In my -South American- country the trend is to look outwards if you're hiring remotely; European countries seem to fit this description too.
Some industries are heavily regulated in the US and having non-US based employees can become a real headache for US companies. A lot of US companies have background check as part of their hiring process, pretty hard to do for someone not US-based.
Also, if you target only the continental US you're already talking about companies that may be spread across 4 major timezones. If you start including Europe you're now dealing with people that are gonna be more than 6 hours removed from your HQ's timezone.
The employer needs to pay social contributions in the employee's residence country. And more often than not, the employee cannot just become a freelancer or incorporate a single-person company and bill only one customer, as this is considered disguised employment. So no, it's not necessarily trivial for an EU company to hire a remote worker somewhere else in the EU, unless they have a local presence already.
Every state has their own tax scheme. Every new employee in a new state is a big set up cost and ongoing maintenance.
[1] https://smallbiztrends.com/2018/04/remote-employee-complianc...
-- Yes, you can outsource most of the payroll-related headaches to someone like ADP but
-- There are still a lot of other state by state details that can't just be handed off to a third party and told "Make it so." It's not a particularly big deal for a larger company, but it can be a fair bit of overhead for a small employer adding a new remote employee in a state with lots of paperwork.
Then there's the potential for each employee's address to be considered a nexus, since each of their homes becomes a de-facto company presence. Potentially subject to local registration, licensing and taxation by local municipal authorities, in addition to just the state level requirements. If you have a presence in the state, and your employee's official work location is that location, then you only have to deal with that local registration once wherever the presence is located. But if you don't have a location the state, or you have employees who are officially designated as work from home (rather than unofficially working from home while being designated as assigned to an office), then this quickly scale into a giant mess of regulation to navigate[2].
[1] https://taxfoundation.org/local-income-taxes-city-and-county...
[2] https://smallbiztrends.com/2018/04/remote-employee-complianc...
No I don't think so. They look with within EU.
With respect to R&D, for example, the US no longer allows foreign R&D activities to qualify for the R&D tax credit.
From what I've seen, many companies will shoehorn regular product development into the R&D category. I'm not sure if it's supposed to cover next iteration of existing products that most company should be doing anyway.
R&D doesn't require something to be socially innovative; it's evaluated at a per-company level. It's intended to incentivize companies to recreate wheels in-house (if it is otherwise financially reasonable to do so).
It does not create a barrier to small companies. If you're not big enough to handle the paperwork for the R&D credit, you're not spending enough to derive meaningful benefit from the credit anyways. And generally, there exist plenty of accounting firms that will prepare the R&D documentation on a % basis (of the allowable R&D credit identified).
It also subsidises product development engineers - a profession that is doing well already
In the software world, sure. There are plenty of industries where product development staff (many of whom aren't engineers) don't make anywhere close to 6 figures.
Also, some states, like CA, are very unfriendly which regard to the extra costs required for employees in terms of benefits, wages (salary exempt) and classification of employees with the ABC test [1], so the wins that states make for employees incentivizes many employers to look elsewhere instead.
In a more remote work culture, even ignoring offshoring/nearshoring, this is going to be really bad for people in certain states. And it will be bad for those states themselves.
The increased competition among states to attract higher income workers will be interesting. States like Tennessee, North Carolina, etc have a massive opportunity in front of them as they were already pretty well poised to attract younger professionals.
This is exactly right.
People seem to think all these regulations are doing them a favor and increasing their freedom but what's actually happening in reality is pretty much the opposite.
It's now literally cheaper even after accounting for delivery risks to hire people from Tennessee, North Carolina, etc.
This explains why so much R&D happens in CA. Because it's too expensive to do it in this state...
The reason R&D happens in CA is because any company that wants to sell to CA is already going to be subject to CA taxation anyway, however they try to apportion their state income. If you develop R&D in another state and use that to sell to CA, you've just added an additional state to your tax compliance burden. Moreover, if you generate the R&D in say, Nevada, but the overwhelming majority of your income is CA sales, CA can (edit: changed from will) simply disregard your chosen allocation as fraudulent.
I did the R&D tax credit this last year and it seems to me the savings for offshoring would drastically make up for the loss in R&D tax credits in most cases.
This was true...before GILTI and BEAT were passed in the TCJA in 2017. It's no longer true. And as a downside, you must also contend with transfer pricing requiring your offshored entity to show a profit, and thus pay foreign taxes which likely would not be recoverable in the US under the GILTI regime.
I do know that certain countries limit what you can send them as far as $ each month as part of anti-money laundering regulations. And it's a pain.
What other implications are there? Is it because some of the offshoring countries force you to register there to conduct business?
Or is it because they want to create a separate P&L for tax and/or liability purposes? Or to park IP?
You don't need an entity to contract offshore, but if you're doing foreign R&D you're savings generally would be less than you would get back with the R&D credit. If for some reason your savings are greater with fully-offshored R&D, you need to ask yourself serious questions about why it's so much cheaper--including the likelihood that your R&D is being shared with the contractors' other clients if you're using an Indian or Chinese contractor.
You're also going to have IP valuation issues due to those risks, meaning that the IP simply won't be worth much, if anything, to a US or EU buyer, compared to the same IP generated anywhere by a subsidiary.
From a GILTI perspective, your IP is now foreign-generated IP, so you're looking at potentially paying the GILTI tax if you sell resulting products outside of the US.
There are additional legal considerations that apply to outsourced R&D development as well.
Additionally, the US company would have to abide by any local labor laws / tax laws in the country they are hiring in.
Depends on what legal structure they've established within the country where the employee resides (and the laws regarding such things).
If you're in Estonia and looking to hire a software engineer for remote work, maybe you end up hiring someone from Poland or Spain. That's still EU hiring in the EU, more akin to what you're referring to with the US. On average the smaller the country, it probably increases the odds that more of the labor you're looking for is going to be outside of your own borders.