Summary of the 2025 HIRE Act

The 2025 HIRE Act would establish a 25% tax on “outsourcing payments,” which is defined to include any “premium, fee, royalty, service charge, or other payment” that is made during a trade or business to a foreign person with respect to labor or services, “the benefit of which is directed, directly or indirectly, to consumers located in the United States.”[2] “Foreign person” is defined to mean any person who is not a US person, other than any corporation or partnership organized under the laws of a US possession.[3] There are no exceptions for payments to foreign affiliates (e.g., shared service center subsidiaries located outside of the US).

In the case of “mixed payments” for services that only partially benefit US consumers, the proposed excise tax would be prorated so that the tax only applies to the portion of the payment that represents labor or services “directed to consumers within the United States” as compared “to all consumers” or, presumably, non-consumers or internal business functions.

The 2025 HIRE Act also provides that the new excise tax is not deductible, and any outsourcing payment within the scope of the new excise tax is also not deductible for corporate income tax purposes.[4]

Finally, the 2025 HIRE Act establishes the Domestic Workforce Fund, a trust fund that would collect the new excise tax and any associated penalties or additions for spending on workforce development, retraining programs, apprenticeships, and partnerships “to expand domestic employment in sectors impacted by outsourcing.” It may also be used for making grants to certain states for “workforce development initiatives” where there has been a high level of job displacement.[5]

Who would be affected

Groups or arrangements most likely to see material impact include:

• US companies with foreign vendors or service providers whose work relates (directly or indirectly) to services benefitting US customers. This is broad and could include many IT services, customer support or call centers, business process services for consumer-facing services, telehealth or remote clinical services for consumers, finance, and accounting services for US consumers.
• Foreign service providers who supply affected services. Contracts with US entities will presumably need to be repriced or renegotiated.
• Global Capability Centers, captive centers, or foreign affiliates that serve US consumer-facing operations.

Key implications

The 2025 HIRE Act raises several questions, including:

• How “benefit…to consumers located in the United States” will be defined and proven[6]
• The mechanics of mixed payments and how to apportion tax and cost
• Whether we will see potential carve outs for specific industries or critical services
• What anti-avoidance rules will look like in practice (e.g., via intermediaries, related parties, or value-added resellers)

These and other technical questions presumably will be addressed in greater detail if the 2025 HIRE Act proceeds in the legislative process. As of the date of this client alert, the 2025 HIRE Act is merely proposed legislation.

In the meantime, businesses should be aware that a truly seismic change affecting nearly all companies that leverage offshore outsourcing and multinational enterprises may be imminent. Both US customers and foreign vendors should begin assessing exposure and consider building flexibility into their contracts.

Special thanks to Shawn Helms and David Noren, who also contributed to this article.