There are those who love talking expatriate tax and there are those who don't. Whether you love it or not, if you are involved in managing a global mobility program, it is essential to have a solid understanding of expat tax.
So, my title was intended to get your attention, but the reality is that determining an expatriate tax policy is not an option. Selecting a tax policy method that works best for your expatriate mobility program is essential to effectively managing international assignments.
The 2016 KPMG GAPP survey revealed that 95 percent of companies have an expatriate tax reimbursement policy in place. To get to that point, companies have to answer many fun questions like:
- Do you want to tax equalize, tax protect or take a laissez-faire approach?
- How are you going to handle compensation elements outside of base salary? Items like incentive compensation, equity compensation and non-company income, etc.
- For how many years after the end of the assignment do you extend the tax reimbursement benefit related to assignments-related equity compensationto assignees?
- What's the basis of your policy's hypothetical tax and what do you include in thehypo-tax calculation in addition to federal/national tax? What do you allow for deductions and credits?
- When totalization agreements are available for the home/host country combination, do you apply for certificates of coverage for your assignees? And if no totalization agreement is available, what portion of the liability will the company pay (employer's portion, employee's portion)?
By now many of you have started to touch your nose, but take a few minutes to check out this article by ECA that really helps to break down some of the basics around tax equalization and tax protection, or head over to plusrelocation.com and check out some of our tax pieces.
Life would be very simple if tax rates were the same around the world, but in reality they vary from country to country. Also, when an employee goes on assignment, their tax liability usually changes. If the assignee becomes tax resident in the host country, their income will be subject to income tax there, regardless of where they are paid. At the same time, there may be continuing tax and/or social security liabilities in the home country if they remain tax resident there during the assignment. Remember that fiscal law determines tax residence, not the employee’s or employer’s choice.