Tax) - to deter US-based MNCs from shifting profits to lower tax jurisdictions.
  
• BEAT impacts IT services companies that operate under the subsidiary model in the US (TCS, HCLT, CTSH). The impact is unlikely on companies operating under the branch route, such as INFO and WPRO.
  
• Impacted service providers, however, can circumvent the impact in the medium term by gradually resorting to the branch mode of operations.
  
• If exemption to "Cost of Goods Sold" in the bill is applicable to Services too, then the impact will be negligible. However, clarity on that is yet to emerge. Meanwhile, Captives do not have a similar circumvent, which dents their attractiveness for now.
  
• Over the longer term though, the regulator's motive of reducing job outsourcing remains an overhang, even if the tax bill does not address it fully.