Offshoring refers to basing some of a company’s services overseas. It is essentially outsourcing certain aspects of one’s work to other countries. More people choose this method for increased cost savings, finding the top talent for a job, seeking different opportunities, and numerous other reasons. Countries like the Philippines, India, and the USA are attractive locations for offshore companies.
For many years, the impact of offshoring on the economy of the USA was debated. While some say that this method is harmful, as offshore outsourcing offers jobs not to locals but to foreign nationals, some say that it is an efficient system that helps companies and workers thrive.
This article aims to be an introductory guide for offshoring in the USA, overlaying the benefits of this practice and how it works.
- Outsourcing vs Offshoring: What’s the Difference?
- Why is the USA a Good Offshoring Destination?
- What are the Requirements for Offshoring in the USA
- What are the Advantages of Offshoring in the USA?
Outsourcing vs Offshoring: What’s the Difference?
Due to their similar definitions, outsourcing and offshoring may be confused with one another. So what are the differences between these procedures?
Outsourcing services involve third-party service providers. When a service is outsourced, it is entrusted to the expertise of another company/individual, often because the talent and/or equipment required to carry on certain tasks is not present in-house. These third-party vendors are outside the control of the home company. If a company outsources a part of its operations, this is called “business process outsourcing”. There are call centers that help manage BPO arrangements.
You can read more about outsourcing on our blog about outsourcing and remote work.
Offshoring, on the other hand, is a process of moving certain processes (manufacturing, accounting, etc.) to foreign countries. It is related to globalization and made possible through the developments in communication technologies. Offshore services offer a multinational working environment.
Outsourcing can be onshore as well as offshore.
Why is the USA a Good Offshoring Destination?
When it comes to offshoring, the social and economic incentives that point to the US are many. Even though it does not offer the lowest costs, it offers advantages with its infrastructure and potential investors. By offshoring to the USA, companies get easier access to the world-famous American market many famous US companies are a part of, which is an added advantage. The taxing system in the US is also beneficial, as it offers privileges to foreign investors.
To summarize, the USA is a leader in the world market that offers financial and social advantages.
What are the Requirements for Offshoring in the USA
There are 3 requirements companies need to fulfill in order to set up and run an offshore company in the US. These requirements are:
1. Registration with Federal Government
Whether you are offshoring for IT services, financial services, or even military services, registration is important. Since a division of your company will be operating in the US, you will need to follow local laws in order to not run into legal issues. There are different federal government departments for different kinds of companies. You must research which of these departments you have to contact in order to register your company under a
2. Registration with State Government
Due to the different jurisdictions in different states and in-state taxation, registering with the state government in the state your company is operating under is also important. Even though some states (Wyoming, Delaware, Oregon…) don’t require in-state taxing, this step is still important.
3. Registration With the Internal Revenue Service
If you set up an offshore company in the USA and open bank accounts outside of the USA, you will need to register with the Internal Revenue Service. Non-compliance with this rule will result in an IVS investigation and even penalties.
What are the Advantages of Offshoring in the USA?
- Lower labor costs. If some services are moved to foreign countries, service providers may spend less on wages. This will also mean lower costs of production, which decreases retail prices. This will have a positive impact on investors and shareholders, and it will also make goods and services more affordable for the public.
- Creates domestic positions. Just as sourcing some tasks that are lacking in-house helps companies focus on their core work, offshoring helps companies focus on creating more sophisticated jobs locally, since the other jobs are transferred overseas. Positions related to information technology, software development, research, and development will open up with the effect of offshoring.
- Helps find the top talent. If the talent required to complete a task is not present in one’s country, it is beneficial to look overseas. Outsourcing arrangements may bring you the top service independent of your location, and offshoring has a similar premise. With clear performance metrics in mind, employers may assess workers and services from different countries and choose from a wider talent pool.
- Flexibility. With a good human resources department managing the potential setbacks (communication, data security, privacy laws in different countries, etc.) arising from operating in different countries, advantages appear. Even though the contract terms and general work will be similar for different countries, other conditions may vary. This means that work done with offshoring will offer more flexibility.
- Helps other countries’ economies. By opening up positions in different countries, companies can help other countries’ economies flourish. A job that is undesirable domestically may not be so overseas. Offshoring and global outsourcing amend this situation. Moreover, with an improved economy, other fields also start to improve (healthcare, education, etc.) which in turn leads to more economic growth due to higher engagement with the market.
Offshoring is an arrangement that carries a part of a company’s work overseas. It creates new jobs domestically and internationally, helps companies find top talent, and increases cost savings. Although it has some disadvantages, these disadvantages can be managed with due diligence, correct assessments, and financial wisdom. The USA is an attractive country for offshoring that requires registration from federal and state governments.
If you are interested in outsourcing and offshoring, especially IT outsourcing, you are welcome to use our resources and services here at Gini Talent. From start-ups to more established institutions, we help companies find the top talent in the best place.
Please keep in mind that although this article aims to be informative on the offshoring methodology for the USA, it is not a substitute for legal advice. For more information on your individual cases, please refer to legal professionals or official government resources.