Author:
Warren Heaps – Birches Group LLC
This is the second part of a five-part series, where we present checklists to help international HR professionals plan and manage long-term international assignments. There are five stages we identified for long-term assignment management:
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In part one of this series, we looked at candidate assessment, selection and approval. In this installment, we will examine Assignment Planning.
Author:
Warren Heaps – Birches Group LLC
Recently, a client posed the following question to me:
“The Ethiopian Birr has devalued recently and management wants to offer an across-the-board increase to our staff there. Can you offer any guidance?”
The first thing I asked my client was if she was referring to expats or local staff. She confirmed local staff, not expats. So, I told her if that’s the case, you might want to reconsider such a step. Why?
Author:
David Bryan – Norfolk Mobility Benefits
Editor’s Note: We are pleased to welcome David Bryan as a Guest Author. David has extensive experience in international employee benefits, and is currently a Marketing Consultant for Norfolk Mobility Benefits in Naperville, IL.
Change is constant, particularly in the realm of international employee benefits. There is a social time bomb ticking — the number of employees paying into various social security systems around the world is diminishing while the number of recipients is increasing. To defuse this situation, many governments are reducing benefits while raising taxes, thereby shifting the burden to the employer.
Today’s multinational employer is evolving into the transnational of tomorrow as corporations do away with defined headquarters and instead move to regional centers of operations. To meet these and other changes, benefits professionals are implementing global benefits strategies (GBS). Yet, in recent surveys in which I have participated, nearly 78% of multinational firms have no formal international employee benefits strategy!
Designing Your Strategy
There appears to be more centralization of core corporate functions in light of the global economy. While authority for certain functions may be retained on a local or regional level, strategy setting is still at HQ. In the end, as long as the global corporate benefit strategy is being deployed, certain aspects, for example the selection of vendors/contracts, can be left to the local operations.
A Global Benefits Strategy will provide for some of the following benefits:
Key Elements of a Global Benefits Strategy
Global benefits strategies can take many forms, and range in length and depth, but most successful strategies will include many of the following elements:
Reaping the Rewards
After the announcement of the new global benefits strategy, a benefits audit is often conducted to educate the central benefits staff about what plans are in place. For a new company, implementing a GBS is easier than for a well-established firm that must harmonize many plans to create a unified and consistent global benefits strategy. The benefits professional’s role is essential at this stage. Many consultants and insurers offer software packages to assist in this process, although many corporations devise their own audit form to meet their specific needs.
Set procedures need to be in place to implement, review and enhance local plans. Usually, one individual has a certain dollar amount of approval authority to exercise any latitude permitted by HQ (for new and/or enhanced benefits). The more senior the individual, the more authority. Local benefit needs — and wants — must be measured against predetermined criteria. This authority can be with corporate, local or both, as set forth in the GBS.
Along with these approval procedures, established communication chains must be followed. In cases of mergers, acquisitions and divestitures, reliable benefits data (pension reserve, for example) must be readily available. Pre-established lines of communication will help in this type of scenario.
In most instances, resources are scarce, resulting in a decentralized approach. In spite of this, there have been more than a few “ideal” GBS roll-outs. An announcement, then an audit, followed by site visits from benefits staff to bring the local plans into compliance with the new philosophy is a typical, effective approach.
Taking the First Step
While global benefits strategies can be similar, each company must tailor one to fit within its industry and corporate HR philosophy. The first step in this process is creating a shared vision for a GBS that is flexible, simple, legal and tax compliant. Further, it should integrate governmental social plans with new or existing supplemental plans provided by the company.
A multinational enterprise must look after its global employee benefit plans. We all are under the budget microscope. However, a well-articulated global benefits strategy will enable HR to manage benefits resources globally and ensure a compliant and competitive benefits approach in every country.
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Author:
Chuck Csizmar – CMC Compensation Group
Even a properly handled international assignment is a complex beast; the procedural morass that confuses as well as frustrates, the emotional stress placed on the assignee and family, the myriad details that could go wrong (and often do), and dealing with career risks inherent with being “out there”. And, to top things off, the entire enterprise is extremely expensive!
Even in today’s economy, though, the need to send employees overseas remains strong, and for good reasons – skill development, setting up a new business venture, organizing an acquisition, transferring knowledge through training and development, filling a skills gap, etc. It is more important than ever to ensure a successful assignment, since failure is very costly and potentially damaging to the business.
To help you manage your assignments successfully, I’ve put together a list of ten “rules of the road” to keep your expatriate program running smoothly. The first five rules follow below. Next week, I will post the other five (so watch for them!).
Rule #1 – Have a Policy and Use It
It is tempting for companies new to the international assignment experience to delay the development of written policies and procedures. With a thought of “we only have one or two people overseas” they deal one-on-one with individual employee situations and make decisions on the spur of the moment that affect only that one assignee. Such a practice ignores the advantage of standardized practice, and sows the seeds for future problems.
Documentation establishes standard practice, provides a managerial consistency that deflects exception requests and restricts (but does not eliminate) the “everything is negotiable” mentality. No matter the size of your expatriate program, making ad-hoc or one-off special arrangements without broader consideration of other existing or future expatriates is always a recipe for trouble. While attempting to placate an assignee, keep an eye that your decision does not aggravate others by creating a perceived atmosphere of special treatment.
Establishing and requiring adherence to an international assignment policy will also help the company lessen the impact of so-called “stealth expatriates”, employees working in another country without being part of the formal mobility program. Oftentimes, well intentioned managers with a get-it-done attitude often send people abroad without going through formal channels. This casual approach to a complex issue usually results in a high rate of assignment failure, as well as additional complexities and the risk of costly penalties (i.e., compliance with tax and visa regulations).
Rule #2 – Require a Business Case to Justify the Expense
Your procedures should require that requesting managers be informed of all projected costs associated with an assignment before an approval will be considered. Oftentimes a break down of these costs is buried among several budgetary line items, not readily evident to the casual observer. An inexperienced manager is usually unaware of the true costs involved. As a rule of thumb, an assignee with family will cost about 3 times salary per year, while an individual assignee would cost 2 times. You should require the requesting manager to sign off on the expense projections – making their approval visible within the organization.
The business case should also demonstrate why an assignee is required (vs. a local employee). What is the operational advantage for the business and how success would be measured? Does the proposal show how the expense will ultimately deliver an appropriate ROI? Soft answers such as “developing talent” and “global exposure” should rarely be included in the top tier of business justification, unless cost considerations have been relegated to a lower level of importance.
Rule #3 – Stick to Your Approval Chain of Command
Establish a clear hierarchy of who is required to approve both the assignment itself (not simply who supports the request) and the associated terms and conditions. You should operate on the presumption that managers, especially those with a tendency to use “stealth expatriates”, should repeatedly be made aware of who this “gatekeeper” is and what the requirements are for approval. A firm hand here will avoid repeated requests searching for someone to say “yes”, while providing an opportunity for the company to speak with one voice.
You should be cautious when dealing with demanding senior managers who support the request but in fact lack the authority to approve the assignment. If not forced back to the Corporate Gatekeeper for adjudication and confirmation, these senior managers could potentially disrupt the process by their inadequate understanding of particulars, by confusing and aggravating the candidate (or family) with mixed messages and by agreeing to terms and conditions for which they are not authorized.
Note: Once an unauthorized management representative commits assignment terms and conditions to an expatriate candidate, it will be difficult to correct any errors without compromising the initial goodwill established with that employee.
Rule #4 – Consider Non-Traditional Assignments
While the traditional expatriate assignment typically lasts from one to three years or more, evidence is growing that companies are increasingly using shorter assignments as a means to reduce costs, attract more candidates and reduce the failure rate.
Obviously, the shorter the assignment the lower the ultimate expense will be (taxes, allowances, gross ups, etc.). However, shorter assignments are also more attractive to candidates who would otherwise have passed on being overseas for several years, usually for family or career reasons. This opens up a new pool of potential candidates as well.
If the company’s goal can be defined in narrower terms (knowledge transfer, specific projects, filling a skill gap, etc.) a shorter assignment, or even a series of extended business trips might be a more reasonable strategy for the business case.
Rule #5 – Select Employees Who Will Become Good Ambassadors
Whatever the technical capabilities of the person you select for an overseas assignment it is critical that they (and their families) have the right persona for the role they will play as ad-hoc “ambassadors” for your company. While capability of performing the assigned role is paramount, assignment failure often occurs when the assignee or members of their family are unable to adjust to living in a foreign environment. Having a flexible nature, as well as at least a taste for adventure will go a long way in making everyone comfortable.
The assignee should live / reside as their local counterparts do, not as the expatriate is accustomed back home (style and size of house, neighborhood, distance to work, etc.). Cultural sensitivities should be considered, so the assignee may “fit” in with like jobholders. Your intent should not be to replace an expatriate’s home country style of living. Working relationships sour quickly if an expatriate Manager or Director lives markedly better than the local Vice President.
Provide cultural orientations and if necessary language lessons for all family members. Institutional differences (banking, medical care, driving, local bureaucracies, etc.) should be explained in advance. Surprises should be minimized, as they are usually negative experiences.
Note: Simply because the locals speak English is not a reason to avoid properly preparing the expatriate for the overseas experience.
In Part II of this article, in my next post, I will discuss the remaining five rules of the road for an effective international assignment program.
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Author:
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:
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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Comments Off on Expats…What tax?
Posted in Expatriate Payroll, Expatriate Taxation, Expatriates
Tagged expatriate, Expatriate Payroll, Expatriate Tax, expats, International Assignments, reducing costs
Author:
Mariana Villa da Costa – Littler Mendelson
The current worldwide economic crisis is putting businesses under increasing pressure to control costs. In spite of the challenging economic environment, however, companies are continuing to do business globally and even more small and medium enterprises are starting up international operations. Along with this growth of international business operations comes the globalization of employment. In addition to traditional “expatriate” assignments, more and more organizations are looking for alternative types of assignments which better address their needs, and have the potential to reduce costs as well.
Below are some ideas on how to tailor your approach to international assignments in today’s environment.
Examine Your Population
For companies going global, look for early-in-career professionals who are seeking international assignments for their own professional development. This group is typically younger, and often anxious for the opportunity. A lot of expenses associated with expatriate assignments are related to family members. Since these assignees are often single, or married but have not yet started a family, many of these costs can be avoided. Companies can create a developmental policy specifically for this situation, with allowances that are scaled back.
“Volunteers” are a similar group – those employees that raise their hand to go overseas for personal reasons, or those with a lot of geographic flexibility. Older employees, without the burdens of young children, are often in this category. An added bonus – these are often the most experienced technical talent in an organization, and can be deployed effectively for technology transfer and other training missions.
Introduce Flexibility
Expats are always keen to get cash and manage their own expenses. Many companies have introduced lump-sum options in lieu of traditional expatriate allowances. This allows costs to be capped, and also offers flexibility to the employees. It is widely known that if the company gives the employee US$ 5,000 for housing, it is likely that the entire amount will be used for monthly rent. On the other hand, if the cap for total housing expenses is US$ 20,000, the employee will allocate his expenses more wisely.
Keep in mind, however, that in some locations, lump sums will not be very tax-effective, and could actually result in higher costs.
Proactively Manage Your Assignments
Another issue facing companies is so-called “permanent expatriates.” These are employees occupying important positions in highly desirable locations of the foreign operation for many years, who for a variety of reasons have not been reclassified as locals. The company needs to establish, in their internal policy and in the international assignment agreement, clear guidelines that outline when such a localization would take place, and then follow the guidelines. Our experience shows that many organizations have policies for localization, but few companies actually use them!
Use Tiered Policies
Many companies use a tiered approach to international assignments. Depending on the type and reason for the assignment, the terms and conditions for the expat package vary. For example, local or “local plus” packages are used for development or volunteer assignments; expat “lite” might be used for moves in markets where talent is widely available or early localization is desirable; and full expatriate packages would be used for senior level executives and leadership positions. Regardless of the pay approach, though, companies must always be mindful of the career planning issues of managing expatriates.
Consider International Pay Scales
For employees in managerial positions, and executives that are going to a foreign location to develop and assess business, and that likely will undertake future assignments, the use of a single global pay scale is another idea. The design of such a scale needs to account for the rates in which the company competes for this key talent. In addition to pay, benefits and some allowances might be included as well.
Summary
Managing a global workforce prudently can be an important factor in the success or failure of a company doing business internationally. Therefore, it is wise for companies to cultivate and develop new strategies to ensure their international compensation program is strategically aligned to their business, and also designed with costs in mind.
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