The U.S. HIRE Act Explained: What Indian IT and Global Businesses Must Know (2025–26 Outlook)
A new bill in the U.S. Senate-the Halting International Relocation of Employment (HIRE) Act-is sending shockwaves through the global outsourcing industry. If passed, its proposed 25% excise tax could fundamentally reshape the cost-benefit analysis for U.S. companies using offshore services. This guide breaks down what the Act means for Indian IT giants, Global Capability Centers (GCCs), and international businesses preparing for 2026.
1. What is the U.S. HIRE Act?
The Halting International Relocation of Employment (HIRE) Act is a bill introduced in the U.S. Senate by Senator Bernie Moreno (R-Ohio) in September 2025. While not yet law, its introduction signals a serious policy shift toward economic protectionism.
At its core, the Act seeks to:
- Impose a 25% excise tax on “outsourcing payments” made by U.S. persons to foreign entities.
- Define “outsourcing payments” broadly to include service fees, royalties, consulting charges, or any payment where the work benefits U.S. consumers.
- Deny U.S. companies the ability to deduct such payments as business expenses, drastically amplifying the effective cost.
- Channel tax revenues into a Domestic Workforce Fund to support apprenticeships and job creation in the U.S.
- Apply to payments made after December 31, 2025.
2. Who Will Be Directly Affected by the HIRE Act?
The tax applies to any U.S. entity paying a foreign entity for services. The impact is wide-ranging:
- Indian IT Service Providers: Major players like TCS, Infosys, Wipro, HCLTech, and Tech Mahindra that contract with U.S. clients are on the front line.
- Global Capability Centers (GCCs): Captives in India that are subsidiaries of U.S. companies providing back-office, tech, or R&D support will be hit.
- Mid-size & Startup Firms: Any company providing SaaS support, data analytics, or BPO services from offshore locations.
- Knowledge Services: Consultancies and legal/accounting firms delivering services from abroad.
Indirectly, employees in India reliant on U.S. contracts and secondary outsourcing markets (Philippines, Eastern Europe, Mexico) will also feel the ripple effects.
3. What does “25% Excise Tax on Outsourcing Payments” Actually Mean?
Unlike income tax, which is levied on profits, an excise tax is a flat charge on the transaction itself. This makes it far more punitive.
Example: The Double-Hit
A U.S. insurance company pays an Indian IT vendor $10 million for claims-processing services. Under the HIRE Act:
- The IRS levies a $2.5 million (25%) excise tax on that payment.
- The U.S. company is also barred from deducting the $10M expense from its taxable income.
👉 The result: The U.S. company faces both an extra tax liability and a higher taxable income, making domestic hiring significantly more attractive, which is the policy's intent.
4. What if Services are Provided Across Multiple Regions?
This is where the “apportionment rule” comes in. If a contract supports both U.S. and non-U.S. markets, the IRS requires the payment to be split based on the portion of benefit accruing to U.S. consumers.
Apportionment in Action
A global IT contract worth $10M supports:
- 70% U.S. operations
- 30% European operations
The excise tax applies only to the U.S. portion: $7M → $1.75M tax. The $3M non-U.S. portion is exempt.
⚠️ The Challenge: Companies must prove this split with hard data (usage metrics, client locations, revenue allocations). Treasury has been directed to issue anti-avoidance rules, so simply writing “30% non-U.S.” in a contract won’t be enough.
5. Why is This So Significant for Indian IT Companies?
India accounts for nearly 60% of the global IT outsourcing market to the U.S. The HIRE Act directly strikes at the industry's core value proposition:
- Cost Competitiveness: Outsourcing may no longer be the cheaper option for U.S. firms. Analysts estimate a 40–60% increase in effective outsourcing costs.
- Contract Velocity: Renewals may slow as clients wait for legislative clarity and evaluate alternatives.
- Profit Margins: The financial model of Indian IT could be severely squeezed.
- GCC Models: Even captive centers aren't immune, as intra-group charges are classified as “outsourcing payments.”
6. How Will Global Capability Centers (GCCs) Be Impacted?
Many multinationals operate GCCs in India for IT, finance, HR, or R&D. Under the HIRE Act, these are not considered safe harbors.
- Payments from a U.S. parent to its Indian subsidiary for services will trigger the excise tax.
- Treasury will scrutinize intermediary structures (e.g., routing payments via a Singaporean entity) to prevent tax avoidance.
- Captives must prepare robust apportionment models and ensure compliance with transfer pricing rules.
In short, GCCs can no longer assume that intra-group = safe.
7. What Legal and Compliance Challenges Will Arise?
The Act introduces significant legal gray areas:
- Defining Benefit: Is an app developed in India but used globally "for U.S. consumers"? This will be a key point of contention.
- Apportionment Disputes: Companies will need defensible allocation methods. The IRS will likely challenge artificial splits.
- Documentation: Expect new reporting forms, officer certifications, and intense audit requirements.
- Treaty Relief: As an excise tax, not an income tax, it is unlikely to be creditable under existing tax treaties.
- WTO Implications: India may challenge the law as a violation of GATS Mode 1 (cross-border services), but WTO disputes take years and won’t provide short-term relief.
8. What Are the Possible Scenarios for the HIRE Act?
- Full Enactment (Jan 2026): The 25% excise tax and deduction denial are implemented as written, causing significant industry disruption.
- Amended Enactment: The bill passes with a lower tax rate (10–15%), sectoral carve-outs, or a phased rollout.
- Legislative Stall: The bill dies in committee, but the resulting uncertainty depresses contract renewals in the short term.
- Global Retaliation: Other nations explore reciprocal taxes on U.S. services or initiate WTO actions.
Most experts believe passage in its current form faces political hurdles, but the uncertainty itself is already reshaping client behavior.
9. How Should Indian IT Companies Prepare? (The Way Forward)
Proactive preparation is crucial. Companies should focus on five key areas:
- a) Contract Strategy
- Insert change-in-law clauses, tax-sharing provisions, and stepped pricing models. Add apportionment schedules backed by usage data.
- b) Delivery Diversification
- Develop dual-shore pods (small U.S. teams + large India back-end). Explore near-shoring to Mexico or Costa Rica to soften U.S. tax exposure.
- c) Compliance Readiness
- Build internal frameworks for benefit allocation documentation. Train tax and legal teams to anticipate IRS audit challenges.
- d) Board-Level Governance
- Run EBITDA simulations under multiple tax scenarios. Present clear, scenario-based impact reports to clients and boards.
- e) Advocacy
- Work with NASSCOM, U.S. industry associations, and chambers of commerce to lobby for sensible carve-outs or amendments.
10. Will This Impact H-1B Visa Programs Too?
Not directly. The HIRE Act is a tax law, not an immigration law. However, it aligns with a broader trend of tightening U.S. labor policies. With the H-1B modernization rule finalized in January 2025 and a wage-weighted selection system under review, the landscape is shifting. Together, these trends limit both offshore outsourcing and onshore staffing, pushing Indian IT to fundamentally rethink its global delivery model.
11. Example: A Real-World Scenario
Case Study: U.S. Retailer & Indian IT Firm
- Contract: A U.S. retail giant contracts an Indian IT firm for global e-commerce support.
- Value: $20M annually.
- Apportionment: 60% of users are in the U.S., 40% in the rest of the world.
- Tax Exposure: The taxable base is $12M (60% of $20M). The excise tax is $3M.
- Deductibility Loss: The full $20M expense is added back to the U.S. company's taxable income.
- Effective Cost Increase: Approximately 55%.
👉 The U.S. company will likely: demand price renegotiations, push for near-shore delivery, or seriously consider bringing the work in-house.
12. Final Word: A Strategic Inflection Point
The U.S. HIRE Act is not just a financial hurdle—it is a legal and strategic inflection point.
- For Indian IT, it demands contract reengineering, delivery innovation, and compliance rigor.
- For global businesses, it signals a new age of protectionist taxation, where the "benefit-to-U.S." is the controlling factor.
- For policymakers, it raises critical questions of fair trade and WTO compliance.
The path forward is clear: Companies that embed legal foresight into their contracts, diversify their delivery structures, and proactively shape client conversations will not only mitigate the disruption but also emerge as future-ready global leaders.
