Expat Lump Sums – Trap or Panacea?

Author:
Mary Lou Stockton – Global Tax Network

A US company sends an employee on assignment to the UK.  The company informs the employee that they will pay X amount for his UK housing.  The employee wants to spend more, because he wants a larger, nicer flat.  He feels the allowance is not enough for the type of flat he wants considering his family needs, including the fact that his wife wanted to live near other Americans.  

The HR Director works with the business manager to determine whether the company would pay more in this case.  The employee is told that he will have to reimburse the company for excess housing cost through payroll.  The employee contends that he should get a tax deduction on his hypo tax for the excess housing that he funded.  The issue went to the tax accountant and finally to the company VP for resolution.  The VP asks why he is being asked to resolve assignment allowance issues and tells HR that they should “handle it”.  The HR Director considers transferring to something less complicated, like nuclear engineering or cell biology.

It does seem expats take a disproportionate percentage of HR’s available time, and require much more administration than one would expect.  The trend in HR today is towards “self-service”.  Why do we need such detailed and centralized control of assignment expenses and allowances?  

Why can’t I just give assignees some extra money to handle the costs of an international assignment?

Employers sometimes use a “lump sum” approach in addressing the additional costs and burdens that international assignees face.  Managed right, this can reduce some of the administrative burdens associated with the expat program.  The employee gets the extra cash that the company was going to spend anyway, and the company is not responsible for negotiating and managing costs at a micro level.

However, lump sums are not always the panacea employers expect.  There are some added risks to consider with the lump sum approach:

• The time burden may not be eliminated – instead it is transferred to the employee
• Assignment costs may increase – both direct costs and tax costs
  • Lump sum payments are typically taxed like ordinary income. In countries where the intended benefits can be provided in a tax effective way, using lump sums may actually increase tax costs.
  • The employee may not make appropriate buying decisions.
• Compliance risks may increase
  • Companies often remove tax compliance services from the expat package when using lump sums, leaving it to the employee to handle taxes.  If this is not done properly, the company could face additional risks.
  • Similarly, immigration issues still need to be properly managed, too.
• Company reputation can be at risk if the employee does not comply with local tax and immigration requirements
• The employee may not appreciate the value of the allowance provided compared with the burden of self-service in managing their assignment costs.
• Administrative time (i.e., HR time) is still needed to develop the appropriate lump sum amount.  Key considerations in determining the lump sum are:
  • What elements should be included,
  • How are these amounts determined, and
  • When does the lump sum amount change, if at all.
• The time the employee spends trying to find a cost effective solution for his or her particular situation means time not spent on the job.
• Employee morale could be negatively affected.  If the assignee perceives that his or her finances are adversely impacted, the resulting stress can impact both work and family.
• If the lump sum amount does not reflect the fluctuations in living differentials during the assignment period (for example, the US dollar takes a dive relative to pounds), or if the employee lacks the ability to live on a pre-established amount, the employee may seek even more money from the employer.
• When this happens, the administrative burden on HR has simply been shifted from the beginning of the assignment to a later point in time.

As a result of these issues, some companies limit lump sum payments to initial relocation costs. Once the relocation costs are determined, the employee is provided with a lump sum amount. The employee is expected to make all his or her own arrangements for the international move. While this may work effectively for domestic moves, it can be more problematic for international moves.

Remember the Goal
Most employers set up their international assignment policies in an effort to protect their international assignees, and to make sure that the international assignment is positive for the employee and the employer. The employer wants to ensure that their assignees do not suffer significant financial or administrative burdens associated with an international assignment. Delivery of benefits over the course of the assignment, coupled with the administration during the assignment, typically provides for a less disruptive and more compliant (i.e., less risky) environment.

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About Global Tax Network

Global Tax Network provides international assignment tax compliance and consulting services for corporate global mobility programs, including program development, ongoing tax management, and special projects. The firm is recognized as a leader in consulting for emerging to mid-sized global mobility programs. GTN has six U.S. offices, with allied partners and resources in more than 100 countries to support assignee home and host tax requirements.  For more information please contact us.