With the passing of the ‘American Jobs and Closing Tax Loopholes Act’ in the House, the controversy over outsourcing American jobs is taking a new high. Should the bill be passed, it will have some drastic effects on how the U.S. is perceived as a trading partner, particularly in offshoring destinations like India and China.

Speaker Nancy Pelose was quoted as saying in CIO, “In this legislation, which is job creating, it closes the loophole which has allowed businesses to ship jobs overseas.  Can you believe that we have a tax policy that enables outsourcing?  So if you have one thing to say about this bill to your constituents, you can say that today, you voted to close the loophole to ship U.S. jobs overseas and giving businesses a tax break to do so.  It is not right.  It will be corrected today.”

The measures included in the proposal include the renewal of tax breaks that are expired – these are defined as the research tax credit, tax breaks that extend federal unemployment as well as deductions on state tax.

The bill proposes to close tax loopholes for firms engaged in offshoring and hence prevent jobs from being outsourced to Mexico or outsourced to India. MNCs typically resort to outsourcing, whether is onshoring, offshoring or nearshoring. As far as this tax bill is concerned, onshoring is an option that is supported by the bill, since it keeps jobs in rural U.S. states like Kansas. Outsourcing to this category of locations within the U.S. is a feasible option since the cost of living is less expensive when compared to major cities like LA or New York.

Despite the likelihood of the bill to pass in the Senate, there is a strong pull towards outsourcing as companies strive to decrease costs in the aftermath of a recession. There have been losses that were inevitable during the global economic downturn and firms will be looking to recover revenues during a potential economic rebound expected in the latter half of 2010.

Most of the work outsourced is still likely to go to offshore destinations like China, India, Philippines, and Brazil. Companies are no longer interested in performing tasks like IT and would rather focus on their core competencies. On the other hand, the bill might keep some MNCs from offshoring to faraway destinations like China and India and have them look for new opportunities at cheaper locations like Africa, which is waiting to tap into the dollar’s value.

Sander Levin (D-Mich.), the House Ways and Means Committee Chairman said that the bill is expected to keep American jobs in the U.S. and halt bypasses that assist companies in moving jobs abroad. The provisions to stall the tax loopholes are enacted to discourage abuse of the foreign tax credit system in the U.S. Initially, the foreign tax credit system was put in place to make sure that U.S. MNCs were not taxed twice. With the current act set for approval, the new legislation would dictate that $14.45 billion of loopholes in foreign tax credit would be stopped.

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