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Strategy

Article in IT Mag: Offshore and Taxation

Frédéric LASNIER
CEO & Chairman (Founding Partner)

The IT Mag asked the following question, whether “the role of taxation” played a role in regards to establishing an offshore outlet? Is this a criterion or not?

Certainly, any business, when considering whether to invest in a new country inquires about the taxation practices in this new environment. On the other hand, is the question of moving offshore solely a function of taxation? NO! An enterprise establishes itself offshore because it is seeking a cost reduction of production or possibly because there is a lack of resources available locally, what I call “capacity offshore” (especially between 2005 and 2008).
In the case of Pentalog, in terms of taxation, we simply followed the logic of our investment needs. We had big needs in Romania, we focused on our results in this country, and it is the same for Vietnam or Moldova.

However, systematically, the results go back to France, far beyond the actual income generated by the French teams, it is simply because our associates are shareholders in a French company, that we must be able to pay dividends, but also for FINANCIAL SECURITY.
The article indeed has forgotten one important point, an offshore outlet because of being established abroad is also exposing themselves to risk because of the currency exchange (rupee / dollar…), and even banking risks (Ukraine, Russia).

I do not therefore believe that the corporate tax policy should dictate whether an enterprise should take the decision to go offshore. However, once the site is offshore, the question can be asked in regards to the future needs of investment, and where are the profits coming from. It’s very different. It would be stupid, in fact, to be established in Germany and under their taxation laws while making a capital increase in India, and while corporate profits are predominantly derived from that country.

I do not criticize foreign states on their policy of low taxation, when major Western states implement the Research Tax Credit system, another weapon used to allow fiscal dumping.
The article mentions that the real decision to go offshore comes from the cost of labor. Who can argue the contrary when the skill levels are the equivalent to ours? But the payroll, too, is indeed affected by the tax policies of the country. The rate of the tax burden (income tax + social security) is a direct driver when calculating gross wage levels. The higher the taxes, the higher the gross wage will be asked for in return. In other words, as an offshore operator, I’m much more attentive to the impact of fiscal policy on my production costs than on the taxation benefits of my group.

Some countries, including Romania and Moldova, have been eager to play in the global market of offshore companies; they established a system of total income-tax exemptions for offshore developers.

The expectations from this type of policy decision were twofold:

– Lowering the level of salary expectations related to the social charges

– Encouraging nationals to remain in the country, thanks to this tax benefit. I must say that the latter has had a positive effect of reducing the difference in purchasing power between the local people and their offshore colleagues from the west.

All stakeholders have benefited from this system. However, many of these countries, have become increasingly more indebted, and seeing their tax revenues melt like snow, have started to eye this tax haven, which promoted better paid professionals rather than paying the national average. As of 2010 this could well be the final year of such devices for excluding IT developers from being imposed. Companies in this context of economic crisis, may not be able compensate at the net, it is virtually certain. The purchasing power of an IT in emerging countries could, in this context, see their first year of decline since the beginning of this offshore movement.


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