Category Archives: Expatriates

Postings and discussions about expatriate programs and policies

Reverse Culture Shock (or Why Do I Hate Being Back Home?)

Posted on August 17, 2009 by | 13 comments

maryd-pic5Author:
Mary Dougherty – Shepell-fgi

When employees begin an international assignment, they often experience “culture shock” in the host location.  Many companies provide support services to ease the transition for these families, ensuring a quick adjustment and a productive and satisfying international assignment experience.  But what happens when the assignment is over, and the family heads home?

  • 25% of expatriates leave the company within 2 years of repatriation (National Foreign Trade Council survey)
  • 69% experience significant “reverse culture shock” (Bureau of National Affairs, Washington)

Coming Home is Not So Easy
Repatriation is not as simple as it sounds.  “Reverse Culture Shock” is often experienced by those returning from an international assignment, and this can have tremendous impact on professional and personal adjustment.  The challenges inherent to living in a different cultural context for a significant period of time do not end with adapting to the host culture; they continue through the process of returning home and re-adjusting to what was left behind.  In fact, it is often those who have adjusted most successfully abroad who have the most difficulty returning home.

It can take up to 18 months to adjust and reintegrate after an international assignment; adjustment issues effect employees and their families both personally and professionally.  Understanding the problems that they may encounter upon reintegration is the key to a successful repatriation.

What to Watch For
Here are some common symptoms or situations that repatriating families encounter:

  • irritability/ resentment
  • sense of difference and disconnect
  • disappointment
  • inability to concentrate
  • low morale
  • change in values/attitudes
  • marital conflict
  • fatigue
  • parent/child conflict
  • educational/adjustment problems for children
  • depression
  • feeling unappreciated personally/professionally
  • decreased productivity
  • loneliness

What Can Employers Do?
One way to lessen the negative impact of repatriation is to provide support to the employee and their family in the form of a “Repatriation Debriefing.” Skilled repatriation counselors can help these individuals recognize the symptoms of reverse culture shock, and provide techniques to manage through it effectively.  To support family members, providing an opportunity for the employee and family to candidly and confidentially discuss repatriation challenges with regard to both work-related and family experiences is key. This process provides an opportunity to examine and explore the potential difficulties of returning home, as well as assisting in problem solving and goal setting.

Employers should also carefully manage repatriation assignments to ensure that expatriates are retained in their organizations, and that the new skills acquired during the international assignment are recognized and leveraged.

Finally, don’t minimize the importance of taking care of the family.  When an employee relocates, so does their family, and the impact on a spouse and children can be profound.

These steps will help minimize turnover amongst repatriates, preserving your international assignment investment, and also ensure that your repatriating employees are quickly and effectively reintegrated into their home country.

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Avoiding Tax Traps with Short-Term Assignments

Posted on August 13, 2009 by | 4 comments

Claudia HoweAuthor:
Claudia Howe – Global Mobility Tax, LLP

Has anybody heard about the magic 183 days?  So, if you stay in the host country for less than 183 days, you don’t have to pay tax in that country, right?  … right?  Well, actually the answer is:  sometimes.

Many folks will remember the 183-day rule, but often they do not quite know why or how.  But it sure lulls many international short-term business assignees (and their managers) into a false sense of security that as long as they are in the other country for less than that magic number of days, thinking they will be exempt from that country’s tax.  Let’s step back.

Tax Treaties Help Prevent Double Taxation

Tax treaties come into play when two countries want to tax the same income leading to the dreaded “double taxation.”  As the world has become smaller and more and more people are conducting business in countries other than their home, these folks find themselves in a position where they may be required to pay tax in both countries under the domestic law of each country.  For example, a UK employee goes to the US for a four-month project.  The UK will tax her on her world-wide income by virtue of being a tax resident in the UK.  The US federal government will want to tax her US source income because she has “effectively connected income.”

How Tax Treaties Work

Tax treaties provide that if certain conditions exist, the person is not taxable in the foreign jurisdiction, in this case the US.  Beware, each treaty is worded differently, but in general, the three main treaty conditions for an individual employed in the home country, and claiming exemption from tax in the host country under Article 15, the Dependent Services article, are:

  1. The employee does not exceed 183 days in the host country.
  2. The remuneration is paid by the home country entity (home payroll).
  3. The remuneration is not charged back to an entity in the host country.

As mentioned above, be careful to read the exact wording in each treaty to evaluate exactly what it says – there are variations on the theme.  For example, the 183 days could be in a calendar year, fiscal year, or in a rolling 12 months. The US has concluded numerous treaties and neatly lists them on the IRS website.   The UK also has a list.

The Fourth Requirement (in some countries)

Over the past few years, another hurdle to using the treaty has crystalized itself, also know as the “economic employer” approach.   The term “employed” or “employment” as stated in Article 15 had not previously been defined, until the OECD (Organisation for Economic Co-operation and Development) stated that substance trumped form.  This means that even if the person is legally employed by the home country, the entity that is receiving the benefit of the services, namely the host country entity, could be construed to be the real employer and therefore the Article would not be useable to exempt the income from tax in the host country.  The US has not adopted this approach as of yet, but many of the European countries that follow the OECD model treaty have.

Our friend from the UK on the 4 month assignment remains on UK payroll, spends less than 183 days in the US during any 12 month period (even vacation days not related to the assignment count), and her company does not cross-charge her compensation cost to any US entity.  So, is she off the hook?

State Tax Implications

Not completely.  The treaty in this case will enable our UK friend to be exempt from US federal taxes, but since she is working in the beautiful (and broke) state of California, which does not accept any treaties concluded by the US federal government, she will still be subject to California tax, regardless.

Social Tax Implications

Our friend also has to make sure that her employer has applied for a certificate of coverage under the US/UK totalization agreement to exempt her from US social taxes (more on that another time).

Foreign Tax Credits

Even if the conditions for an exemption from the host country tax are not met, the treaty can still be helpful in avoiding double taxation:  the income may now be taxable in the host country, but under the Relief of Double Taxation article (contained in most treaties), the home country must grant a credit for taxes paid in the host country, up to the amount of tax that would have been paid in the home country on that same income.   This might also apply in cases where no treaties exist.  Keep in mind, though, that in some countries, the practical requirements for claim a foreign tax credit are so complex that for small amounts, it may not even be worth the bother.

Summary

So, what should you, an HR professional, faced with the news of a short-term assignment and, the manager’s famous last words are: “we will make sure it’s less than 183 days,” do?

  1. Check the host country’s domestic law for when a person will become taxable.
  2. If taxable, check if the home and host country have a treaty and then find the latest version of the treaty (not the one you printed 5 years ago and … “it’s gotta be somewhere in this drawer”).
  3. Request a detailed travel schedule for 12 months prior to the assignment from the employee to understand how much time he or she has already spend in the host country for any reason (vacation, holiday, trade shows, business trips, etc.).
  4. Read all the provisions of the treaty carefully.
  5. Find out from the manager and your finance team if the compensation will indeed remain in the home country and will not be charged to the host entity or a client in the host country.
  6. Find out if the host country has adopted the “economic employer” approach.
  7. Are there any other taxing jurisdictions that you need to consider (state/province/social tax, etc.)?
  8. Whew – I am getting tired just writing all these things. . . . .

Unless you have checked all this out, you cannot rely on the famous 183 days.  And don’t forget the reporting and filing requirements for each jurisdiction!  You may want to call your favorite global mobility tax professional to assist with all of the above and to co-develop the options for the assignment step by step so you can articulate the risks and options to that manager and to your management.

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How Big Must Your Relocation Provider Really Be?

Posted on August 2, 2009 by | 10 comments

edit-Alan Biz Mug Shot 1The Forum recently received a great question via our “Ask the Expert” feature:

“We are a “young” international and domestic relocation management company but our staff has many collective years of experience in the industry. We are having a hard time breaking into the corporate market.  It seems that HR Departments do not want to give us the opportunity to present our services.  How can a small company like ours work itself into the international employee relocation market within a corporation?”

We can truly empathize with this situation, which is one we’ve often seen.  This is especially true in today’s economic environment of slashed budgets and significantly reduced transfer and assignment volume.  Overworked and highly stressed company staff are unlikely to spend precious time, now, to hear about services they’re not currently using.

The reader suggested that the “big” global relocation service firms receive a better reception from prospective clients than do the smaller and newly established firms.  In our experience, this is basically true.  The reader also stated that many of the smaller firms have a stronger service orientation and can be much more responsive and flexible than the big well-established providers.  Indeed, we have seen cases of this too.  It’s possible to demonstrate that smaller firms made up of seasoned experts, but with lower operating overhead and more flexible processes, can be quite cost competitive while providing high quality services as well.

So why are the small firms having difficulty “breaking in”?  What is it that the big firms offer as “competitive advantage”, often successfully, that the small firms do not?

Big firms have a large footprint.

They can point to wholly owned offices and affiliate relationships in a wide array of countries.  This can be a huge issue for corporations that want to have local touch points for their employees and direct knowledge of local environments readily available.  The small firms often don’t have such a geographic footprint and might not be sure how to establish one.

Big firms have globally experienced staff.

Frequently, their staff come from a variety of countries, have lived and worked in multiple countries and speak a number of languages.  They also frequently have individuals with prior international assignment policy development and program management experience on their teams.  This engenders great credibility in the eyes of the corporate buyer.

Big firms leverage their extensive experience.

 They have managed programs covering multitudes of assignees across a variety of countries and industries.  The corporate buyer is far more impressed with stories about “been there, done that” than with honest admissions of “haven’t been there, haven’t done that — yet”.  Corporations tend to be risk adverse and shy away from “being the guinea pig on whose dime the new service provider learns the business”.

Big firms have technology.

They offer sophisticated state-of-the-art, web-enabled capabilities for projecting total assignment costs, managing reimbursements, communicating with clients and their transferees, interacting online with data providers, providing country-specific information, and tracking and reporting expenses.  Many smaller firms do not have such (expensive) technology and, occasionally, cannot demonstrate expertise in managing the complex requirements of expense management and tracking across multiple countries and pay-points.

Big firms have strong relationships with key service providers.

They know and work with a variety of firms providing assignment cost of living and housing data, international tax experts, destination country employment counsel, cultural and language training firms, etc.  These pre-existing working relationships mean single point of contact and seamless service provision that is extremely attractive to corporate clients.

Big firms invest in polished marketing campaigns.

They advertise, host and sponsor conferences, deliver keynote presentations, conduct webinars, host booths at SHRM and ERC conferences, develop highly polished web sites, publish surveys and articles, etc.  This does not, of course, make the big firms better at providing services but, at the end of the day, polished marketing does impress prospective clients and creates name recognition.

Big firms have the advantage of name recognition.

 Finally, there is the cliché that no procurement professional was ever fired for hiring a well-known “big name” even if there was a service breakdown later. Let’s face it, in many corporations there is a built in bias toward hiring only name firms and avoiding the perceived risk (accurate or not) of hiring unknowns.

So what can a small/new firm do?

Emphasize responsiveness, service orientation and flexibility.

Probably the two most critical attributes in which to excel and compete are outstanding service and price.  Responsiveness, flexibility and competence are critical in what, I think we would all agree, is a service industry, after all.

Build internal international expertise.

This should be done via hiring highly experienced, preferably well-known, and globally networked staff and through education such as the SHRM GPHR and ERC GMS programs.  Travel and learn from first-hand experience about assignee destinations around the world.  External consultants also can be quite helpful in this area.

Invest in technology.

The ability to project and track costs, communicate with management, transferees and other services providers, e.g. the client’s international tax firm, and manage data is critically necessary.

Develop and nurture relationships with complimentary service providers.

This must include in-country providers and data, immigration, tax, language training and cultural training firms, among others.

Create name recognition through a well-focused and professional marketing campaign.

Demonstrate how the firm should be perceived as a trusted advisor and capable service provider. Create a public presence in the industry.

Delight your current clients and enlist them as your champions

When courting new business, make use of recommendations and testimonials from satisfied clients.  Ask your clients for leads and to make “warm” introductions.  Word-of-mouth recommendations are priceless.

Direct business development efforts towards smaller firms.

They tend not to have the budget for, and less of a bias toward, the big firms. It’s also relatively well known that the big firms don’t give their best attention to small accounts. Go where there IS business AND less competition.

Implement a “Blue Ocean” strategy.

There are many capable providers of  global mobility services, large and small.  The market, especially in the current economic scene, may actually be over-supplied with providers.  Competition is fierce.  We would suggest that small firms specifically target prospects whose mobility needs – geographically and transfer types – best match the firm’s geographic footprint and operational strengths.  Approach those firms that are not being approached by the multitudes of providers.

Seek out the advice and counsel of those with depth of experience and expertise.

We believe that seeking guidance and mentoring from experts can be quite worthwhile.  Professionals with prior “in-house” corporate experience, as buyers of external global mobility services, across a variety of industries are especially valuable.

We again thank the reader who submitted the question.  Now we invite our readers to share their views.  Please let use know your thoughts via comments on this post.

More about Alan:

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Posted in Expatriates, General, Global HR Expertise, Global Mobility Services, International Expertise, Relocation

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Recalling Expats? Handle with Care

Posted on July 28, 2009 by | 2 comments

Photo Liz Perelstein (2)Author:
Liz Perelstein – School Choice International

“In recent months, companies have begun recalling expats from multiyear assignments up to 12 months early… The CEO of a Pacific Northwest manufacturer (who requested his publicly traded company’s name not be used) is pulling his European division manager home after only eight months of a two-year assignment because the business can’t continue to foot the $500,000 annual bill for his salary and living expenses.”  –Workforce.com, March 16, 2009

Education is a top priority for middle class families in every culture worldwide, and always has been.  This is true of 32,200 Tamil school girls praying before entering examinations in Madurai, Chinese families who have pinned all of their hopes and dreams on their sole child, and parents in the Northeastern part of the United States who are still, according to The New York Times blog The Choice (July 18), willing to spend $40,000 on college placement counselors for their children despite the economy.  This results in scarcity of suitable school options in major cities globally.  Even if there are vacancies in less popular schools, those that are generally considered “top tier” are overbooked no matter what the economic situation.

As a result, repatriation, which always is difficult, brings additional challenges when it is sudden and forces families to seek schooling for their children mid-year, particularly under rushed and stressful circumstances.  In addition to the logistical challenges involved in gaining admission to schools, children are excluded from extracurricular activities – the cricket team already has been chosen, as has the cast of the play – essential aspects of re-entry if they are to successfully make friends and reintegrate into their home cultures. Repatriation to one’s former home is particularly difficult, according to The Art of Crossing Cultures by Craig Storti, because expectations and reality clash.  When employees are moved home without sufficient notice, they, and their families, do not have sufficient time to process the emotional aspects of the repatriation so it is all the more important that they receive assistance with the logistics of the school search and transition, as together both aspects are quite overwhelming.

Regardless of the country of repatriation, employers can provide:

  • Accurate and easy to use information in the form of books, research, websites and web based tools;
  • Transition assistance so that families understand that the former school may no longer be the best school for a child given the wealth of experiences s/he has had overseas as well as the curricular differences;
  • Expert help in identifying and getting into schools that meet the unique needs of each child at this point in time;
  • Specialized assistance for children with special needs, gifted children, and those seeking schools in particularly competitive locations.

This is something that companies must think about if their goal is to develop policies that will serve them in good times as well as bad.  Benefits of good support when employees with children are recalled are rapid employee productivity, increased loyalty, talent retention, willingness to take future assignments, and improved morale, which includes encouraging other employees to undertake assignments when needed.

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Accurately Measuring the Price of a New Location

Posted on July 14, 2009 by | Comments Off on Accurately Measuring the Price of a New Location

Photo Liz Perelstein (2)Author:
Liz Perelstein –  School Choice International

One of our clients identified a new emerging economy where operating their business would save considerable money.  In this new region property, local labor, and running the plant promised to cost only a fraction of the price of similar variables in their current location.  In order to get the new plant operating successfully, they needed to move 100 families for up to three years to train local employees on their processes and corporate culture.

About to embark upon a group move of the initial families, unanticipated costs surfaced.  The company had previously implemented a policy where it moved families as locals rather than as expats.  As a result, international schools were not budgeted for the current move.  This was a good decision in the previous location. However, in the new country, local residents use private schools whenever possible.  While local private schools may not be as expensive as international schools, they are still a significant expense for a move of 100 families.

Before moving into a new country, learn about the culture of schooling and the impact to your budget.

In some countries, public schools educate the “top” local talent – only students with “problems,” or those who are unlikely to succeed in the public sector attend private school. In others, public schools have poor records of educating students. They may even have chronic union problems, facilities issues, or other structural troubles that deplete the government run educational system on an ongoing basis.  In these areas, parents may use private schools when possible and send their children to public schools only if no alternatives are available.

To identify your educational costs for a group move, picking a location where state schools are viable for local middle class (and higher) residents is a good first step.  However, it is still important to ascertain whether these will be appropriate for non-native families.  Once you have determined the overall culture of public vs. private schooling in your proposed location, compare the school systems that your families are coming from with those they are going.  Are the curricula similar or will children have a hard time adjusting in the new location – as well as repatriating – if they do not attend home national schools?  And finally, are the schools familiar with overseas children so that the transition is reasonable?  Do they work with new families to ensure that the experience will be both academically and socially worthwhile?

If schools are aware, willing, and able, a local education in expatriate destinations can be immensely profitable for many children.  But if you do not ask the right questions before the move, you may find that you have grossly underestimated your costs, or otherwise find yourself with many failed assignments.

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Update! Employer Mandated Health Coverage in Dubai

Posted on July 6, 2009 by | 3 comments

George BashawAuthor:
George Bashaw – Atlas Global Benefits

In early May, I wrote a blog on the Dubai Health Authority’s (DHA) efforts to implement employer mandatory health insurance.  Since my blog, the Director-General of the DHA has put the funding scheme on hold until 2010.

Instead of paraphrasing a nice article in the Khaleej Times, you may find it here if you would like more information on the topic.

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Five Easy Ways to Waste Money on Expatriate Assignments

Posted on June 21, 2009 by | 8 comments

bio_400x400Author:
Chuck Csizmar – CMC Compensation Group

Once your company decides to send an employee overseas on expatriate assignment the danger of imminent waste looms large. The problem usually begins with management not understanding or even choosing to ignore the real costs of the international assignment. The money pit is then worsened by having only a weak business reason to support the assignment. If you lack a compelling business justification for why an employee is needed overseas, it is likely that you won’t be able to measure whether their assignment will be a success or not.

Below are some of the major reasons for the cost spiral of money slipping out of your hands; however, this is by no mean an all-inclusive list. I have no doubt that you can provide your own reasons as well.

  • Do not worry about the ROI

For some companies it is easier for a manager to have an international assignment given a green light than it is to have a piece of hardware or software approved for purchase. Where is the business case? Where is the justification via projected financial return that management should be held accountable for? Is anyone being held accountable that an ROI is achieved?

You should think twice before agreeing to pay out 2-3 times annual salary to provide for an expatriate assignment. “It’s in the budget” is never a good business reason.

  • Tell the employee that they are the only one who can do the job

Once an employee realizes that they are the only, or preferred choice for the assignment, you lose all negotiating leverage. I recall one fellow who insisted that he and his family live in Inner London (meaning: uber expensive) – though the office was 35 mi. north – or else he wouldn’t take the assignment. Do not expect someone holding leverage to be reasonable and accommodating when discussing terms & conditions of what you will pay for.

Strive to develop a stable of qualified candidates. It would also help if you remember that the ability to perform the job should not be the only criteria for selection. A bad cultural “fit” would be a painful and expensive experience for everyone.

Note: an employee with an attitude of doing you a favor, versus appreciating the career opportunity being offered, is a bad bet.

  • Do not bother to create an international assignment policy

Unless you enjoy living in a “let’s make a deal” world, you would be advised to lay down an international assignment policy, and then adhere to it. You will still be challenged by the employee / spouse to make improvements in their conditions, but without the support of a policy you will be hard pressed to stand your ground.

Note: make sure all terms & conditions have been confirmed *before* the plane departs. Once you have an expat on the ground in the host country you have lost whatever leverage you might have had. From there you *will* agree to term revisions, because senior management will conclude that having already made the investment you have to keep the expat happy or risk the assignment.

  • Focus on the employee, not the family

Even an otherwise contented expatriate will be rattled if every night they come home to complaints about life in the host country. Such a situation will distract the employee from concentrating on their assignment, and eventually you will face the need to further revise terms (increase costs) and / or the employee will throw in the towel and the assignment will be deemed a failure.

Be sensitive to potential family issues and include everyone in cultural orientations. The family is the expat’s support group, and if they are unhappy . . . well, you know the rest.

  • Separate assignment costs into multiple budget categories and line items

This way no one would understand the full extent of the costs involved. During five years spent overseas on assignment, neither Corporate nor local Finance was able to explain the full cost of my assignment. They had assigned expenses into so many diverse costs centers and budget line items that the confusion never cleared. Imagine the drip – drip – drip of your money if no one is even asking!

If no one is watching the costs of the assignment, those costs cannot be controlled. It would be like handing over a blank check – with no guarantees of gaining anything in return.

Finally, watch out for the manager who tries to “save money” by circumventing HR assignment policies. These creative thinkers consider that short cuts save money, but typically those “cuts” do little more than alienate the expatriate (and / or family) by treating them as second class citizens. Bad idea.

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International Schooling – At a Glance

Posted on June 16, 2009 by | 3 comments

Photo Liz Perelstein (2)Author:
Liz Perelstein –  School Choice International

Educational concerns and the details surrounding them are sometimes overlooked when structuring an expatriate package, but to families moving with children there is no greater obstacle to taking on an assignment or to the potential success of a move.  Here are some examples of information that may make a big difference, either to the employee or employer.

Did you know that private school fees in the UK have risen by 43% since 2003?  (Source found here.)

The best place for raising expat children is:

  • UAE 
  • France 
  • Spain 
  • UK 

Viva España!  In a recent survey conducted by HSBC based on five categories, including the cost of raising children and how much time they spend outdoors, Spain comes first.

Did you know that Canada ranks among the world’s leaders in per capita spending on public education?

Did you know that Cuba spends 9.8% of its GDP on education and the US 5.8%? (Source found here.)

Did you know that 27% of children in India are privately educated?

Please sign up here to receive the Fact of the Week from School Choice International.

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Expats…What tax?

Posted on June 14, 2009 by | Comments Off on Expats…What tax?

Claudia HoweAuthor:
Claudia Howe – Global Mobility Tax, LLP

You are an HR professional (or a VP of Tax or a CFO) and you have just been told that your company wants to send an expat (oh horror!) to the UK.  “Expat,” you think to yourself – “what now?  How can we understand the costs, and what about taxes – isn’t that a really expensive and complicated area?”

Understanding the Basics

Understanding the basics of an expat assignment is critical, especially the tax costs.  As many already know, the tax costs can be the most significant line item on the cost projection worksheet.  But don’t worry; there are ways to manage it!

If your company does not have an international assignment policy in place, you will have to determine the whole package including housing, COLA, education cost for the kids, and what tax reimbursement philosophy is to be employed.  Without a policy, many of these items will be subject to individual negotiations.  This can work for a few assignees, but once you expand your program beyond one or two, it’s a good idea to establish a formal policy to help manage costs and reign in the negotiations.  While all of the aspects of an expat policy are interesting, my expertise is in the global tax arena, so this posting will concentrate on how to decide the best approach to managing taxes for your expats.

Tax Reimbursement Methods

When an employee goes overseas, there is always an impact on the employee’s taxes – income taxes and social taxes.  If left unmanaged, there could be unforeseen consequences, either positive or negative, from the employee’s perspective as well as from the employer’s viewpoint.  Expat tax policies address these issues with tax reimbursement methods including tax protection, tax equalization, or the “simplest” of all:  laissez-faire (aka “do nothing”).

While laissez-faire keeps the company’s costs down, it usually gets the expat worried about the tax implications of the assignment as any incremental costs will directly hit the assignee’s bottom line.

Tax equalization and tax protection are alternatives which help both employees and employers manage the costs of assignments.  If you are not familiar with tax equalization or tax protection, it is easy to get them confused.  Here are the basic definitions:

  • Tax Protection – Employees are “protected” from any additional taxes that may result from the international assignment but can benefit from any decrease in taxes which may occur when, for example, moving from a high-tax country to a low-tax country or no-tax country.  So, the employee may pay less tax, but will never pay more than if at home.
  • Tax Equalization – Employees are “equalized” so they pay the same amount of tax – no more, no less – as if they were at home.  The company pays any difference and also benefits from any tax reductions.  This method is the most equitable for a workforce and the employees can easily understand the tax impact on them:  none – the employees pay the same tax as if at home.

Both methods are designed to help the employee, and if the host country tax rates are higher than the home country tax rates, then they technically will result in the same bottom line to the employee and the same cost to the company in the long run.  The fine distinction between the two is that with tax protection the company promises the expat that he will be reimbursed for any excess tax costs over his “stay-at-home tax,” i.e. he will pay no more than had he stayed home.  Tax equalization says that the employee will pay “neither more nor less” than had he remained in the home location.  And, unless they are going to Dubai, the host country will have the right of taxation and will tax the income (yes, even if paid from the home country and even if the work performed is for the benefit of some other location).  Because the host country tax system is unfamiliar, it is not always easy to know how much tax will be due in that country.

Tax Equalization vs. Tax Protection

Here you are, with your first expat, and you now wonder:  “hmm – tax protect or tax equalize” – how should we decide this?

The answer is usually more complex than meets the eye.  When you are in the infancy stage of your expatriate program you usually can afford customization to each expat’s situation.   We often see in practice that the first few assignments in an organization are custom built.  Tax reimbursement policies are often written once the first few assignments are already underway.

Here are some examples to help illustrate the two approaches.

Tax Protection Example

Let me give you an example where I would clearly recommend tax protection:  you are moving a young single line manager from the UK to Spain for 2  years; she will not receive any allowances, only relocation benefits.  The tax protection gives her the additional assurance that she is not going to pay more tax than had she remained home, but if she pays less in Spain than what she would have paid in the UK on the same income, then she gets to enjoy the windfall (and spend the extra money on something nice).

Tax Equalization Example

However, on the other end of the extremes, for example, when you are moving a US executive with wife and school age children from the US to Singapore, I would highly recommend tax equalization.  You ask:  why?  Well, it usually will take a bit more financial incentive to get the executive to accept the “risk” (financial and otherwise) of taking such an assignment (so he is doing the company a favor).  The assignment costs will increase due to the family’s need for financial assurance, there is a cost of living differential, and housing is a lot more expensive.  So, the cost projection worksheet is filling up quickly and the total compensation reportable in both countries becomes staggering.  All the numbers will make everyone’s heads spin, but the company really needs this executive to focus on the task at hand.  The easiest way calm this person’s financial anxiety is to tax equalize; promise him that he will pay the same amount of tax as if he had stayed home.  This will tie his personal bottom line to a tax system he is familiar with and leaves the tax planning and tax risks in the hands of the company (and their trusty tax advisors).  This approach also allows the company to pursue expatriate tax planning strategies to help manage the tax costs, therefore reducing the overall cost of the assignment.  Such strategies are available in many countries but require expert assistance and a full examination of income, social and corporate tax impacts.

How To Get Started

So, what about this first expat you are told is going to the UK next week (or wait, did they say he had moved already?  Or was that just a business trip?)?  It is best to break it down into the big components first:  immigration, payroll, taxation, relocation etc.

Then consider the needs of the company and the needs of the employee and find out the costs to each party under a couple of scenarios.  Once the costs have been established (and you may need assistance with some of the items) then it is time to go back to management to get the costs approved.  And don’t forget the tax costs!

Yes, managing expats is a complex and daunting task at first.  But if you prepare yourself with good information, helpful advisors, and most importantly gain strong support from your line managers, your company can reap the benefits of international assignees and, at the same time, manage the costs effectively.

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Why Culture is Important in International Business

Posted on June 8, 2009 by | 12 comments

Denise HummelGuest Author:
Denise L. Hummel – Universal Consensus

Editor’s Note:  We are especially pleased to welcome our first Guest Author, Denise Hummel, who contributed the piece that follows on the importance of culture in international business

Doing business on a global basis requires a good understanding of different cultures.  What works in your country might not work well in another, and could even be interpreted as an insult!  And in your role as an international human resources professional, it’s important to raise the awareness of cultural issues within your organization to ensure effectiveness.

Consider the following basic questions:

When George Bush gave Chinese Premier Li Peng a gift of cowboy boots embroidered with the American and Chinese flags, was it an appropriate gift?

  1. Yes, a thoughtful sentiment and a keepsake appropriate to the occasion
  2. No, a significant miss on the part of administration protocol experts
  3. Yes, a good choice, if only he had known the Premier’s correct shoe size

Answer: 2. 

Unfortunately, in China, the soles of the feet are considered to be the lowliest part of the body and gifts of footwear, no less embossed with the nations’ respective flag, was a significant miss on the part of administration protocol experts.

When formalizing a deal in the Middle East, it is imperative to

  1. Determine that the contract is iron clad with strict attention to jurisdictional issues of international law to secure a just outcome should there be conflict
  2. Solidify the interpersonal trust relationship as this rapport is critical both during the deal and if conflict develops
  3. Retain legal counsel in the country in which the business undertakings will primarily take place and ensure that this attorney has a golfing relationship with most members of the judiciary.

Answer: 2.

When doing business in the Middle East, the surest indicator of a successful business relationship has very little to do with the content of the contract or the extent to which the language will hold up in court.  Court systems in many of these countries move slowly with inconsistent results, and your business counterparts in many Middle Eastern countries do not put their faith in the legal system to determine the outcome of a conflict.  Absolutely essential to the success of the deal is the interpersonal rapport and relationship established during the negotiation stage and at every point thereafter.  Failure to understand and cultivate this aspect of the deal increases the risk of failure to a critical degree.

In sending an email to a Japanese colleague with whom may wish to collaborate on a potential business deal, you would be most successful if you

  1. Begin the email by addressing the individual warmly and openly, by his first name, immediately closing the cultural gap
  2. Always use Mr. , Miss or Mrs. followed by the last name of the individual, followed by an embracing and forthright interaction
  3. Use the last name, followed by the term “sama” to address your email, followed by clear text set forth with the utmost formality.

Answer: 3.

The risk of email is that it lacks certain social contextual cues such as body language, eye contact and intonation and can therefore create misunderstandings.  There is also no way to see the demeanor or reaction of your counterpart and adjust your communication strategy to compensate for a misunderstanding once it is created.   When in doubt, it is always safer to err on the side of greater formality and deference.  The Japanese have become accustomed to making allowances for informal communication from other countries, but you will proceed with more credibility if you make a sincere effort to adapt to their customs.  The use of the term “san” and, for those in a position of high authority, “sama” is honorific.  Use the last name, followed by the honorific term, followed by extreme clarity and formality in the text, with as few assumptions for context as possible.

Summary

The cultural nuances that affect international business obviously go far beyond the ability to greet your international colleague or choose the correct gift.  Issues related to the culture’s time orientation, whether it is an individualist or collectivist society, space orientation, and power distance, not to mention conflict assumptions and non-verbal communication all affect understanding your colleague across the table, as well as your chances of being understood. 

Preparation by a trained expert related to these issues not only assures that unnecessary blunders will be avoided, it brings to each of us a personal knowledge that deepens our understanding of others, thereby promoting acceptance, understanding, and on the level of international relations, peace and prosperity.

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