Do You Need a Mobility Tax Program for Permanent Transferees?

In the ever-evolving landscape of global mobility, the traditional landscape of long-term assignments has given way to a rising prevalence of permanent transferees. However, many companies have not established a formal mobility tax program for permanent transferees. Instead, a typical approach is to simply provide a cash stipend to the permanent transferee with the suggestion to use the funds to find a local tax provider to help them with their tax matters in their new country.

Although providing “cash” and then “forgetting” about the transferees can be inexpensive and minimize the administrative burden for the company, this approach can result in two key problems:

• Non-compliance by the employer or employee in either the Home country or the new Host country
• An unpleasant experience for the transferee as they move from one tax jurisdiction to another

In this article, we will explore these potential problems so you can determine if it would be beneficial for your company to expand mobility tax support for your permanent transferees.

Difference Between an Assignee and a Permanent Transferee

Let’s look at some of the key differences between an assignee and a permanent transferee. Assignments typically entail individuals being dispatched to a Host location for a predefined period (typically a period of up to five years), while remaining tethered to their Home country employer and retaining Home payroll and benefits. In contrast, under a permanent transfer scenario, the individual typically becomes an employee in the Host location, overseen by the Host employer who is responsible for payroll and benefits.

Many global mobility managers believe that a permanent transfer comes with less administrative tasks than a long-term international assignment, due to the fact that the employment relationship ends in the Home location. While that is partially true, there are still many employer tax issues to consider for transferees.

Employer Tax Challenges for Permanent Transferees

Moving expense reimbursements

To support employee transfers, it is common for employers to provide some level of financial support to assist the employee with move-related costs. For example, the company may cover all, or part of, the cost of moving household goods to the new work location.

From a tax perspective, some companies may rely on the assumption that all payments made on behalf of permanent transferees are taxable based only on Home country rules or the rules in the country where the payment occurred. However, there are risks associated with this treatment. For instance, moving expense reimbursements of up to GBP 8,000 may be excludable in the UK. However, the 2017 US tax reform eliminated the deduction/exclusion for moving expenses in the US. Therefore, a UK company paying moving expenses for a transferee to the US may either neglect to withhold, or withhold insufficient US tax, if relying only on the UK tax rules.

Relocation payments

Because of the complexity in global payroll reporting, we often see gaps in payroll reporting compliance for permanent transferees related to relocation payments, such as a lump-sum relocation allowance. Historically, companies often waited until the employee transferred to payroll in the new location before paying the relocation allowance. However, many transferees raised the issue that they needed the relocation allowance BEFORE they moved to help offset moving costs, not after the move was completed.

Accordingly, some companies have changed their approach to pay the relocation allowance prior to the move and will often utilize the services of a relocation management company (RMC) to pay the lump sum relocation allowance. Although the employee generally prefers receiving their relocation allowance prior to their move, there are two possible tax withholding issues with this approach that need to be addressed:

• The relocation payment may be taxable in the Home country if it is paid prior to the move. Even though the relocation payment relates to the move to the new tax jurisdiction, the Home tax jurisdiction(s) may have a right to tax the relocation payment if it is made while the employee is still a resident in the Home tax jurisdiction. This can result in potential double taxation (at worst), or a complicated reporting process (at best).
• The determination of tax withholding on the relocation allowance can create many challenges. Specifically, if an RMC pays the relocation allowance and the employee is supposed to receive the amount as a “gross” amount and then be subject to tax withholding, then how is the tax withholding determined since the employee is not on the payroll in the Host country yet? If the Host country is the US, then an estimated amount of US tax withholding can be calculated on a reasonable basis, as the US has relatively straightforward rules on withholding of lump-sum payments. However, if the employee is going to any location other than the US, the amount of Host country tax withholding can be very difficult to ascertain without the help of a mobility tax provider.

In some cases, there may be tax planning opportunities for the company to minimize the reporting challenges for lump-sum relocation allowances, but that discussion goes beyond the scope of this article.

Trailing tax liabilities on bonus and equity income

Permanent transferees sometimes receive payments after moving to the Host location that were earned during the period worked in their Home location. Common examples of income that can be earned in a period prior to payment include bonus and equity income. The company may have a payroll-reporting requirement for these payments in one or more locations.

Many transferees are removed from their Home country payroll system at the time of their transfer. Therefore, trailing payments are often only reported in the transfer country payroll. Unless the transferee is authorized for tax services in years subsequent to the transfer, it is unlikely that these trailing payments will be reviewed to determine if a portion should be reported on the Home country payroll or Home country tax return.

Understanding the taxation of equity income can be particularly challenging. Countries can differ in the timing of taxation for equity (e.g., grant, vest, exercise). These differences can result in the same equity income being taxed in two or more countries, with the potential for double taxation if foreign tax credits are not allowed.

It may be possible to uncover specific strategies to reduce or eliminate adverse tax consequences from equity income resulting from the transfer, such as:

• Realizing the equity income before or after the move
• Cancellation of awards/use of alternative compensation strategies
• Delaying or cancelling the transfer to the new location if the tax implications of equity income are significant

It is critical for companies to understand the income and payroll tax rules in the locations where their employee has worked. This way, a plan can be created to address any reporting or withholding requirements in the Home, Host, or other locations where the employee earned the income. A matrix summarizing the tax rules by applicable country is a good start in helping your company’s payroll team understand the requirements.

Employee Tax Challenges for Permanent Transferees

Relocating can be one of the most stressful events in a person’s life, and providing support, service, and guidance to those that are relocating is a major undertaking by global mobility program leaders. One major complexity faced by international permanent transferees is understanding and adhering to the complex tax rules and regulations in their new country.

To understand the tax challenges, consider what an individual may face when transfering to a new country:

• Breaking Home country tax residence
• Ending Home country social security contributions
• Suspending participation in Home country pension plans
• Possible taxation of previously tax-exempt income
• Possible new tax filing requirements (e.g., many countries do not require an annual tax return)
• Entering a new social security system
• Uncertainties around net pay in the new location
• Participating in a new pension plan and understanding the short- and long-term impact
• First-time exposure to stringent foreign asset declaration rules

The US tax system can be particularly complex for permanent transferees. For example:

• Anyone with more than $10,000 in foreign bank accounts needs to declare all their foreign accounts. Failure to do so can lead to penalties of 50% of the balance of the accounts or even jail time.
• Income from non-US investments considered tax-free outside the US may become taxable following a move to the US.
• Many countries allow for a tax-free sale of real estate; this is often NOT the case once an individual is in the US.
• The US has complex residency rules, especially in the first year of a transfer, which can have a large impact on the transferee’s US income tax liability.
• State income tax must be considered in addition to the federal income tax.

Providing Services to help Alleviate the Stress of a Permanent Transfer

There are often three key tax challenges that permanent transferees face when they are considering a move:

• Overall, what are the tax implications of this move?
• What will be my net take-home pay in the new location?
• How do I go about filing the applicable tax returns or other forms that may be needed?

It is a best practice to offer tax support for permanent transferees to address these three key challenges.

Challenge 1 - Overall, what are the tax implications of this move?

To address this challenge, companies can engage a mobility tax provider to provide the following services:

• Tax counseling session or “entrance meeting” for their new Host location to advise the transferee on their new tax responsibilities such as filing requirements, residency rules, state tax issues, and personal income reporting.
• Tax counseling session or “exit meeting” for their Home country to advise the transferee on potential tax planning opportunities.
• To allow for any potential tax planning, it is strongly recommended that both the entrance and exit meetings occur prior to the individual’s transfer to their new location.

Challenge 2 - What will be my net take-home pay in the new location?

To help with this challenge, the company may want to consider having a mobility tax provider prepare the following:

• A net pay estimate for the new country, including both income and social taxes
• A memo or sample calculations to illustrate the impact of the bonus and/or equity income being reported in both the Home and Host countries

Challenge 3 - How do I go about filing the applicable tax returns or other forms that may be needed?

Three key services often provided by employers to address this challenge include:

• Tax return preparation in the Home country for the year of the move to help ensure that any “departing” tax obligations are met.
• Tax preparation in the new Host country for the year of the move to help ensure that any “arriving” tax obligations are met.
• Potentially providing tax return preparation services in the year(s) after the move in the Home and/or Host countries to address ongoing tax implications related to the original move, particularly if there are trailing obligations related to bonuses or equity.

While the stress of an international transfer cannot be fully eliminated, mobility program leaders can help to lessen the burden on the transferee by showing support and providing services throughout the process. Providing tax assistance for the transferee can maximize employee satisfaction and will help to ease the stress the transferee and their family may be feeling.

Ensuring Successful International Workforce Management

While permanent transfers might seem to offer simplified administrative processes, it's crucial to recognize that the journey is not without its complexities. The interplay of tax regulations across Home and Host countries requires careful consideration. As we've explored, concerns such as reporting moving expenses and managing trailing tax liabilities on bonus and equity income demand thoughtful strategies. To navigate these intricacies successfully, companies must understand the interplay between tax rules in multiple locations and provide tailored compensation structures. By doing so, they can mitigate risks, foster effective global mobility, and pave the way for a seamless and compliant transition for their international workforce.

For personalized guidance in navigating the intricate terrain of global mobility and ensuring tax compliance, consider partnering with GTN. We are a leading mobility tax services firm, ready to assist your organization in crafting tailored solutions that address your unique mobility challenges. Schedule a call today with GTN's seasoned professionals who possess a deep understanding of international tax regulations and can help you formulate strategies to optimize your global mobility initiatives. A call with GTN will enable you to embark on a path of informed decisions and successful international workforce management.