There is a very good (and big) reason that most companies utilize cost projections that are inclusive of the tax costs for every assignment. It is a rather large chunk of money that if not considered for each assignment would dramatically underestimate the total cost, not only for a specific assignment but for the entire program.
Consider these points from KPMG's 2018 GAPP survey:
- Controlling program costs was the third most important goal for international assignment programs.
- Income tax was the top most challenging compliance issue to address for programs when relocating employees across borders.
- Tax consultation is the function most frequently outsourced by corporate mobility programs.
- More than 90% of companies always do a tax cost projection at the beginning of every assignment inclusive of tax and social security costs and all allowances and benefits for the entire assignment.
In this article from GTN, Brett Sipes educates on three main approaches to do this essential task of accounting for the tax costs of an assignment:
- Full accrual method
- Partial accrual method
- Full cash method
Some of the things that might influence your decision are factors such as the number and locations of your assignees, the importance of budgeting for your company's business units, and the bandwidth of your accounting and finance teams. While he advises that there is no perfect methodology, he does suggest that the full accrual method may result in the most administrative work for the company as it requires upfront planning and tracking. He goes on to mention that the full accrual method typically helps the company minimize unanticipated adjustments to the expense account in years after the assignment period.
Which methodology are you using within your program?
Has your company ever been surprised by a large tax bill for a mobile employee?When a company sends an employee on a tax equalized assignment, the company agrees to cover the worldwide incremental tax obligations for that employee due to the assignment. Without proper planning and processes, the total costs for the company, or the timing of the tax payments, can result in some very unpleasant surprises.