The HIRE Act Analysis -Financial Impact on US-India Cost Centric Entities
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Blog Content Overview
AI Summary
The HIRE Act, proposed in the U.S. Senate, targets outsourcing by imposing a 25% excise tax on payments to foreign entities for services benefiting U.S. consumers. This tax, coupled with the denial of tax deductions for these payments, could raise the effective cost of outsourcing by 46% to 58% for U.S. companies. While currently just a proposal, the HIRE Act signals a shift towards discouraging offshore cost arbitrage. Indian IT service providers, heavily reliant on U.S. revenue, could face price renegotiations. The bill may impact captive cost-plus models and "flip" structures. Companies might explore alternative funding methods for Indian entities, such as equity or loans, but must adhere to Transfer Pricing and FEMA regulations. The Domestic Workforce Fund is proposed to be financed by the 25% outsourcing tax to boost domestic employment.
Decoding the financial impact on USA – India cost centre entities
Background
The Halting International Relocation of Employment (HIRE) Act was introduced in the U.S. Senate on October 6, 2025 by Senator Bernie Moreno (R–Ohio). According to Senator Moreno’s official statement, the bill was introduced to address decades of “globalist politicians and C-Suite executives” shipping “good-paying jobs overseas in pursuit of slave wages and immense profits.”1
What the Bill says:
Under the Bill2, The U.S. Internal Revenue Code would be amended to create a new Chapter 50B “Outsourcing Payments.” The key operative provisions, discussed below, introduce both an excise levy and a denial of tax deductions:
Outsourcing payment defined – The term ‘outsourcing payment’ has been defined as follows:
“The term ‘outsourcing payment’ means any premium, fee, royalty, service charge, or other payment made—
(A) in the course of a trade or business,
(B) to a foreign person, and
(C) with respect to labor or services the benefit of which is directed, directly or indirectly, to consumers located in the United States”
Imposition of tax – There is hereby imposed on each outsourcing payment a tax equal to 25% of the amount of such payment.
Additional no tax deduction – Section 280I provides that no deduction shall be allowed for such outsourcing payment
Domestic Workforce Fund: The bill creates a Domestic Workforce Fund in the U.S. Treasury, financed by the 25% outsourcing tax and related penalties which will support workforce development, retraining and apprenticeship programs to boost domestic employment in sectors affected by outsourcing.
Effective date: The amendments made by this Act shall apply to payments made after December 31, 2025.
Reporting and Penalties: The bill requires persons making such outsourcing payments to file returns providing details of these payments, with substantial penalties prescribed for failure to pay or report the tax correctly.
Conclusion: The HIRE Act proposes a 25% excise tax on payments by U.S. companies to foreign service providers benefiting U.S. customers, with no deduction allowed for such payments leading to additional tax cost of upto 58%.
What’s the current status?
As of the current date, the bill is merely proposed legislation and has not proceeded beyond the introduction stage.
While the Bill may still take time – or face dilution – it clearly signals a shift in the U.S. policy environment and reinforces a clear policy direction: offshore cost arbitrage seems under political pressure.
What does it mean for Indian back office service providers?
IT services, including hardware, account for $224 billion of export revenue, 62% of which comes from the U.S., according to estimates by Nasscom3.
A combination of the 25% outsourcing tax and the loss of deductibility (resulting in 21% federal tax plus applicable state taxes) would raise the U.S. client’s effective outsourcing cost in the range of 46% to 58% depending on the state in which the U.S. client is domiciled.
In the absence of any exemption for related-party transactions means even intra-group service payments may be caught and any captive cost-plus models and “flip” structures (U.S. hold-co with Indian delivery arm) would be also be exposed.
Independent service providers and consulting firms working with U.S. clients could face price renegotiations or slower new deal flow.
Illustrative Computation – Impact on a Delaware-Based U.S. Entity
Assume a U.S. company incorporated in Delaware engages an Indian firm for back-office support and pays USD 100,000 for services benefiting U.S. customers.
| Particulars | Amount (USD) | Remarks |
| Base payment to Indian provider | 100,000 | Contracted service fee |
| Add: 25 % Excise Tax (HIRE Act) | 25,000 | Payable by the U.S. entity on the outsourcing payment |
| Subtotal (cash outflow) | 125,000 | Service fee including excise duty |
| Add: Tax cost from non-deductibility – Federal | 21,000 | U.S. federal corporate rate ≈ 21 % → lost deduction on 100,000 |
| Add: Tax cost from non-deductibility – State (Delaware) | 0 | Assuming no business in Delaware, no corporate income tax in Delaware has been considered |
| Total effective cost | ≈ 146,000 | Combined impact of excise + lost deductions |
| Effective cost increase over base | ≈ 46 % | Compared to USD 100,000 base cost |
Result: A service engagement costing USD 100,000 today could cost nearly USD 147,000 once the HIRE Act applies.
Possible Alternatives to fund the India Co
Businesses might consider funding captive entities as equity investments or evaluating FDI or loan-based funding (ECB) as temporary alternatives to service fee flows. However, these approaches must be carefully assessed for Transfer Pricing and FEMA compliance, ensuring that transactions continue to reflect arm’s length principles and genuine commercial substance.
Disclaimer:
This note has been prepared by Treelife for general informational purposes only. It should not be treated as legal, tax, or investment advice. Readers are advised to seek professional guidance tailored to their specific circumstances.
References:
- [1] New Moreno Bill Would Crack Down on Outsourcing, Fund American Worker
↩︎ - [2] https://www.moreno.senate.gov/wp-content/uploads/2025/09/The-HIRE-Act.pdf ↩︎
- [3] Caught in the HIRE Act, Indian IT may lose its cost advantage – The Economic Times ↩︎
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Treelife
Treelife Team | [email protected]
We are a legal and finance firm with a deep focus on the startup ecosystem. We offer a wide range of services, including Virtual CFO, Legal Support, Tax & Regulatory, and Global Expansion assistance.
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