As you may already know, it can be very expensive to send an employee on an international work assignment. Housing, transportation, cost of living allowances, and dependent education are just some of the allowances that contribute to the high cost of an international assignment.
Depending on the duration and location of the assignment, the employee may also incur individual income and social tax liabilities in the home and host country. To assist the employee with the incremental tax cost, employers frequently provide tax equalization or tax protection. Further, to assist with the additional administrative burden of filing returns in two countries, most employers engage an experienced international assignment tax specialist to assist the employee with return preparation and advisory services.
When the company offers tax equalization or tax protection to the employee, the resulting tax reimbursement will become part of the assignment cost. In an era of cost cutting and budget control, it is more important than ever to know these costs in advance of a decision to send an employee on assignment.
Companies estimate the tax-reimbursement costs of an assignment in order to:
Estimate the cost of an assignment as part of a company project.
For example, if the company is bidding on a project, accurate assignment costs are important components of a profitable bid.
Compare tax costs between assignment types or assignment lengths.
Often, companies want to evaluate the tax and overall cost implications of the term or duration of an assignment. Tax cost projections can be prepared to compare the overall costs associated with a long-term assignment (typically more than one year in length) to a short-term assignment (typically no more than one year in length). This analysis would include a review of income tax treaties and alternative compensation packages that would be impacted by assignment length. It will help identify which assignment length provides the lowest tax cost for the company.
Evaluate the cost/benefit of tax planning opportunities.
As an example, a company may typically provide a housing allowance. Under current tax rules for some countries, if a lease contract is entered into by the employer, housing and related costs paid by the employer directly to a landlord may be treated as non-taxable for income tax purposes. Tax cost projections with varying assumptions can be prepared to identify the assignment cost differences and determine whether it is cost-effective to make a change to the typical compensation package.
Plan for tax-efficient compensation delivery.
In some countries, the nature of a payment as a cash or non-cash benefit can impact taxability. In addition, the structure of the manner in which the payment is made - such as home, host, or split pay can be reviewed to determine the impact on taxable compensation in the host location.
Budget for costs on an accrual basis over the duration of the assignment.
Many companies prepare detailed tax cost projections for budgetary purposes or for accruing assignment tax costs. These projections are helpful if the tax is paid in a year after the tax liability was incurred. When a host country tax assessment is not issued until many months after the company's financial year-end, the accrual is important in order to avoid a surprise when the tax bill arrives. Upon completion of a tax cost projection, the details should be provided to the finance group so the estimated costs can be accrued and charged to the relevant business entity.
How Companies Can Prepare
Various tools can be used to estimate assignment tax costs. Each projection is based on a series of assumptions. The accuracy of those assumptions will impact the accuracy of the projection. Thus, it is very important to understand and document these assumptions.
Common assumptions that can impact a tax projection greatly are:
Assignment length - Assignment length will impact the tax projection greatly. Treaty exemptions, taxability of allowances, and the availability of certain favorable tax exemptions or exclusions in both the home and host location all depend, in part, on the assignment length.
Cost-of-living allowances - Data providers update cost-of-living allowances regularly. The most recent available data should be used to make the projection as accurate as possible.
Salary adjustments - Employees may negotiate a pay raise connected to the assignment or their compensation package could change. Either of these salary changes needs to be reflected in the cost projection to ensure accurate accruals.
Changes in the home and host country tax laws - Changes in tax laws can have a big impact on the overall cost projection so it's important to stay informed of any changes.
Exchange rates - Exchange rates will impact the conversion of compensation between the home and host locations with a direct impact on the cost projection. The most current rates should be used to improve the accuracy of the projection.
The assumptions used when preparing a tax cost projection have a significant impact on the accuracy of the projection. Consulting with an international assignment tax specialist can help a company obtain more accurate cost projections. In addition, working with the specialist will typically allow a company to identify planning opportunities that might otherwise be missed if an off-the-shelf cost projection tool is used to prepare the cost projection.
Summary
Preparation of a tax cost projection should be an important component of planning for an international assignment and a key element to minimizing costs and avoiding surprises. Your GTN representative can provide more information about preparing tax cost projections for your international assignees.
Please also refer to the February 2015 Newsletter which addresses the Social Security tax costs in detail.
If you have any questions, please feel free to contact us at help@gtn.com.
The information provided in this newsletter is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.
Authors: Jennifer Stein, Managing Director & Sajjad Abadin, Manager
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