Expatriate tax calculations are highly complex and it’s critical that organisations get them right. Karalyn Brown explains the benefits of a number of approaches and looks at why many organisations often seek help in the area
Expatriate tax calculations are highly complex and it’s critical that organisations get them right. Karalyn Brown explains the benefits of a number of approaches and looks at why many organisations often seek help in the area
A globally mobile workforce has many benefits. International assignees may help fill gaps in skills or experience. Organisations can replicate best workplace practice or translate successful working culture. And experienced employees, promptly deployed, can respond with efficiency to a business emergency.
There are positives for the employee as well. Many assignees view international postings as a good career development move, a chance to improve their skills and increase their company knowledge, or as an opportunity to work in an exciting location.
There are downsides though. Expense is one, while providing benefits, allowances and relocation assistance all require resources and administration. Additionally, the cost of sending a senior executive on a long-term assignment overseas can be up to three times their actual salary.
How to handle expat tax
While there are some common approaches for international assignees, each with different tax implications, the reasons organisations adopt a particular approach are unique to their individual assignees and circumstances. Organisations may consider resources available in the host country, the stability of the country, its existing tax system, the reason for the assignment, the length of the assignment, what they want to offer the individual and why they want to offer it.
For the build up or expat approach the employee stays on the home office payroll. Changes such as living conditions and salary differentials are compensated for with extras, such as a cost of living allowance, housing and education assistance, medical insurance or a car.
An estimated ‘hypothetical’ tax on these benefits and allowances is deducted in the home country to pay in the host country. ‘Tax equalisation’ accompanies this approach and is intended to ensure that the international assignee is no better or no worse off for having undertaken the assignment.
‘Build up/tax equalisation’ can help with the repatriation of the assignee. They may not perceive they are being disadvantaged by coming home to lower compensation compared to what they may have earned in, for example, the US or the UK, where they may have been paid in line with foreign market conditions.
An alternative arrangement is ‘local engagement’. The employee becomes a tax resident of the host country. While there may be some crossover period which means the employee will need to submit two tax returns in their first year on assignment, the employee’s income and benefits are subject to the laws of that country. While it’s impossible to generalise given the individual circumstances, the advantage of this method is that it may be simpler to administer.
Organisations may also use this approach to train and develop the careers of their staff. The assignee benefits from gaining new skills and experience as they work alongside peers who they are paid in line with. They may receive limited benefits and allowances from their company, and therefore have fewer tax obligations as they pay their own tax in the host location.
Outsourcing and expat tax
According to a global KPMG survey of assignment policies and practices, 85 per cent of organisations sending staff on assignment outsource tax services for compliance reasons. Commonly cited reasons were “to gain access to the service provider’s global resource and expertise” and to “reduce administration so that HR can concentrate on core activities”.
Expatriate tax calculations are critical for any organisation to get right. Most organisations are choosing to partner up with a specialist – generally one of the Big Four firms that specialise in the area.
Many organisations will seek advice on payroll, remuneration and benefits and HR issues from a specialist. For the employee a specialist may provide taxation briefings prior to the assignment and on arrival, throughout the assignment. They may also help prepare tax returns.
So why outsource?
There can be severe legal and financial penalties for both the individual and company if organisations miscalculate their employees, and their own tax liability. Both the home and host countries may apply these penalties.
Taxation laws are highly detailed and change from country to country. Tax laws within countries will change over time and may be subject to changes in interpretation. And tax treaties designed to minimise taxation double-ups between two countries are often renegotiated.
Organisations need advice on the best and most economical way to structure salary, allowances and benefits packages. Outsource providers can ensure they take advantage of legitimate concessions in home and host country.
Whichever way an organisation chooses to structure the expatriate’s pay and tax status, a move overseas will change an employee’s tax situation. Staff, quite rightly, will question their financial position before accepting any assignment. Employees experiencing the emotional and psychological stresses of relocation, may place pressure on HR or any relocation specialist, to provide advice they are not qualified to give.
Income, benefits and allowance arrangements are individual arrangements and subject to the company’s international assignment and tax policy. Employees may also derive their income from many sources, not just the salary and benefits included in their packages. These may be subject to tax in the host country as well as things not traditionally taxed in Australia. So companies who have offered oversees postings need to ensure the individual understands their compliance obligations following the move.
Melbourne IT
Internet solutions provider Melbourne IT has eight offices worldwide and 200 staff. One third of their employees are located overseas.
Since last year Melbourne IT has relocated five senior people to the United Kingdom and New Zealand and has chosen to ‘locally engage’. They employ their staff in the local office under the employment and taxation laws of the host country. Employees they send overseas are provided with visa support, relocation allowances, four to six weeks accommodation and a return ticket home.
So why locally engage? “We felt it was simpler for the organisation,” says human resources manager, Rosalind Rixon. “There’s a huge range of tax issues, not just on income but on other things as well. Our business is small/medium and we may not be able to offer staff a role to come back to. But staff are fully briefed and understand what the implications are.”
In making the decision to locally engage, Melbourne IT sought financial advice from a firm that specialises in the area and considered their options.
“We looked at two models, the expat model or the locally engage route,” says Rixon. “We talked to other organisations. We talked to senior people and asked what worked for them. We looked at what worked for the company and what worked for the employee.”
Rixon also believes this arrangement suits their staff profile: “They are young, the career generation and are looking for career variety.”
Melbourne IT give their staff a full briefing backed up by literature to read before leaving. Departing employees receive letters of offer which emphasise the need for financial advice and HR and finance teams handle any questions that individuals may have. When appropriate they will provide their staff assistance with tax returns.
Employees have many questions around their assignments including where to live, what to expect in terms of the culture and visa issues, according to Rixon. As for finances, “it’s generally what they can spend their relocation on that will maximise the dollar value. There’s restrictions on what they can use their relocation on before they pay tax.”
Depending on circumstances Rixon will consider the expat model in the future but concedes they may need specialist knowledge within the finance and HR area. “We see the local engagement model as a clean transition,” she says.
Be warned – You may have a ‘stealth expatriate’
Two months in London, four months in Belgium and back for another three in the UK. Globally mobile employees are the new type of expatriate – the ‘stealth expatriate’– and are providing a headache for HR departments.According to a recent survey of 216 HR executives responsible for employee relocation, 78 per cent believe or suspect they may have a stealth expatriate on their books. Commissioned by Cedant Mobility and Worldwide ERC, the survey attributed the rise of stealth expatriates to a lack of understanding of global assignment programs (25 per cent), more efficiencies in bypassing HR (17 per cent), a perception that such expats are less costly (19 per cent) and an increase in the use of alternative assignment types (10 per cent).
Stealth expatriates, however, cause project delays and complications. HR executives say they are often found by chance within organisations (45 per cent) while 17 per cent said they were identified by tax and immigration providers and 15 per cent had special projects to identify such employees.
Despite the high levels of experience with stealth expatriates, 83 per cent of respondents indicated their organisations did not have systems in place to track or uncover stealth expatriates. “Even with growing awareness of the ramifications, taking the ‘stealth’ out of the stealth expatriate issue is not an easy task,” says John Arcario, executive vice president of Cendant Mobility.“The tools that can help companies track their employees, such as targeted policy support and online tracking and reporting, are effective only if the assignees are captured in the system.
Complicating the matter, companies are discovering that the origins of stealth expatriates are as numerous as the ways in which they are discovered, pointing to the difficulty in controlling the trend.”H. Cris Collie, executive vice president of Worldwide ERC, also said tracking assignments to avoid tax issues is the most troublesome expatriate area for HR professionals – falling to them about 90 per cent of the time. “As the stealth expat phenomenon and other types of non-traditional expatriate situations gain more focus, we expect companies to put more sophisticated tracking processes in place and improve communications between managers and departments to aid in compliance and build the optimal global workforce.”
