Taxing situations for expatriates

Workforce, June, 2003 by Sarah Fister Gale

Haynes advises anyone shopping for a foreign tax firm to make sure the service they get is worthy of the fee. "That means access to an expert when you need it, customized plans based on your company's policies and needs, and detailed invoices that show you what you are paying for," she says. "If you are not getting that, there are alternatives."

Cutting Costs by Training Local Talent

Name: CH2M Hill

Location: Denver

Type of organization: Engineering design firm

Number of employees 11,000

Of the more than 1,000 employees that CH2M Hill has working in 20-odd countries, only 4 percent are U.S. expatriates. "It wasn't always that way," says John de Leon, vice president of international human resources. "The number of expatriates in proportion to the size of the company has gone down dramatically in the past five years." For example, in 1998, they had 10 non-Spaniards in their Spain office. Today there are none.

The drop is intentional and it happened for several reasons, he says. "We've had re sounding success developing local talent to run our businesses," which has always been a goal. "Nationals understand the culture and language better than expatriates, and they cost a lot less."

Expatriate salaries are usually higher than those in the host country, and the extra costs that go along with foreign assignments drive up the pay-package price considerably. That's not to say de Leon won't send a U.S. employee abroad. "The first challenge in filling a job is always to find the best person." If the talent can only be found in the United States, his goal is to find someone who can work well cross-culturally and transfer the skill set to the local workforce.

Once someone has been assigned, there are three major cost categories in addition to the base salary that de Leon has to manage. Taxation is the first and typically most expensive. In most cases, CH2M Hill offers expatriates tax equalization to sweeten the deal. It adds a lot to the cost of the assignment but makes the transition easier, de Leon says. For example, expatriates in Germany may incur twice the income tax they would in the United States, and they are taxed on their housing and cost-of-living allowances as well. Even the tax payment becomes taxable when the company covers it, he says, which adds to the complexity and growing costs. "This financial snowball effect is a great incentive to make sure we really need to fill the position with an expatriate," he says.

He uses a tax firm that specializes in handling expatriate assignments to manage these issues, and says that the most important thing to look for in a tax services provider is customer service. He finds that shopping around for service providers and building relationships with multiple vendors gives him a sense of comparison and competition. "It's easy to determine if a tax firm has expertise and access in the host country," he says. The differentiator, he says, is whether they are accessible and communicate well with your employees, explaining the tax situation in terms they understand. "Foreign taxation is so complicated that the level of communication is critical. You want someone who has an empathetic attitude, who can understand the human side of the tax situation as well as the technical aspects of it," de Leon says. "When employees have someone like that to help them, they will be more productive and they will see that the company cares about them."