“ObamaCare”: Promotion of Automation, Offshore Outsourcing and Job Losses; Penalizing Foreign Companies Based in Tax Havens (and Other Non-Treaty Countries)
Posted November 16, 2009 by Bierce & Kenerson, P.C. · 
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If enacted, President Obama’s healthcare reform would probably hurt domestic employment and accelerate automation, outsourcing and offshoring. It would change the economic incentives for keeping service industries in America. And it would hurt foreign-owned businesses whose ultimate parent company is based in a tax haven or other country that has no U.S. income tax treaty.
On November 6, 2009, by a paper-thin margin of 220 votes to 215, the U.S. House of Representatives passed the “Affordable Health Care for America Act,” H.R. 3962, the 1,990-page health care reform law that has been frequently called “ObamaCare.” If substantially adopted by the Senate and passed into law, the bill would impose significant new burdens on employers and self-employed persons.
Automate, Outsource, Offshore. As a result of the new mandatory taxes and/or health costs, American employers would be encouraged to automate processes, outsource many business functions to external service providers for more automation, and offshore many business functions. At a time when the U.S. unemployment rate is over 10%, this health care bill could permanently kill re-hiring in many service jobs that have been lost. It would encourage further globalization of American enterprises to establish foreign shared-service captives.
Taxing American Employers Encourages Export of U.S. Jobs. This version of ObamaCare would require every American citizen and lawful permanent resident (but not illegal immigrants) to enroll in a “qualified plan.” §§ 202 and 224. Every plan must be identical in coverages, except only for differences in co-payments and deductibles. § 303. If your employer fails to pay 72.5% of the cost of the “qualified plan” for individual plans (or a 65% share for your family coverage), your employer must pay an 8% payroll tax. § 412(b)(1). If you are the employer, your cost of hiring a U.S. employee would increase by at least 8% of the employee compensation. This would not affect independent contractors and consultants.
Part-time employees would be affected too. For part-time employees, the employer contributions are required in proportion of the average weekly hours of employment to the minimum weekly hours specified by the health insurance Commissioner for an employee to be a full-time employee. § 412(b)(3).
Small Business. Small businesses (with payrolls from $500,000 to $750,000 including owner salaries) would pay a lower tax in 2% increments for payrolls of $585,000 or more. § 413. If the small business has affiliates doing different businesses, they are aggregated for determining whether they get “small business” treatment. While small business might not consider offshore outsourcing, the House ObamaCare bill would encourage small business to automate and use independent contractors, staffing companies and outsourcing service providers domestically.
Taxation of High-Income Americans. The House ObamaCare bill would impose an additional 5.4% personal income tax on citizens and resident aliens earning $1.0 million per year (for married persons filing jointly), or $500,000 for individuals filing singly. This could be enough to encourage some high-earners to re-consider their personal tax planning and expatriation or non-residency for high-income years.
Hardships to Be Studied. The ObamaCare bill acknowledges that employer responsibility requirements may pose significant hardships. Yet it failed to take into consideration any special provisions for any employers by industry, profit margin, length of time in business, size or economic conditions (such as the rate of increase in business costs, the availability of short-term credit lines, and ability to restructure debt). Instead, the bill contemplates a future study of such hardships. § 416. The “hardships” listed do not include the impact of the ObamaCare system on the use of automation, outsourcing or offshoring.
Classification of Workers as Employees or Independent Contractors. The ObamaCare bill contemplates new regulations (in addition to existing tax and labor regulations) for “recordkeeping requirements for employers to account for both employees of the employer and individuals whom the employer has not treated as employees of the employer but with whom the employer, in the course of its trade or business, has engaged for the performance of labor or services” to “ensure that employees who are not properly treated as such may be identified and properly treated.” § 423(a). Existing regulations of the Department of Labor, the Internal Revenue Service and other agencies already address this issue. It will become a pivotal issue and encourage unemployed persons to set up new personal service companies or to work through staffing companies in lieu of permanent employment.
Individuals Taxed if Not Adequately Insured. For individuals who fail to purchase (or be covered by their employer’s purchase of) “acceptable” health insurance, the House bill would impose a federal income tax equal to 2.5 percent of a slice of income as especially defined in section 6012(a)(1)). § 501. Exemptions would apply to non-resident aliens, non-resident U.S. citizens, residents of U.S. possessions and religious conscientious objectors.
Collateral Targets: Foreign Business with U.S. Subsidiaries. Foreigner-controlled businesses would help pay for ObamaCare unless the controlling parent is in a treaty with a U.S. income tax treaty. The ObamaCare health “reform” would thus significantly increase the cost of doing business for foreign businesses that are not based in a country that has an income tax treaty with the United States. Amending U.S. federal income tax law (and bundling a tax provision unrelated to healthcare), the ObamaCare bill would require the U.S. subsidiaries of foreign-controlled companies to apply the normal 30% withholding tax on all deductible income paid unless an income tax treaty applies to the foreign-controlled parent company. “In the case of any deductible related-party payment, any withholding tax … with respect to such payment may not be reduced under any treaty of the United States if such payment were made directly to the foreign parent corporation.” Payments subject to withholding consist of passive income such as dividends, interest, rents and royalties. § 561, adding a new §894(d) to the Internal Revenue Code of 1986. The bill would apply to U.S. subsidiaries that are part of a “foreign controlled group of entities” that have a common parent that is a foreign corporation.
The U.S. currently has income tax treaties with 67 countries, including Russia, India, China and the Philippines. For the entire list, see http://www.irs.gov/businesses/international/article/0,,id=96739,00.html.
Foreign-controlled companies established in low-tax jurisdictions are targeted, including Aruba, Barbados, Bermuda, the British Virgin Islands, the Channel Islands (Jersey and Guernsey), Hong Kong and Panama. Formerly U.S.-based companies that moved their situs of incorporation from the United States to tax havens, such as Accenture did, will be directly affected.
However, the draft healthcare legislation would also have an impact on foreign businesses established in other industrial and commercial countries that provide significant levels of business process and IT services to U.S. enterprise customers. These countries include Brazil, Columbia, Costa Rico, Malaysia, Mauritius, South Korea and Taiwan. Companies in such countries that provide call center services, customer care and other remote offshore services would find that the cost of doing business in the United States is increased.
Conclusions. ObamaCare will cost American employers and American taxpayers. These costs will give a new comparative cost advantage to foreign service providers, assuming their ultimate parent company is based in a country with a U.S. income tax treaty.