How could the HIRE Act hurt the IT services sector

UBS warns that Senator Bernie Moreno's proposed HIRE Act, which seeks to disincentivize outsourcing by imposing a 25% tax and disallowing deductions on payments to foreign entities for U.S.-directed services, will likely weigh negatively on the IT services sector. The bank highlights that this legislation could accelerate AI adoption for service automation and poses significant revenue exposure for many firms, with some, like Tech Mahindra and Wipro, having over 30% of their U.S. revenues tied to affected categories such as Business Process Services, while also raising questions about the treatment of Global Capability Centres.

Analysis

According to a UBS research note, the proposed Halting International Relocation of Employment (HIRE) Act represents a significant headwind for the IT services sector. The bill, introduced by U.S. Senator Bernie Moreno, aims to disincentivize outsourcing by imposing a 25% tax on payments to foreign entities for labor or services directed to U.S. consumers, while also making such payments ineligible for tax deductions. This legislative risk compounds existing sector pressures from macroeconomic uncertainty and the disruptive potential of AI. UBS highlights substantial revenue exposure, citing Gartner data that Business Process Services (BPS) and application management account for 21% and 9% of the U.S. IT services market, respectively. Several firms, including Tech Mahindra, Mphasis, Wipro (WIT), and CGI (GIB), are noted as having U.S. revenue exposure exceeding 40% from these vulnerable categories. UBS also points to secondary effects, such as a potential acceleration in AI adoption to automate services and uncertainty regarding the treatment of Global Capability Centres (GCCs), which could alter the outsourcing landscape. This new threat adds to the sector's existing above-average risks, including macro sensitivity, high fragmentation, and substitution threats from cloud and AI technologies.

Key Decisions for Investors

• Investors with exposure to the IT services sector should immediately quantify the specific revenue and margin risks for portfolio companies, especially for firms explicitly named with high U.S. exposure like Wipro (WIT) and CGI (GIB).
• Monitor the legislative progress of the HIRE Act and any clarifications on its scope, particularly regarding the treatment of Global Capability Centres (GCCs), as this could create distinct winners and losers within the industry.
• Evaluate the AI and automation strategies of IT services holdings, as firms with advanced capabilities in these areas may be better positioned to mitigate the bill's impact and could represent a relative safe haven within the sector.