Last week, US President Barak Obama’s tax policy reforms speech stirred a hornet’s nest with the whole global outsourcing business worried about its impact. Post the attack on tax havens and the talk of creating jobs in Buffalo, American multinationals are trying to figure out what to do next - to expand or not, in the low cost, high quality bases overseas or ship jobs to third-party providers such as Infosys, Wipro, TCS, HCL and others. On the other hand, local companies are trying to figure out what will work best - expand at home or open some centres in Buffalo, New Jersey or Ohio to assuage American feelings. The latter are more expensive than India but cheaper than New York, San Francisco or Silicon Valley.

The issue that the President is trying to address is actually the American tax code which impacts every American corporate from automotive to pharma, rather than just outsourcing. On the whole the President, while keen on creating more jobs in the US, wants to overhaul the tax code. He noted: "The American tax code is full of loopholes that make it perfectly legal for companies to avoid paying their fair share. It’s a tax code that makes easy for a number of individuals and companies to abuse overseas tax havens to avoid paying any taxes at all. And it’s a tax code that says you should pay lower taxes if you create a job in Bangalore than if you create one in Buffalo."

While addressing a larger problem, the President should understand why this whole business of offshoring started by US companies like GE and Amex took off in the first place. The business would never have started if the US had enough engineers and other skilled graduates to do the job, their cost structures were as attractive as those in India and if American multinationals had other alternatives to stay competitive.

Today the IT services companies, Indian or American, in cities like Bangalore, Hyderabad, Pune, Gurgaon do everything from complex engineering design services to updating healthcare records for over 500 global corporations, a vast majority of them American. If they had similar talent available, scale and cost opportunity that India provides, the business would not have grown more than 10-fold, as it has since Y2K.

The other issue of "US companies paying lower taxes by creating jobs in Bangalore" is as misplaced as a case of common cold being mistaken for swine flu by an over enthusiastic customs guy. For global companies offshoring work to third party players is an ‘expense’ and not a profit centre as in the case of a captive unit. President Obama is actually asking corporate America to pay tax on global profits which they have been evading by parking in tax havens like Cayman Islands, Mauritius and Luxembourg.

According to Silicon Valley Leadership Group, a Valley-based think tank, American IT companies HP, IBM, Cisco, Microsoft and Google lowered their tax bill by $7.4 billion last fiscal by not bringing profits back to the US. It has nothing to do with offshoring to Bangalore. Interestingly President Obama also noted: “a building in the Cayman Islands had over 12,000 businesses who claim this building as their headquarters!”

Indian industry will actually be delighted if the US government brings back profits of the US companies rather than have them parked in tax havens. It will - at least in the short term - give a boost to the third-party offshore companies and make captive units like those of GE, Intel, Amex and Microsoft less attractive. Though it may not lead to the curtailing of the captives since even after paying US tax, the offshore model - via captives or third party - is too attractive to ignore.

Also, while it might be a great idea to create jobs in the US, a lot of the migration of work via offshoring happens because the US does not have enough new engineers to meet all the demand. Besides, a S&P 500 research noted that 50% of the profit of US companies comes from outside the US and the growth of US multinationals outside the US is 2.5 times that in the US. Hence, a strategy to retain jobs in the US by curbing offshoring is not the answer to creating jobs in the US.

The $50 billion IT-BPO sector has about $25-30 billion worth of work coming from the US and employs about 2 million engineers and other graduates in India. Work comes to Bangalore and elsewhere in India because of low cost and good talent. It does not go to any tax haven be it Mauritius, Luxembourg or Cayman Islands as you can’t really do any IT-BPO work there. And very little actually goes to low-cost destinations within the US and near-shore destinations (like Canada, Mexico) as there are limitations on how much companies can scale up with the limited manpower they have.

Studies in the past by McKinsey Global Institute and others have also shown that every dollar of spending that US companies transfer to India, creates about $1.46 in new wealth, most of it going to the US companies. This is through cost savings to US businesses, repatriated earnings from offshore providers, and the additional economic output created when US workers are re-employed in other jobs. Even as the US figures out how best to create new jobs at home and tax profits of American companies, offshoring as a business proposition will continue to grow.