Title

Legal And Tax Considerations In Outsourcing

Abstract

Outsourcing is not new; it is as old as the ancient trade routes to China and India. Trading with the East provided the produce and products that were not farmed or manufactured in the West. Although it involved physical products, support services, such as banking, brokering, and logistics, were required on the global scale to make the trading easier. The consumers, traders, and producers started relying on other parties to perform those services; thus begun services outsourcing. While individuals and organizations can perform some activities themselves, they rather have those activities performed by others, because others can do it better and/or cheaper. As Adam Smith put it, "it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest" (Smith 2000, p. xviii). The roots of modern day outsourcing are in subcontracting, joint ventures, and strategic partnership. As products became complex and componentized, manufacturers started subcontracting individual components to external organizations. Subcontractors enhanced the subcontracted components thorough process and product innovations and increased dependence of the manufacturers on them. The two sides, being dependent on each other, entered into joint ventures and strategic partnership to ensure long-term relationships and pre-empt potential competitors. The development of efficient transportation and logistics systems on the global scale fueled this process. In 1970s and 80s, routine manufacturing activities started being outsourced to companies in East Asian countries such as Japan, South Korea, Taiwan. With the development of information technology and voice/data communications infrastructure on the global scale, it has become possible now to outsource routine service activities, such as IT/IS development and business processes, to the companies, both onshore and offshore, that can perform those activities with equal quality but in a much more cost-effective manner. International Data Corporation predicts that the worldwide market for offshore IT software and services will increase annually by 20% from nearly $7 billion in 2003 to $17 billion by 2008 (IDC 2004). The key areas for IT outsourcing would be the custom applications development, applications management, data center administration, and systems integration. Recently, we have seen growth in business process outsourcing (BPO) and knowledge process outsourcing (KPO). Offshore outsourcing of business processes is expected to quadruple to $64 billion by 2007 (Frank 2005). According to NASSCOM, the global KPO industry would grow at the annual 46 percent rate to become worth $17 billion by 2010 (CIIOnline 2005). The protection of legal rights in outsourcing, specifically in the offshore context, has been one of the top concerns of business executives (Tapper 2004). Outsourcing without complete understanding of potential legal and regulatory pitfalls in heavily regulated industries and foreign jurisdictions can expose organizations through their outsourcing partners to regulatory sanctions and legal liability. Therefore, when organizations enter into outsourcing arrangements, whether onshore or offshore, they should consider legal and tax issues in addition to the business and management issues they typically consider. It is crucial for both parties involved in an outsourcing transaction to examine issues related to industry specific regulations and foreign jurisdictions that potentially affect the transaction. While a lot has been written about business and management issues in outsourcing (Ilie and Parikh 2004), very little has been written about legal and tax considerations in outsourcing (Brody et al. 2004; Miller and Anderson 2004). In this chapter, we discuss legal and tax implications in outsourcing, with a specific reference to offshore outsourcing with Indian companies. The purpose is to provide better understanding of the legal and tax risks involved in outsourcing and ways to manage them.

Publication Date

12-1-2006

Publication Title

Information Systems Outsourcing (Second Edition): Enduring Themes, New Perspectives and Global Challenges

Number of Pages

137-160

Document Type

Article; Book Chapter

Personal Identifier

scopus

DOI Link

https://doi.org/10.1007/978-3-540-34877-1_6

Socpus ID

84878560641 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/84878560641

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