Virginia McMorrow

Most employers traditionally focus their expatriate tax policy around tax equalization whereby the assignee neither gains nor loses financially (with the exception of any incentives that the company may choose to offer an employee for accepting an international assignment) as a result of going abroad. But other options are available. Tax protection holds the employer responsible for tax liability if the assignee's income taxes are higher than what they would have paid at home, allowing the individual to keep any windfall when taxes are lower. And still others decide to follow a laissez faire approach, placing all responsibility for tax matters in the hands of the assignee.<br />

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To find out how employers are handling tax matters, as well as uncover those areas under policy review, ORC Worldwide conducted an expanded follow-up to a series of studies on employer practices on assignee tax. The 2008 Global Tax Policy Survey added expatriates from Germany, France, and Switzerland to the past studies of U.S., U.K., and Canadian assignees. <br />

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The Overall Approach</strong><br />

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Under tax equalization, the most common methodology, the employer typically withholds a hypothetical income tax, which is assessed against compensation at the same level as a home-country peer earning the same salary and with a comparable family size. In turn, the company is responsible for the tax assessed on the expatriate's company-earned income. <br />

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But some expatriates have extra income from investments (e.g., interest, dividends) and spousal employment. An important policy question is the extent of coverage, if any, to which this non-company-source income will be subject and, thus, equalized. Although some employers limit their coverage to company-source income, the survey reports a number of organizations that include a portion of outside income, typically handling equalization of such income as they do work-related income. For those expatriates with sizeable non-company income, the policy has implications for the tax burden on both the individual and the employer.<br />

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Crunching the Numbers</strong><br />

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Beyond a decision about which income (and what amount) to equalize, the employer must also decide on the methodology of calculating and applying a home-country hypothetical income tax. Variations on how to calculate this amount include using:<br />

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"       Deductions taken by the average home-country counterpart<br />

"       Deductions calculated with a fixed percent of salary applied to all income levels<br />

"       An average of assignee deductions several years prior to the assignment<br />

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The expatriate typically makes the payments to the appropriate tax authorities, with reim-bursement by the employer. Most companies offer some form of assistance in preparing tax returns by providing, at company expense, the services of experts familiar with international tax laws. Others go a step further and implement a tax reconciliation process.<br />

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Evolving Policies</strong><br />

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As a company grows more sophisticated in the field of international compensation and expands the number, type, and home-host locations of expatriates, the level and complexity of tax treatment may increase, as well. (See sidebar, "What New Policy Areas Are Under Consideration?) Many companies new to expatriation start out with the laissez faire approach and work up to either tax protection or equalization as their programs become more intricate, thus involving the company in the expatriate's financial situation. And that involvement demands experts - either in house or external - to keep up with changing home- and host-country tax regulations. <br />

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Source: ORC Worldwide's 2008 Global Tax Policy Survey<br />

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