About 100 companies rely on PeopleSupport's two 24-hour call centers, one in St. Louis and one in Manila. "We call it St. Manila," says Rosenzweig. "All the clocks are on St. Louis time, and we have videoconferencing links between the two so clients that want to train their teams can come to St. Louis." Although run as one virtual call center, there is a significant difference between the centers: the approximately 150 customer service representatives in Manila cost a quarter of what PeopleSupport must pay the same number of reps in St. Louis.

With the economy in a downturn, Rosenzweig is betting that the popularity of offshore customer support will soar. To meet the demand, PeopleSupport plans to form an incubator service to help companies set up their own Manila-based call centers. "It is hard to justify a U.S.-only customer service location," says Rosenzweig, "because the cost savings [offshore] are tremendous, and the quality and retention levels are better."

Tim Reason is a staff writer at CFO.

Offshore Options

Ireland: Pros

• EU member
• Business-friendly government
• Corporate tax rate of 12.5% to be phased in by 2003
• High rate of multilingualism
• Excellent education system
• English-speaking

Ireland: Cons

• Victim of its own popularity, with rising labor and overhead costs
• Intense competition for
• Relatively small labor pool

India: Pros

• 12-hour time difference from U.S.
• East Coast ideal for round-the-clock work
• Huge labor pool
• Excellent education system
• English-speaking

India: Cons

• Distance from U.S. limits ease of site visits/training
• Some problems with physical infrastructure, particularly power

Philippines: Pros

• "American"-speaking
• Excellent education system
• Stable workforce

Philippines: Cons

• Some political instability
• Some physical infrastructure shortcomings

Russia: Pros

• Overbuilt, redundant infrastructure
• Inexpensive labor pool
• High number of PhDs and engineering degrees

Russia: Cons

• Labor pool has little or no business training
• High rate of business fraud
• Asset risk

Taxing Issues

In February, the European Union issued an unprecedented formal reprimand to Ireland's government, which was planning to boost its already skyrocketing economy through additional public spending. This isn't the first time the Emerald Isle has run afoul of its continental counterparts; the EU previously challenged targeted tax breaks to certain industries as unfair state aid.

Ireland's response? A plan that moves all industries to a standard corporate tax of 12.5 percent by 2003, eliminating the "state aid" objection. "Taxes are a sovereign issue for nations within Europe," explains Enda Connolly, director of IDA North America. "Europe cannot dictate the corporate tax rate."

"Ireland will offer one of the lower rates in EU countries," says Stephen Bates, a senior manager with KPMG's E-tax solutions group. That should keep the country a good bargain despite rising labor and real estate costs. But Bates and other tax experts warn that other tax issues also should be considered when shopping for an offshore location:

"Controlled Foreign Corporation" status. Offshore operations that are majority owned by U.S. corporations must be carefully structured to minimize the impact of CFC (also known as Subpart F) regulations that could make some of the entity's income taxable directly to its shareholders.

Value-added tax. "VAT rates can be in the double digits, and are always an extremely important consideration in Europe and around the world," notes Bates. For shared services centers and many other corporate support operations, "the entity can be structured so that VAT is avoidable or the cost can be mitigated," he says.

Withholding taxes. These are "a trap for the unwary," says Bates. Withholding taxes don't directly affect a decision about where to locate offshore operations, but they do determine which countries they can serve. For example, India might require a company subsidiary to withhold taxes from the fees it pays to a service center located in Ireland. "That could be a deal killer," adds Bates. "A lot of developing countries require withholding taxes for technology services."

Permanent establishment. PE is the international equivalent of nexus. That is, serving a customer subsidiary could establish presence, making the offshore entity liable for taxes in the customer's country.

Treaty networks. "Withholding rates are often reduced significantly by treaties" between countries, notes Bates, so companies should check both the quality and quantity of tax regimes. Treaties can also prevent tax on business income if there is no PE. —T.R.

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