The question concerns the strategy of Offshore Outsourcing, the
contracting of services that had previously been performed within the
US, either within the company itself or by another company located in
the US, to a service provider located in a foreign country. Offshore
outsourcing is attractive to many businesses in that it can lower the
cost of the service, thereby increasing the profit margin.
Legal issues of offshore outsourcing for services mainly involve
contractual terms of performance, liability, worker's rights,
applicable foreign taxes, etc. Tax issues in the U.S. are the same as
for onshore, but there could be taxes in the jurisdiction of the local
contractor/vendor that you will have to consider (depending upon the
country). Foreign taxes can be deducted as a business expense when
computing US Federal tax, of course. (There are some exceptions for
embargoed countries such as North Korea and Libya.)
Contractually, the country whose laws will bind the client and the
provider must be agreed. Usually, the basic contract should be written
with US laws in mind, but it is probable that certain legal restraints
imposed by the code of laws of the contractor's country must be
accommodated. The differences between legal systems and the provisions
of law must be taken into account. The client incurs certain
responsibilities to the contractor in some jurisdictions that would
not be recognized under US law. Also, the right to privacy that exists
within the US may not be protected in other countries, and even the
act of transmitting data from the US to a foreign country may vitiate
the domestic right to privacy in some circumstances. Moving data from
one jurisdiction to another places the data under multiple
jurisdictions, possibly creating vulnerabilities.
INTERNATIONAL and OFFSHORE OUTSOURCING
There is a difference between International and Offshore outsourcing.
International can mean nothing more than that a company with its
headquarters in another country acquires the contract to provide
services, while the actual service is still performed in the US.
Offshore means that the service itself is performed outside the US.
Legal Voice:
Contracting for International Outsourcing
by Brad Peterson and Mark Prinsley; Mayer, Brown, Rowe & Maw
http://www.offshore-outsourcing.com/contracting.html
http://www.mayerbrown.com/ventureandtechnology/pdf/intl_outsourcing1002.pdf
"International outsourcing occurs where a customer turns over
responsibility for a function performed in more than one country."
[...]
'"International” Not “Offshore"'
"It’s easy to confuse international outsourcing with offshore
outsourcing. Offshore outsourcing occurs when a customer turns over
responsibility for a function being performed in one country to a
service provider who will perform it in a different country. For
example, a customer in the U.S. might turn over application
maintenance to a service provider who will perform the work in India.
That work would most likely be performed under a contract between the
customer’s U.S. company and the service provider’s U.S. company. In
offshore outsourcing, the key issue is moving the work to another
country; in international outsourcing, the key issue is coordinating
outsourcing efforts where the work is performed in the original
country."
[...]
"Legal Systems
Each country has its own legal system. The legal system involves both
the set of
laws and the way that disputes are resolved. Dispute resolution tends
to involve
either courts or arbitration."
[...]
"Data Protection and Privacy Regulation
Part of the efficiency in an international outsourcing transaction
arises from processing data from one country in another country. In
the EU, the Data Privacy Directive restricts transfers of personal
data from a country within the EU to a non-EU country. The burden of
compliance with the EU Directive remains with the “data controller” -
generally the customer and not the outsource provider."
[...]
"More generally, the customer will be bound by the privacy laws of
each of the jurisdictions where it gathers data. As a result, the
customer must bind the service provider to adequately protect all data
from a country under that country’s laws, even if the data is being
maintained in another country."
[...]
"Labor and Employment Law
Every country has its own labor and employment laws to protect the
rights of employees. For example, U.S. lawyers familiar only with the
WARN Act might be surprised by the provisions of the EU Acquired
Rights Directive. That directive gives employees in a business
protection in the event of a transfer of that business – essentially
they transfer with the business on terms and conditions, which are in
most respects the same.
[...]
"Intellectual Property
Most intellectual property rights are national. For example, rules
dealing with ownership of intellectual property can be subtly
different from country to country. Great care needs to be taken with
ownership of intellectual property in materials generated during an
outsourcing engagement."
[...]
"Taxes
Structuring an international outsourcing transaction in a
tax-efficient manner requires careful tax planning by international
tax lawyers. Taxes may vary, for example, based on where services are
performed, the entities performing and receiving services, the entity
that acquires title to intellectual property created during the
engagement, whether intellectual property is assigned or licensed,
where invoices are rendered and paid, and how invoiced amounts are
characterized on the invoices."
Understanding Law - Staying Afloat When Going Offshore
http://www.optimizemagazine.com/issue/008/law.htm
"Legal tangles
In response to the unique legal challenges to offshore outsourcing, a
number of legal-structure options have developed. These include:
* Direct contract with a domestic supplier that has offshore
subcontractors or an offshore facility.
* Direct contract with a foreign supplier with onshore account
management and project-management teams.
* Establishment of a shared-services subsidiary to handle
administrative functions offshore."
[...]
"The contract terms for offshore outsourcing must take into account
the unique international political and legal issues, as well. Among
these are:
* Data privacy. Offshore outsourcing contracts must ensure compliance
with multiple laws."
[...]
"* Security. After the events of Sept. 11, virtually every new
outsourcing contract addresses the security of the physical facilities
that process remote transactions. Related issues include
business-continuity planning, contingency planning, and disaster
recovery.
* Intellectual property. Every offshore-outsourcing contract must deal
with intellectual property across multiple legal regimes."
[...]
"Also, while global legal pacts such as the Paris and Berne
Conventions and the World Trade Organization agreements generally
establish minimum standards for intellectual-property protection, the
degree to which governments and local-market participants enforce such
principles may vary."
[...]
"* Metrics. Performance metrics (service-level agreements) for
offshore transactions should cover parameters that might be considered
implicit in onshore operations."
[...]
"* International payments. Currency fluctuation is usually the
vendor's risk. It may be managed by forward-hedging contracts with
costs embedded into the pricing."
[...]
"* Risks. For classic business losses, insurance tools--standby
letters of credit, performance bonds, and indemnification--resolve the
problems. For political risks, currency inconvertibility,
expropriation, and nationalization of foreign service subsidiaries,
political-risk insurance may be offered by the customer's home-country
government or commercially."
Emerging Trends in Outsourcing: A Legal Perspective
http://www.outsourcing-journal.com/issues/jul2002/legal.html
"Negotiating a good single country outsourcing relationship is not a
trivial task. The agreement obviously must address service level
issues. It usually must address what, how and when personnel, assets
and intellectual property rights will be transitioned from the client
to the provider. It also should address how the outsourced function
may eventually be transitioned back to the client in the event that
the parties terminate their relationship. Outsourcing should be viewed
as a marriage; do not underestimate the importance of negotiating a
good pre-nuptial agreement."
Follow The Changing Laws
http://www.optimizemagazine.com/issue/008/law_side.htm
"* Regulatory protection of confidentiality. Even without invasive
surveillance, companies hiring offshore services must ensure that the
process does not cause violations of the Graham-Leach-Bliley Act on
financial information, the Health Insurance Portability and
Accountability Act of 1996 on health-care-related information, and FTC
regulations in the United States or the European Data Privacy
Directive."
[...]
"* International treaties. The World Trade Organization's rules on
services specifically exempt any confidential information that would
impede law enforcement, or be contrary to the public or business
interests.
[...]
The good news: WTO encourages nondisclosure of confidential
information, but there's no guarantee that such protection will be
granted."
"* Super-criminalization of certain business activities.
[...]
Anti-terrorist legislation such as the U.S. Patriot Act of 2001 might
require a supplier or customer to make disclosures of confidential
business information to U.S. legal authorities."
TAXES
FEDERAL
Publication 334
Tax Guide for Small Business
http://www.irs.gov/pub/irs-pdf/p334.pdf
"Taxes
You can deduct on Schedule C or C–EZ various federal, state, local,
and foreign taxes directly attributable to your business." (Pg. 36)
See also:
Publication 535
Business Expenses
http://www.irs.gov/pub/irs-pdf/p535.pdf
US Department of Commerce (DOC)
Office of Chief Counsel
http://www.osec.doc.gov/ogc/occic/
OTHER USEFUL LINKS
THE APOSTILLE: AUTHENTICATION OF OFFICIAL U.S. DOCUMENTS
http://www.osec.doc.gov/ogc/occic/apostill.html
FOR USE IN FOREIGN JURISDICTIONS
Foreign countries often require "official" documents to be
"authenticated" before such documents will be accepted in the foreign
jurisdiction. An "authentication" is a governmental act by which a
designated public official certifies to the genuineness of the
signature and seal and the position of the official who has executed,
issued, or certified a copy of a document.
In 1981, the Convention Abolishing the Requirement of Legalization for
Foreign Public Documents entered into force in the United States.
Under the Convention, signatory countries (including the United
States) agreed to mutually recognize each other's "public documents"
so long as such documents are authenticated by an apostille, a form of
internationally recognized notarization. The apostille ensures that
public documents issued in one signatory country will be recognized as
valid in another signatory country.
The apostille, which is a French term for "certification", is issued
by a designated government official of the country (or sub-national
government unit) that issued the document to be authenticated. The
sole function of the apostille is to certify the authenticity of the
signature on the document in question; the capacity in which the
person signing the document acted; and the identity of any stamp or
seal affixed to the document. The apostille either must be attached as
an annex to the official document or placed on the document itself by
means of a stamp. The form of the apostille is prescribed in the
Convention and is mandatory. (A copy of the form is reproduced.)
For the purposes of the Convention, "public documents" that may be
authenticated by an apostille include documents issued by judicial
authorities, including those emanating from public prosecutors, court
clerks, and process servers; administrative documents; and official
certificates affixed to documents signed by persons in their private
capacity, such as official certificates recording the registration of
a document, notarial authentications of signatures, etc. Documents
executed by diplomatic or consular agents, or administrative documents
relating to commercial or customs operations, may not be authenticated
by an apostille.
Authorities in the United States that are competent to issue
apostilles include the Authentication Office of the U.S. Department of
State; clerks of U.S. federal courts; and secretaries of state for
most U.S. states (for Alaska, Hawaii, and Utah: the Office of the
Lieutenant Governor). Diplomatic and consular officials at U.S.
embassies, consulates, or missions may issue apostilles in certain
circumstances when requested by a foreign governmental authority.
MODEL APOSTILLE
APOSTILLE
(Convention de La Haye du 5 octobre 1961)
1. Country : _____________________________________________
This public document
2. has been signed by _____________________________________
3. acting in the capacity of _________________________________
4. bears the seal/stamp of __________________________________
Certified
5. at ___________________________ 6. the __________________
7. by ____________________________________________________
8. No. ___________________________________________________
9. Seal/Stamp:
10. Signature:
_____________________________________________________________
For additional information, contact the Authentication Office of the
U.S. Department of State (202-647-5002), the Clerk of the nearest U.S.
Federal Court, or the Office of the Secretary of State in your state
capital.
Department of Commerce Contact:
Adam Bobrow
Attorney-Advisor
Office of the Chief Counsel for International Commerce
U.S. Department of Commerce
(http://www.doc.gov/ogc/occic)
Tel: 202-482-0937
Fax: 202-482-4076
E-mail: abobrow@doc.gov
FREE TRADE ACT
http://www.osec.doc.gov/ogc/occic/301.html
SECTION 301 OF THE 1974 TRADE ACT
Jean Heilman Grier
"I. OVERVIEW OF SECTION 301
Section 301 of the Trade Act of 1974, as amended (19 U.S.C. § 2411),
is the principal statutory authority under which the United States may
impose trade sanctions against foreign countries that maintain acts,
policies and practices that violate, or deny U.S. rights or benefits
under, trade agreements, or are unjustifiable, unreasonable or
discriminatory and burden or restrict U.S. commerce."
INTELLECTUAL PROPERTY RIGHTS
Overview of Intellectual Property Rights and the TRIPs Agreement
http://www.osec.doc.gov/ogc/occic/ipr.html
"I. What is Intellectual Property?
Intellectual property refers to rights in creations of the human mind
which arise under the laws of patents, copyrights, trademarks, trade
secrets, unfair competition and related laws. Article 2 of the
Convention Establishing the World Intellectual Property Organization
(WIPO) defines intellectual property as follows:
(viii) "intellectual property" shall include the rights relating to:
- literary, artistic and scientific works;
- performances of performing artists, phonograms, and broadcasts; -
inventions in all fields of human endeavor; - scientific discoveries;
- industrial designs;
- trademarks, service marks, and commercial names and designations;
- protection against unfair competition; and
- all other rights resulting from intellectual activity in the
industrial, scientific, literary or artistic fields."
OUTSOURCING LAW AND BUSINESS
http://www.outsourcing-law.com/newsletter/newsletter0602.htm
TAXES
http://www.outsourcing-law.com/taxation.htm
LEGAL SYSTEMS
http://www.outsourcing-law.com/legal_systems.htm
SEARCH TERMS
offshore outsourcing
international outsourcing
small business administration (search for outsourcing at SBA)
IRS publications business credits
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