Imagine this: you are sitting at your desk working to finalize the weekly status update. In walks the president of the company and says, “In order to increase our business, we are expanding overseas. I would like to send Jane Smith to Germany for three years. How soon can you make this happen?”
I’ll bet the questions that race through your mind are the same as every other HR manager tasked with sending employees internationally for the first time:
- Where do I start?
- What do I need to consider?
- What processes need to be in place?
In many organizations, the leap to having a globally mobile population starts in a similar fashion. So, what are the basic steps required to administer and support globally mobile individuals? The steps can be divided into the following categories:
- Establishing policies for a globally mobile workforce
- Formalizing the payroll process
- Selecting mobility vendors that can help you expand globally
Below are some of the issues facing HR and mobility teams and some actionable ideas that can be implemented to help.
Download our guide: The Foundational Steps to Establishing a Mobility Tax Program
Establishing policies for a globally mobile workforce
Before drafting a global mobility policy, consider the business needs of the organization and the benefits that will be needed to support the mobile employees. Examples of steps to take in preparation of creating a policy can include:
- Determine the assignment types needed (i.e., long-term assignments (generally defined as more than one year), short-term assignments, permanent transfers, remote workers)
- Determine the general compensation and benefits philosophy for each needed assignment type (i.e., balance sheet, local, local-plus)
- Determine the level of tax support for each assignment structure (i.e., tax reimbursement methodology, tax compliance support, education)
Oftentimes, the first global assignment for a company is a long-term assignment such as in the above example for Jane. For this type of assignment, many companies will utilize a “balance sheet approach” for the compensation methodology, along with “tax equalization” for the tax reimbursement methodology. The balance sheet approach provides certain compensation “up-lifts” to allow a mobile employee to maintain their Home-based purchasing power. Similarly, an employee under tax equalization is held to the tax burden that would have applied had they remained working in their Home location.
Use of the balance sheet and tax equalization approaches will allow an employee to:
- Receive sufficient funds that will enable the employee to maintain their current expenditure patterns, reasonably equivalent to what they would have had at Home
- Bear a similar tax burden to what they had at Home, neither paying a penalty nor receiving a windfall
- Have at least the same opportunity to save, as they would have had at Home
Various allowances may be paid to the employee to ensure a compensation package at the assignment location with an equivalent Home-based purchasing power. Paying separate allowances also makes assimilation back into the Home country compensation structure easier at the end of the assignment as these allowances are not included in the individual’s base salary and can be discontinued upon repatriation.
In addition, most companies maintain international assignees on their Home country benefits program. This is consistent with the temporary nature of the assignment. In this way, the employees maintain their current level of benefits and protect their ability to participate in retirement programs. It is important to work closely with your payroll and legal teams to consider any employment law (i.e., mandatory benefits) that may apply in the Host locations for your mobile employees.
Communication with your mobile employees will be key. At a minimum, an assignment letter detailing the compensation structure should be provided to the employee even if no global mobility policy has been formally established. By communicating with your employees, you can manage both corporate and employee risks, understand where your employees are working and what jobs they are performing, and ensure duty of care for your workforce.
Finally, in addition to your payroll, legal, and human resources teams, your corporate tax team should be kept in the loop so that your mobile employees do not inadvertently create unexpected corporate tax issues. Mobile employees present companies with a challenge to ensure their corporate tax position is reviewed and aligned with the mobility arrangement. Not only can a mobile employee have an impact on corporate tax obligations, but the corporate tax position may have an impact on the individual taxation of the mobile employee. Given corporate tax and global mobility are often separate teams, it is important to have frequent communication between the teams to share the information needed for a successful mobility strategy and to help build a policy.
Formalizing the payroll process
Once the type of assignment is decided, working out the payroll process will follow. In the example above, since Jane is going on a long-term assignment (3 years), the company will maintain her in the Home country payroll system and benefit plans.
By continuing to pay Jane out of her Home country, she will continue to have funds in Home country currency to pay ongoing obligations such as mortgage and credit cards. In addition, her payments to Home country social tax obligations (i.e., Social Security, Medicare) and retirement plans are consistent.
However, Jane may also need funds in the Host country currency. To accommodate this, the company may deliver a portion of the base salary and allowances in Host country currency. Note the location of payment does not, in and of itself, determine the taxability of the income. The company will need to review the payroll reporting and withholding requirements in the Home and Host location, as well as ensure compliance with local laws.
The cross-border payroll process is more complicated than that of a domestic employee. For example, in an international scenario, the company will need to:
- Determine the need for allowances to address incremental employee costs or necessary incentives, typically in the form of cash or benefits-in-kind (i.e., employer-provided housing)
- Establish procedures to advise employees of changes to their allowances
- Establish procedures to advise the payroll department of what to pay and when to pay it
- There may be specific cutoffs for processing payments
- Document all instructions to the payroll department in writing
At year-end, the tax provider preparing the employee's Home and Host country tax returns will request a summary of the various amounts paid to or on behalf of the employee. Payroll may be unable to provide detailed information for amounts paid in addition to base salary. To avoid a last-minute rush to accumulate information, it is important to meet with the payroll department as soon as possible to establish the infrastructure for international assignments. It is critical to determine the capabilities of the payroll system and establish an alternative method for tracking the information, if appropriate.
Selecting mobility vendors that can help you expand globally
The saying, “It takes a village…” is very fitting in the world of global mobility. It is very likely the following providers (among others) will be involved in Jane’s move to Germany:
- Immigration provider
- Language and destination services provider
- Mobility tax provider
- Payroll provider
- Relocation management company
While each of these service providers handles different aspects of your mobility program, they are all interlinked. Various providers should not only address the main issues you are facing related to their service but should also help you come up with ways to reduce costs and act as your educator for other challenges that can arise in any aspect of your mobility program. Find vendors who actively collaborate with your extended vendor team and work together to:
- Define cost saving initiatives
- Minimize time spent explaining the same information
- Provide strategic guidance and best practice ideas for ways to handle different areas of your program
Selecting the proper vendors to assist your organization can be a daunting and time-consuming process. To assist in the process, and to make it more manageable, consider reaching out to your professional network for references, checking with your local relocation council, or reviewing what relationships already exist within your organization. And keep in mind, the right providers will operate as an extension of your mobility team to help resolve problems and guide decisions.
While the above is not an all-inclusive process for moving your employees around the world, it can be used as a baseline – and don’t forget to seek help from your village. At GTN, our focus is exclusively on handling the tax challenges faced by today’s mobile workforce. Schedule your free, 30-minute consultation with an expert from our team to learn how we can help you expand your company globally.
