Two Tax Planning Strategies to Reduce Expatriate Costs

Eric Loff – Global Tax Network

The tax cost of an international assignment can be significant and companies struggle to find ways to manage these costs.  This article outlines two straightforward strategies for reducing the tax costs of your expatriate program.

Where do those excess taxes come from anyway?
Excess tax costs associated with an international assignment include the actual taxes paid by the employer on behalf of the employee which exceed the employee’s tax burden as calculated under the company’s tax equalization policy. But don’t worry. There are a variety of tax planning techniques that can reduce these excess tax costs. Two common ones are:

  • Paying benefits-in-kind in lieu of cash payments
  • Proper timing of the assignment

Read on to learn how these tax savings strategies work.

In general, cash paid to an employee is taxable, regardless of why the cash is paid to the employee or how the employee spends the cash. In lieu of giving the employee cash, the employer could directly pay expenses for the employee. The direct payment of certain expenses by an employer is considered a benefit-in-kind; in many countries certain benefits-in-kind will not be fully taxable to the employee. Examples of common benefits-in-kind are housing, cars, and club dues.

In China and Hong Kong, for example, the direct payment of housing by an employer can receive beneficial tax treatment, i.e., less than the full payment is taxable to the employee. The company is typically the lessee and pays the rent directly to the landlord. Many landlords prefer this because the company is perceived as a more reliable tenant than an individual. This technique is relatively easy to implement, available in a number of other countries, and used by many companies. Before implementing employer-paid housing, you should consider the associated corporate liability.

The direct payment of car leases by an employer can also generate beneficial tax treatment in many countries, such as China, Indonesia and Spain. Providing company cars is also a prevalent benefit for local hires in many countries. Before implementing such an arrangement, you should consider if a car is necessary for the employee. Also compare the cost of leasing a car to the cost of purchasing a car. In many locations the price differential between leasing and buying is significant.

Club dues are another area where beneficial tax treatment may exist for direct payment by the employer, especially if the club is required for business purposes. Before paying for club dues, the company should determine if this is necessary for the employee. In fact, many companies are moving away from paying for club dues.

Timing of an Assignment
The start date and end date of an assignment may significantly impact the tax and administrative cost of the assignment. Although general rules do not exist, there are several factors associated with the assignment period that may impact the tax cost.

For example, in some countries tax treaties may provide benefits if the assignee is in the country less than 183 days in a tax year. For countries using a calendar year for the tax year, this means an assignment should start after July 1 and end before June 30.

In other cases, it may be possible to achieve tax savings if the assignment is less than a specified amount of time under a country’s domestic law.  Under U.S. law, it may be possible to provide certain benefits such as housing and per diems for assignments of no more than one year on a tax-free basis.  This time limit will vary by location, so it is important to understand the domestic tax rules in advance of sending assignees or business travelers.

On the other hand, be cautious about starting an assignment right before year end or ending an assignment shortly after the beginning of a new tax year. The administrative burden of filing an additional tax return may outweigh other benefits.

Finally, timing of the assignment can significantly impact the taxation of certain income such as bonuses or stock option exercises. The tax impact of these transactions should be considered as the assignment dates are finalized.

The information provided is for general guidance only, and should not be utilized in lieu of obtaining professional advice. Please see the following link for Circular 230 disclosure:

More About Eric
Eric Loff is the Managing Director for GTN Minneapolis, and focuses exclusively on providing Expatriate and Foreign National tax services to corporate and individual clients. He has more than 17 years of experience in the management of international assignment programs and the human resource, tax and payroll aspects of internationally mobile employees. Eric is a frequent speaker on global mobility topics and is the lead for the Minneapolis chapter of the Forum for Expatriate Management. Prior to joining GTN, Eric was an Executive Director with Ernst & Young.

He is a Certified Public Accountant and is a member of the American Institute of Certified Public Accountants and Minnesota Institute of Certified Public Accountants.

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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.

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