Offshore Outsourcing - The Convergence of Immigration, Labor and Tax Issues

Recent government scrutiny underscores the importance of U.S. companies recognizing the immigration, labor and tax issues when relying on offshore service and technology companies. Infosys Limited, an Indian software and outsourcing company, recently confirmed that it is the target of a federal grand jury investigation. Infosys also disclosed that the U.S. Department of Homeland Security is reviewing its employment eligibility verifications on Form I-9 with respect to its employees working in the U.S. The investigations followed a whistleblower complaint that alleged the company arranged for its workers to obtain B-1 visas for long-term work engagements in the United States.

Any company that uses or owns offshore service and technology operations should be aware of potential immigration, labor and tax issues when relying on such operations. Companies with offshore subsidiaries providing onshore support should have appropriate controls in place to prevent improper use of B-1 visas to supplement its U.S. workforce or circumvent the more restrictive H-1B visa program. In addition, U.S. companies that have supply agreements with offshore companies to provide workers in the U.S. must consider whether it could be perceived as having been complicit in visa abuse by the offshore company.

Companies fitting this profile should be aware of several red flags that could subject them to unwanted scrutiny:

• Rendering services by foreign nationals on B-1 visas to a U.S. company;
• Payment of salaries by a U.S. company for foreign nationals on B-1 visas;
• Awareness of individuals obtaining a visa type that is inconsistent with the activities to be performed in the U.S.;
• Treatment of third-party individuals with H-1B and/or L-1 visas as employees of the U.S. company; and
• Particularly with Indian companies, the performance of certain services in the U.S. through its employees or other personnel for a specified period of time.

The starting point for any company should be a robust compliance program designed to prevent and detect visa fraud and related tax deficiencies. At a minimum, companies should adopt controls designed to ensure that non-U.S. persons have the appropriate visa type for the activities they will perform in the U.S. and that they do not exceed permissible activities. U.S. companies also should monitor services rendered in the U.S. by non-U.S. persons to ensure proper U.S. tax payment and reporting.

Aside from reputational damage, immigration and tax fraud carry significant penalties. Immigration related sanctions include civil and criminal penalties ranging from monetary fines to imprisonment. Moreover, foreign companies and their employees (and in certain instances, the U.S. sponsors) can be subject to significant penalties if they fail to timely pay U.S. tax and file the required tax returns and related disclosures with the Internal Revenue Service. Further, the failure to file a timely U.S. income tax return can result in the foreign company being required to pay U.S. tax on the corporation’s gross U.S. source income, without reduction for expenses and other customary tax deductions.

Planning and administering outsourcing to India, or any overseas destination, involves immigration, labor and tax issues that have continuing ramifications (See previous articles related to this topic from February 9, 2012). McGuireWoods' global Technology & Outsourcing team works with the firm’s experienced practitioners in these areas to identify potential exposure to the risks described above and would welcome the opportunity to help other clients establish or revise their policies to minimize those risks.