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:
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.
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.
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.
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:
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.
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:
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.
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:
The US tax system can be particularly complex for permanent transferees. For example:
There are often three key tax challenges that permanent transferees face when they are considering a move:
It is a best practice to offer tax support for permanent transferees to address these three key challenges.
To address this challenge, companies can engage a mobility tax provider to provide the following services:
To help with this challenge, the company may want to consider having a mobility tax provider prepare the following:
Three key services often provided by employers to address this challenge include:
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.
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.