Taxing Situations for Expatriates

There are so many financial implications associated with sending employees onassignments in foreign countries that it’s a wonder companies send anyoneabroad. The cost of sending an employee overseas has been estimated to run threeto seven times that person’s salary, annually. In other words, if an employeemakes a base salary of $100,000, it can easily cost half a million dollars forthat person to take a position overseas–and much of the additional cost is taxrelated.

    Tax equalization, country-to-country tax treaties, income tax, and propertytax are among the myriad issues that must be addressed when an employee takes onan expatriate assignment, says Brenda Fender, director of InternationalInitiatives for the Employee Relocation Council in Washington, D.C. “Thecomplexity of tax laws for expatriates is unlimited,” she says. “Taxes canbe the largest cost associated with overseas assignments, and there is anendless variety of situations that occur.” The country of origin, the hostcountry, the length of stay, and the present economy are all factors in managingexpatriates.

    The most frequently heard advice from individuals who have handled the humanresources side of an expatriate project is to get outside expertise early on inthe process. That doesn’t mean asking your regular tax guy to get involved,Fender says. You need a company with experience handling taxes in the hostcountry and representatives in that country who can meet with your employees tohelp them handle their financial situation.

    You also should have all of the financial aspects worked out before employeesand their families get on the plane, warns David Kolb, partner at Global TaxNetwork, a tax services company based in Denver. “If you wait until they arealready abroad to address tax and other financial issues, it’s going to costyou a lot more than it should have.”

    The biggest cost–and headache–comes from the additional income tax in thehost country. Income tax is comparatively lower in the United States than inmost European countries, which means employees are faced with surprising taxburdens in their new assignments. Most companies use the tax equalization law to reduce thatburden. Through tax equalization, the employer withholds the amount of money theemployees would have paid in U.S. taxes from their paychecks, then pays all oftheir taxes in the host country.

    That typically adds thousands of dollars to the cost of the assignment, saysTim Lenneman, managing partner at Global Tax Network, but it’s just thebeginning of financial complications for expatriates. Beyond taxes, you need toknow how other cost-of-living increases will be handled, and who pays forhousing and education expenses. You don’t want to just boost the employee’ssalary, because it sets expectations for compensation when he returns to theUnited States, he says, but the employee still needs a package that puts him ina comfortable financial situation.

    To manage expectations, living, housing, and school costs are typically addedon to the employee’s base salary as allowances, but they still can count astaxable income, so it’s important to make educated choices, Kolb says. Whenyou work with a firm that understands the tax and financial situation in thehost country, you can find ways to reduce the burden. In some countries, forexample, if the company rather than the employee leases the housing, it’s nottaxable income. In Japan, a company can make a donation to a school in exchangefor free tuition to eliminate tax implications. “There are a lot of ways tomanage costs, and companies are motivated to find them,” Kolb says.

    However, it’s a tricky balancing act to find cost-saving measures that don’tbackfire, says George Doyle, president of Lexicon Relocation, Inc., a relocationsupport services company in Jacksonville, Florida. You want the best price butalso need to rely on the service. For example, you want your housing locatorabroad to find suitable housing for employees at a reasonable price. And youwant to be sure that the company delivering your employee’s household goodsgets them there on time so the employee’s family doesn’t have to live in a$400-a-night hotel for three weeks. “You need dependable relationships withpeople who have local knowledge,” Doyle says.

    You also want to be sure your employees have the financial guidance they needwhen they need it, says Lenneman. That means there is someone in their host citywho can answer their questions and help them deal with their financialsituations, whether it’s leasing a house or filing tax statements. It’s amatter of productivity and satisfaction, he says. If an employee is frustratedor feels abandoned in the host country, she is more likely to give up and comehome before the job is over. “The cost of a failed expatriate assignment ishuge,” he says.

Workforce, June 2003, p. 100-104 — Subscribe Now!