Tax Strategies and Hidden Costs of Employees vs. Outsourced Labor

Business Tax Advantages You’ll Want to Learn About Sooner than Later

Business Tax AdvantagesIn this progressively more competitive international marketplace, major corporations are evaluating potential business tax advantages of raising shareholder value significantly by establishing outsourced production processes. Outsourcing offers the potential to improve production greatly, but it is also fraught with risk. One of the greatest challenges involved is answering the question of whether or not to partner with onshore or offshore outsourcing firms.

Business Tax Advantages of Outsourcing

Offshore outsourcing means exporting work from the US to other areas of the world where lower labor costs or tax savings possibilities exist. In offshore outsourcing, the foreign-based firm will provide services for a US-based organization. By contrast, onshore outsourcing keeps business process within the US while utilizing a partner who supplies US-based labor and other resources.

Whether a company selects offshore or onshore outsourcing, the reasons for their choice are typically the same:

  • Reduce operating costs
  • Improve focus on core competencies and strategic priorities
  • Access world-class capabilities and cutting-edge technology
  • Re-allocate resources to higher-value use
  • Address limited resources
  • Accelerate transformation efforts
  • More effectively manage difficult functions

Before you determine whether to select offshore or onshore outsourcing, your company must fully recognize the ramifications of these two very different models, and select the one that best suits your unique strategic needs. This analysis should include a balance between performance, cost and risk objectives.

Onshore outsourcing providers have developed technology and automation to offset comparatively high labor structures. The technology-grounded model completes work in an effective and efficient way with smaller workforces, offering clients both automation and process transforming assets. Most Fortune 1000 firms spend 60% of their annual IT budget on maintaining legacy systems. An onshore outsourcing firm will provide access to state-of-the-art equipment, in addition to development and maintenance spread out across a broad client base.

Processes suitable for onshore outsourcing include processes that are highly dependent on manual labor, are vulnerable to human error and would benefit from re-engineering. Such processes, more often than not, require rigorous quality assurance standards and ongoing communication between the company, customers and suppliers.

Hidden Costs

It’s unusual for cost reduction not to play a role in the decision to outsource. Offshore firms do offer labor arbitrage. However, companies frequently ignore the hidden costs of long distance training, communication and travel. Establishing and maintaining long-distance business relationships can be extremely expensive and time-consuming. Onshore providers offer much lower costs in these areas. That, in combination with automation processes, delivers a more affordable total price structure that is very competitive, compared to offshore providers, with the additional benefit of a lower risk profile across the board.

Business Tax Advantages

Tax Incentives

The issue of tax benefits for outsourcing is a very controversial one. There are numerous loopholes and business tax advantages that can be found in any outsourcing plan. These are highly industry-specific, and are all extremely vulnerable to the winds of political change. At present, it is generally accepted that offshoring is somewhat more tax-friendly. In cases where this offsets other expenses related to travel and risk, offshoring can be a viable option. For firms that cannot handle the risks and travel costs as well, onshore outsourcing may be the most prudent option.

Vertical Market Expertise

A lot of companies opt for an outsourcing provider, based on extensive market expertise in unique process-required needs in a given industry. An offshore provider generally will focus on achieving maximum throughput from a given process. They place their focus on certain processes across a number of industry segments. Onshore providers, conversely, tend to position themselves in local markets as process experts in fewer vertical markets. They focus on developing services to address those specific segment needs. This often allows US-based onshore providers to offer even more sophisticated business transformation options to their client firms.

Business Continuity

Many companies are now having difficulty accurately assessing the many global, political and security risks.  These arise from using offshore workers and housing proprietary data with these firms. Some countries have imposed policies that limit intellectual property freedoms, and function amongst rampant economic espionage. Those countries that offer the most competitive labor costs are usually the ones who are still actively developing their political infrastructures.

Finally, there are issues of public perception to be dealt with. Many consumers frown on offshoring, as it can mean the loss of jobs in communities that they care about. If good public relations is an important commodity for you, then you should strongly consider not seeking an offshore outsourcing partnership. Weighing all of these factors carefully, itemizing the cost/benefit profile of each factor should go a long way to help you finally decide on whether to choose an offshore or onshore outsourcing partner.

For more information on the business tax advantages and implications of outsourcing, contact the professionals at Incompass Tax, Estate, and Business Solutions. Our tax experts are standing by now to help.

Categories: BUSINESS TAX STRATEGIES.