A well-calculated tax cost projection is a thing of beauty! When considering the costs of an expatriate assignment, there are some important reasons for getting the cost projection correct in advance. Most of the challenges involve either calculating the tax component correctly or incorporating quality planning at the start in an attempt to minimize the tax impact for the company and the employee. As taxes are among the largest expenses related to an assignment, companies should perform or outsource analysis around where tax is incurred and whether it can be reduced.
Jen Stein from GTN explains that companies:
1) Need to prepare an estimate at the very beginning, especially if and when clients will get charged for these costs.
2) Should consider the options by comparing the tax and overall costs of a specific assignment type and assignment length.
3) Should structure specific benefits in the most tax-advantageous manner - particularly when it comes to housing payments and per diems. Clients are sometimes surprised when increasing the housing allowance and reducing the cost-of-living allowance actually reduces the overall cost of the assignment.
4) Need to plan for tax-efficient and compliant methodology for compensation delivery.
5) Really should be budgeting for the costs on an accrual basis over the duration of the assignment.
See what else she has to say about exchange rates, salary adjustments, and changes to home and host country tax rules!
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