A federal grand jury investigation targeting an Indian software and outsourcing company underscores the potentially significant exposure for U.S. companies that use or own offshore service and technology operations. Any company with a foreign service or technology subsidiary, or that relies on a foreign organization for periodic services within the United States, should consider the immigration, labor and tax issues discussed below.
In its recent SEC filing, Infosys Limited (Infosys) confirmed that the company and certain of its employees are targets of a federal grand jury investigation being conducted by the U.S. attorney’s office for the Eastern District of Texas. This announcement comes after multiple reports that the U.S. Department of Justice and Department of State (DOS) are investigating Infosys for visa fraud. Infosys allegedly arranged for its workers to obtain B-1 visas for long-term work engagements in the United States, rather than H-1B visas which are harder and more expensive to obtain.
The Infosys investigation was prompted by a whistleblower complaint filed in Alabama in February 2011. It has since attracted the attention of federal lawmakers. In April 2011, Sen. Chuck Grassley of Iowa asked for a “thorough investigation” into the B-1 visa program and the use of that program to recruit workers who are not subject to the more stringent requirements of the H-1B program. In response, the DOS is in discussions with the Department of Homeland Security (DHS) to modify the B-1 visa guidelines. In India, consular officers in cooperation with the DOS’s Office of Fraud Prevention Programs and the DHS are closely scrutinizing B-1 visa applications to combat illegal work performed in the United States by foreign nationals holding B-1 status. The issues under investigation in the Infosys proceeding are not unique.
Immigration and Labor Issues
The B-1 visa allows temporary business visitors to come to the United States to conduct activities of a commercial or professional nature, such as consulting with business associates, negotiating a contract, attending business conferences or attending short-term training. B-1 visa holders are prohibited by law from engaging in employment in the United States. A temporary work visa (rather than a B-1 visa) is required to render services to a U.S. company.
An often-utilized temporary work visa is the H-1B. It authorizes foreign nationals to work in the United States in professional occupations. The H-1B visa program is governed by complex regulations intended to protect U.S. workers from unfair competition. It has restrictive requirements regarding wages, working conditions and benefits that must be provided to workers in this category. Currently, the number of H-1B visas issued each fiscal year may not exceed 65,000 (excluding certain H-1B visas, such as those issued to advanced degree graduates of U.S. universities).
Improper use of the B-1 visa category by organizations seeking to supplement their U.S. workforce or to circumvent the H-1B visa program rules may pose serious legal risks, including violations of the Immigration Reform and Control Act of 1986 with respect to workers who may be deemed to be de facto “employees” and employment eligibility verification rules (Form I-9).
The performance of services in the United States by employees of a foreign company can give rise to U.S. tax payment and reporting obligations, for both the foreign employer and its employees. In certain instances, U.S. companies that sponsor foreign persons also may be liable for the unpaid income and payroll taxes of the foreign employees. As explained below, these issues are especially problematic for Indian companies and their employees.
Under U.S. domestic tax law, a foreign corporation generally is subject to U.S. tax on income “effectively connected with a U.S. trade or business.” A foreign corporation may be engaged in a U.S. trade or business by reason of the performance of services by its employees in the United States. Also, the foreign employees may be subject to personal U.S. taxation on remuneration received for their U.S. services.
Tax treaties often limit or completely exempt a foreign individual or company from U.S. tax. For example, many tax treaties protect a foreign company from U.S. taxation except where the corporation’s activity creates a “permanent establishment” in the United States. The level of activity necessary to create a U.S. permanent establishment under some tax treaties is significant. Unfortunately, this is not the case with India.
Under the tax treaty between the United States and India, an Indian company will generally be considered to have a permanent establishment in the United States if, among other things, it performs certain services in the United States through its employees or other personnel for a specified period of time. Services rendered to an unrelated U.S. customer will not create a permanent establishment unless the services continue for 90 days within a 12-month period. However, certain services rendered to a U.S. affiliate may immediately create a permanent establishment and thereby immediately subject the Indian company to U.S. taxation.
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 (currently at 35 percent) on the corporation’s gross U.S. source income, without reduction for expenses and other customary tax deductions.
Planning and administering an outsourcing to India, or any overseas destination, involves immigration, labor and tax issues that have continuing ramifications. 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.