Taxing situations for expatriates

Workforce, June, 2003 by Sarah Fister Gale

There are so many financial implications associated with sending employees on assignments in foreign countries that it's a wonder companies send anyone abroad. The cost of sending an employee overseas has been estimated to run three to seven times that person's salary, annually. In other words, if an employee makes a base salary of $100,000, it can easily cost half a million dollars for that person to take a position overseas--and much of the additional cost is tax related.

Tax equalization, country-to-country tax treaties, income tax, and property tax are among the myriad issues that must be addressed when an employee takes on an expatriate assignment, says Brenda Fender, director of International Initiatives for the Employee Relocation Council in Washington, D.C. "The complexity of tax laws for expatriates is unlimited," she says. "Taxes can be the largest cost associated with overseas assignments, and there is an endless variety of situations that occur." The country of origin, the host country, the length of stay, and the present economy are all factors in managing expatriates.

The most frequently heard advice from individuals who have handled the human resources side of an expatriate project is to get outside expertise early on in the 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 host country and representatives in that country who can meet with your employees to help them handle their financial situation.

You also should have all of the financial aspects worked out before employees and their families get on the plane, warns David Kolb, partner at Global Tax Network, a tax services company based in Denver. "If you wait until they are already abroad to address tax and other financial issues, it's going to cost you a lot more than it should have."

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

That typically adds thousands of dollars to the cost of the assignment, says Tim Lenne-man, managing partner at Global Tax Network, but it's just the beginning of financial complications for expatriates. Beyond taxes, you need to know how other cost-of-living increases will be handled, and who pays for housing and education expenses. You don't want to just boost the employee's salary, because it sets expectations for compensation when he returns to the United States, he says, but the employee still needs a package that puts him in a comfortable financial situation.

To manage expectations, living, housing, and school costs are typically added on to the employee's base salary as allowances, but they still can count as taxable income, so it's important to make educated choices, Kolb says. When you work with a firm that understands the tax and financial situation in the host country, you can find ways to reduce the burden. In some countries, for example, if the company rather than the employee leases the housing, it's not taxable income. In Japan, a company can make a donation to a school in exchange for free tuition to eliminate tax implications. "There are a lot of ways to manage costs, and companies are motivated to find them," Kolb says.

However, it's a tricky balancing act to find cost-saving measures that don't backfire, says George Doyle, president of Lexicon Relocation, Inc., a relocation support services company in Jacksonville, Florida. You want the best price but also need to rely on the service. For example, you want your housing locator abroad to find suitable housing for employees at a reasonable price. And you want to be sure that the company delivering your employee's household goods gets 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 with people who have local knowledge," Doyle says.

You also want to be sure your employees have the financial guidance they need when they need it, says Lenneman. That means there is someone in their host city who can answer their questions and help them deal with their financial situations, whether it's leasing a house or filing tax statements. It's a matter of productivity and satisfaction, he says. If an employee is frustrated or feels abandoned in the host country, she is more likely to give up and come home before the job is over. "The cost of a failed expatriate assignment is huge," he says.

Small Firm Delivers Big Savings

Name: Ariba Inc.

Location: Sunnyvale, California

Type of organization: Developers of "spend management" software