The Tax Benefits of Outsourcing IT

by David Roberts; Updated September 26, 2017
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Outsourcing has been a controversy for several years in this country. Companies that outsource employment have long been demonized as anti-patriotic or un-American. But there are financial benefits for an American company to handle a portion of its business in another country. Outsourcing IT to places like India has long been a punchline of jokes against these companies. One of the financial benefits is the reduction in taxes on those outsourcing companies.

The Credit for taxes paid to a foreign country

The U.S. tax code allows American based companies to deduct the amounts they have paid in taxes to foreign nations. On a tax return it is called a Foreign Tax Credit. For many companies struggling with increasing labor costs here, this is a win-win proposition. First, they pay the foreign taxes on profits earned in the overseas location, then they report that income to the IRS and receive a credit on the taxes paid.

Lower Tax Rates

The United States has one of the highest corporate tax rates in the world at 39.3 percent in 2006. Only Japan is higher at 39.5 percent according to the Tax Foundation. Ireland's corporate tax rate is at 12.5 percent. Companies move offshore for IT, Human Resources, Manufacturing and more because they can save money based on the taxes they pay in those countries. Because they are able to deduct the foreign taxes paid on their American tax return, the companies essentially end up paying taxes at the lower foreign rate.

Reinvestment in Foreign Location

The American company has the option, or loophole as some have called it, to reinvest the profits made in the foreign country back into the foreign location. If the profits are never transferred to the company in the United States, the company is not required to pay taxes on those profits. These profits are used to expand overseas operations and remain not taxable by the IRS. The IRS calls this money, "Unrepatriated Earnings", and the total of unrepatriated earnings reaches well into the $600 billion range.

Savings on Payroll Taxes

For many corporations in the United States payroll expense represents half of their total expenses every year. Overseas companies do not have the employer contributions, unemployment taxes and the minimum wages that contribute to the large expenditure that it is in this country. Coupled with the literally thousands of people in other nations for whom a $7.00 per hour job would be a windfall, many companies see these tax benefits as more than making up for the negative publicity and the constant campaign against outsourcing.

Unique Nature of IT

Thanks to the internet and modern technology, IT support is just as accessible as support located in Seattle or New York. Remote access allows an IT professional on another continent to diagnose and in some cases, repair issues with computers without leaving their country. Since IT does not have the additional expenses of the manufacturing jobs that have been outsourced, the advantages both tax-wise and expense-wise are clear.

About the Author

David Roberts has been writing since 1985. He has published for various websites including online business news publications. He has over 11 years experience in tax preparation and small business consultation. He is also a Certified Fraud Examiner. He received a Master of Business Administration from Florida Metropolitan University in 2005.

Photo Credits

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