If you are planning an international expansion, you will likely need to employ expatriates in critical markets to grow your business. Sending an employee abroad; however, creates a host of issues, and
A major consideration in designing an expatriate package is the degree of tax assistance provided to the employee. Tax assistance is required to ensure the employee does not have to pay more income taxes as a result of the assignment than would have been paid at home.
For example, consider a U.S. expatriate working in the United Kingdom whose local tax burden is higher than it would be in the U.S. When and how should this issue be approached? Is the expatriate responsible for making up the difference? Or the employer?
The answer depends on the structure the company chooses, and below you will find three of the most common ways of managing expatriate taxes:
1) Tax equalization. In the example of the U.S. expatriate, the employee would pay the same taxes as he/she would if working at home. It then becomes the company’s responsibility to pay any tax difference to the government, while also reaping any potential tax reduction benefits. This structure is easiest for employees, as they pay the same tax as if working at home.
2) Tax protection. Under this method, expatriates are expected to pay any difference in taxes between home and host country, but the employer promises to reimburse for any cost above the tax rate in the home country. The result is an expat being “protected” from higher rates.
3) Laissez-faire. Just as the French name suggests, a laissez-fair policy is all about “letting it be,” and making all taxes on income the responsibility of the expatriate. Naturally, this keeps company costs down, but increases the pressure on expatriates.
Expatriate satisfaction, productivity and safety are paramount to the success of international operations, and simplifying complexities such as the appropriate tax liability structure can make a huge impact.
