A new US Senate bill titled the “Halting International Relocation of Employment Act” or “HIRE Act,” introduced by Ohio Senator Bernie Moreno, proposes a 25% tax on payments made by US companies to foreign persons for labor or services that benefit US consumers (referred to as “outsourcing payments”) and prohibits companies from deducting any outsourcing payments in determining their taxable income. The proposed bill also contemplates partial outsourcing payments where the services rendered by the foreign service provider benefit consumers both within and outside of the United States. While the bill does not describe how US companies would perform the complicated partial payment analysis, the amount of the outsourcing payment subject to the 25% tax would be calculated based on the percentage of total fees paid to the outsourcing provider that are attributable to services directed at US consumers. Taxes collected on outsourcing payments would then be used to establish and support the “Domestic Workforce Fund,” which would provide workforce development and retraining programs, apprenticeship programs and partnerships to expand domestic employment, and grants to states for workforce development.

A “foreign person” is defined as “any person who is not a United States person, except that such term shall not include any corporation or partnership which is organized under the laws of a possession of the United States.” The bill also authorizes the Secretary of the Treasury to implement additional regulations and guidelines to prevent the avoidance of this tax through the use of related parties, controlled foreign corporations and other intermediaries, or through the use of transfer pricing arrangements. How a “foreign person” is defined will be critical for US customers to understand because US-based affiliates of foreign service providers are often the domestic contracting party to the governing services agreement (for important but unrelated reasons). Whether and how the implementing regulations instruct companies to handle payments made to affiliates of foreign service providers will determine whether this approach is also an effective mechanism to reduce or eliminate the application of this tax.

If the HIRE Act becomes law, it would greatly impact the costs of outsourcing for US companies at a time when the US continues to struggle with a significant shortage of domestic skilled technology workers. The imposition of this tax would undermine the traditional cost savings of labor arbitrage that often motivates companies to resort to offshoring. As a result, companies may choose alternative service delivery frameworks, including reshoring offshored services or increasing automation and internal capacity, where possible, to reduce the need to access foreign labor markets. As customers approach long-term outsourcing contracts, they will need to consider negotiating for exit or cost-shifting provisions that address changes in the regulatory regime that increase the cost of obtaining the outsourced services.  For example, many foreign providers are willing to bear the risk that tariffs might be imposed in the future on cross-border services. They also may be willing to assume the risk of similar costs imposed as direct taxes on US customers.

Foreign markets will also be impacted if the HIRE Act is implemented. Industry leaders speculate that a downturn in demand for foreign labor will result in additional costs being passed through to US customers who choose to use foreign service providers as a result of foreign headcount reductions and stalled onboarding of new foreign workers. Others fear that a slowdown in outsourcing will reduce innovation speed because outsourcing providers perform comprehensive innovation, continuous improvement and process efficiency services for their customers that often improve service delivery and performance for US consumers and end users.

The bill is still early in its journey to become law; however, its proposal alone has created a stir both in the US and abroad. As the bill moves through the legislative process, customers reliant on outsourcing should closely monitor its progress and consider the impact it may have on current outsourcing arrangements. Customers in the middle of negotiating or seeking requests for proposals for outsourcing services should carefully consider what contractual provisions may be necessary in their in-flight services agreements given the potentially shifting regulatory framework. If the bill is adopted in its current form, the tax would be applicable to payments made after December 31, 2025. 

See our prior Alerts about similar past legislative efforts: Outsourcing: Federal Legislative Roundup (2012) and : Top Issues Facing Retailers in the Trump Administration (2016).

About Hunton’s Global Technology and Outsourcing Team

Hunton’s Global Technology and Outsourcing team combines remarkable depth and breadth of experience on a worldwide platform. In any given year, the team works on multiple domestic, global, offshore and multi-shore sourcing and technology transactions with total contract value in the billions of dollars. We are well-versed in these issues, have guided customers through contract negotiations for decades, and are happy to assist you as you manage these developments.