Overview of the proposed HIRE Act
The HIRE Act proposes a 25% excise tax on payments made by U.S. companies to foreign persons for labor or services performed outside the United States. The tax would apply when the benefit of those services is directed—either directly or indirectly—to consumers located in the U.S.
Key provisions of the bill include:
- Excise tax: Companies would be subject to a 25% tax on “outsourcing payments” made to foreign persons for services benefiting U.S. consumers.
- Reporting requirement: Companies would be required to report “outsourced income” on a U.S. tax or information return
- No deduction: Payments subject to the excise tax would not be deductible for U.S. tax purposes.
- Penalty for noncompliance: Companies that fail to pay the tax would face a penalty of 50% per month, with no cap.
- Domestic Workforce Fund: Revenue from the tax would be directed to a fund that supports domestic workforce training.
- Timing: The HIRE Act would apply to payments made after Dec. 31, 2025.
The legislation, introduced in the U.S. Senate by Sen. Bernie Moreno, a Republican of Ohio, does not provide carve-outs for payments to foreign affiliates or coordination with other tax provisions, such as the base erosion and anti-abuse tax (BEAT). If enacted as initially drafted, some companies could face overlapping tax liabilities under both regimes.
The proposed HIRE Act: Definitions and scope
The bill defines a “foreign person” as: “any person who is not a United States. person, other than any corporation or partnership organized under the laws of a U.S. possession.” As initially drafted, the bill contains no exceptions for payments made to foreign affiliates.
Interestingly, the scope of payments the bill covers is quite broad. It defines “outsourcing payments” as: “any premium, fee, royalty, service charge, or other payment” that meets each of the following three criteria:
A. Made “in the course of a trade or business
B. Made “to a foreign person”
C. Made “with respect to labor or services the benefit of which is directed, directly or indirectly, to
consumers located in the United States”
The bill does not specifically mention wages or compensation as in scope, but it also does not exclude these items, so further clarification would be needed.
Likewise, the bill does not set forth any clear exceptions or exemptions under which the excise tax would not apply. It also does not address coordination with other relevant or applicable provisions of the Internal Revenue Code or tax treaty provisions.
It does, however, provide guidance for mixed payments for services for the benefit of consumers located both inside and outside of the United States. The rule would prorate outsourcing payments based on whether the work outside the United States benefits a consumer inside or outside the United States.
The bill would require U.S. companies to report the outsourced payment and the liability on a U.S. tax or information return. While the legislation does not specify what type of return will be required, it would likely be an IRS Form 720, Quarterly Federal Excise Tax Return.
HIRE Act: Implications for industry and jurisdictions
As drafted, the bill would apply across all sectors and could affect essentially any service being offshored including information technology (IT), front/back-office teams, customer support, design, research and development, and others.
Similarly, jurisdictions such as India and China, whose economies have clearly benefitted from companies seeking more cost-efficient labor and resource solutions, would be affected by the rules if passed.
The 25% tax and elimination of the related deduction (for U.S. corporate income tax purposes) would likely make outsourcing of work (as defined under the bill) more costly and less attractive for U.S. companies while significantly challenging foreign economies that have historically relied on U.S. outsourcing, such as India or China.
Consequently, many U.S. companies may be forced to reevaluate workforce planning models and supply chains to reduce reliance on offshore workers.
Coordination with U.S. federal income tax
The initial draft of the bill runs afoul of traditional U.S. federal income tax withholding principles governing cross-border payments to foreign persons as set forth under applicable provisions of sections 1441 and 861.
Under these rules, income paid by U.S. companies to foreign persons is generally subject to U.S. nonresident alien reporting and withholding at a rate of up to 30% only when it is derived from sources within the United States, such as when services are performed in the United States by non-U.S. persons.
Until now, services performed by non-U.S. persons at locations outside of the United States have generally not been subject to U.S. federal income tax withholding. Under the HIRE Act, fees or charges by non-U.S. persons for services performed outside the United States would be considered outsourced payments subject the 25% excise tax.
Implications for companies subject to BEAT
BEAT is a minimum tax imposed on large corporations to ensure that they pay tax on a minimum amount of income by adding back certain deductible payments (such as service fees, royalties, and interest) made to related foreign parties to their income.
Interestingly, cross-border service payments made to foreign affiliates could be considered both “outsourcing payments” subject to the 25% excise tax proposed under HIRE and “base erosion payments” subject to BEAT, which is set to increase to 12.5% in 2026. Thus, payments could arguably be subject to both taxes if HIRE is enacted as initially drafted; companies could face both a 25% excise tax under the HIRE Act and a BEAT liability if other deductible payments made to related entities satisfy BEAT thresholds.
Finally, the increased compliance burdens posed by the HIRE Act for companies that are already subject to BEAT and required to track related-party transactions could be significant.
Monitoring the HIRE Act’s difficult path forward in Congress
The HIRE Act, if enacted as initially drafted, could impose transformative change on U.S. companies making outsourcing payments as defined under the proposed legislation. It would require companies to consider crucial workforce planning efforts to prepare for changes abroad.
Moreover, several interpretational issues raised by the proposed legislation would need to be addressed if the bill advances further in Congress.
The bill is still in the very early stages of the legislative process. Enactment would require a number of factors, many of which are difficult to predict. While anything is possible, particularly as Congress approaches year-end with a potential openness to bipartisan legislation, it seems like an uphill climb at this point for the bill to move further in the current Congress.
Companies should continue to monitor developments.
