Expatriate management best practices, risks and opportunities
A good thought-through expatriate management process will no doubt significantly reduce the stress level for any company sending employees abroad and for the individuals themselves.
Once employees to send abroad for a company’s international expansion needs (or perhaps because the employee has requested to work overseas for a while for personal reasons) have been identified, there is usually a lot of paperwork and research to plough through to make the assignment a reality.
This is where having a roadmap for how the company is going to deal with the entire expatriate management process, from departure to repatriation, may make the difference between whether the assignment itself is successful or not.
For the employees who are leaving home, the journey is just beginning and what inexperienced companies often don’t realise is that they are committing themselves to thinking a lot more about their new expat after-work lives than they normally would.
The success (or lack thereof) in their expatriate management, will play a major role in the expat own happiness at work and sometimes, by extension, in the company’s ability to successfully expand overseas if this is the first and only individual they are sending abroad to explore a new market.
This is why it is vital to have a suitable expatriate management blueprint for the entire assignment duration so that the individual/s being sent, may focus 100% on the work they have to do whilst in the host country.
In order to design an appropriate expatriate management process, first of all, let us look at what is an expatriate and some of the different circumstances for which an individual may or may not require one.
Non-Expats: some people often refer to themselves as an “expat” even after they have been living and working as local hires, permanently transferred, in a foreign country for 20+ years.
These individuals may still feel an emotional attachment to their home country and / or never have fully adjusted to the host country’s culture, gained citizenship, etc. which is why they may still consider themselves as “expats”, but from a global mobility perspective, they are not expats.
An expat, in the international tax and global mobility world at least, is usually someone working overseas for up to 5 years, who has not been localized / permanently transferred, since there is an intention for that individual to return to their home country.
Commuters: these are often nationals of a first country, working in a second country but living in the first country. Quite common in Europe (for example between Belgium and the Netherlands) or in other locations where distances (i.e. workers living near the border between the US and Canada) allow for such an arrangement to be put in place.
Short term business visitors: individuals who have a regular pattern consisting of 2-3 days stays with each trip in one or more foreign country over a certain period of time.
Long term business visitors: long spells of up to 6 months in duration each time they work overseas.
Assignees: employees sent to work in an overseas location away from their “usual” place / country of work, usually for 1-2 years but they may be sent for up to 5 years sometimes.
Apart for the non-expats, each of the 9 steps of the below expatriate management process will be relevant to the other expat arrangements described above in some way.
Immigration should always be the first step to consider when planning to send an employee to work overseas.
The inability to obtain relevant work permits (which can be down either to the individual / country combination or to the costs involved being prohibitive) may become a real showstopper in allowing any type of expatriate arrangement to be put in place.
The main aspects to consider as part of the expatriate management process are:
A major consideration in setting up an expatriate management process and an assignment package is the degree of tax assistance the employer intends to give to the individual.
One of the main reasons why tax assistance is given is to ensure that employees do not have to pay more taxes as a result of their overseas workdays, which in turn impacts the net salary received.
As already discussed when we touched upon the concept of shadow payrolls, there are three classic approaches:
The principle of Tax Protection / Tax Equalization is that home hypotax is calculated on (and deducted from) “stay at home” gross employment income such as salary and estimated variable compensation to provide a benchmark.
This is then compared to actual taxes which would have been paid at home, had the expat never gone to work abroad.
The difference is then compensated by the employer by way of cash reimbursement so the employee is left “whole” (or vice versa if the employee has been under-withheld in terms of hypos).
Once the level of tax assistance has been decided, good expatriate management practices dictate that the agreed terms of the relocation for work abroad are captured in an official assignment letter.
A well written assignment letter will document the relocation policy (housing allowance, cost of living allowance (COLA), relocation expenses), exchange rate policy and any other policy (such as repatriation and home leaves) to be adhered to whilst the employee works abroad.
The foundation of any compensation package is the base salary, reflecting the value associated with the position, determined by a combination of the position and employer’s philosophy in regard to that market.
As explained in the previous section, a well written assignment letter will also detail benefits and allowance to ensure there are no misunderstandings on what the expatriate overall compensation may or may not include.
In designing a fair and competitive compensation package some companies choose to run cost projections either themselves internally or with the help of a third party provider.
The importance of running a cost projection cannot be underestimated as it is invaluable to many businesses to have a clear picture of how much the entire operation is going to cost them.
No expatriate management programme should be implemented without thought being given to the actual logistics in connection with relocating for work abroad.
This is where companies may choose to approach relocation vendors in order to facilitate their employee in finding suitable accommodation, a school for their children, shipment of their goods and other important logistic aspects in connection with the move.
Many expatriate employees are not familiar with the requirements of the host country tax system and companies provide this support not only as a benefit to the employees themselves to help them comply, but also to ensure that as a company representative, the employee is not exposing the business to non-compliance risks.
This protects the company from potential reputational damage for failure to ensure fiscal compliance and it’s considered good expatriate management practice.
Typical compliance services and assistance may include:
No comprehensive expatriate management process would leave out the identification of potential tax or social security contributions saving opportunities.
For instance, depending on the home / host country combination, it might be possible to apply for an A1 Certificate or Certificate of Coverage, to avoid host country social security obligations.
Similarly, some countries offer special and fiscally advantageous tax reliefs for expats and foreign workers in an attempt to lure them to contribute to their economies.
The “Hot Topics” section of this website contains articles which cover the main countries that offer special concessions to expatriates.
In any case, the individual tax and social security analysis is a must-have of any decent expatriate management endeavour.
In terms of expatriate management, choosing a suitable payroll arrangements is incredibly important. The options available usually are:
– Home or Host payrolls
– Split Payrolls
– Dummy (Shadow) payroll arrangements.
In the UK for instance, an employer is required to withhold wage taxes, known as Pay As You Earn (PAYE), from an employee’s salary and to remit the PAYE to the UK tax authorities (HMRC) on a monthly basis.
These rules apply to employees who spend more than 183 days over a 12 month period (or sometimes over a fiscal year) in the UK and therefore are not able to use the double tax treaty (DTT) between the home country and the UK to exempt their employment income from UK tax.
In accordance with the employer obligation to withhold PAYE, it is necessary to put in place payroll arrangements to ensure that the UK PAYE obligations are complied with for employees.
If the intention is to maintain the employee on the home payroll, then the UK payroll arrangement will be a “shadow” payroll. This is a non-cash payroll required to allow PAYE compliance in the UK.
It is not the primary payroll from which the employee will be paid.
At the end of the tax year (5 April of each year), the employee will need to file a UK individual income tax return (deadline for filing is 31 January following the end of the tax year in question).
Based on the information reported in the tax return, the final UK income tax liability will be determined.
The PAYE taxes paid will be off set against the tax liability arising and may result in a UK tax refund (where certain deductions like overseas workday relief are available) or an additional amount of tax may be due (in situations where the employee has other non-employment income which may create an additional UK tax liability).
Any residual under or overpayment would likely be due from / to the company if a tax equalization policy is to be adopted but excluding any private income.
Details of what is and is not to be covered by the chosen tax policy (see section 2 above) would need to be clearly explained to the employee/s.
If the company opts for tax equalization, the UK taxes will be paid wholly by the company, in consideration of a payment to the company by each employee of the income taxes that would have been payable, had the employee remained in their home country (that is “hypothetical” (“hypo”) tax).
This will be achieved by the employees being paid a net amount through the home country payroll (that is net of “hypo” tax).
As the employee is being guaranteed a net payment, the UK payroll is run on a “net to gross” basis which produces a tax gross up.
While home actual taxes will arise, they should be reduced substantially by the UK taxes that are paid.
This is known as a Foreign Tax Credit (FTC).
In principle, the UK taxes should be fully creditable against the ultimate home taxes arising (subject to certain limitations, such as AMT in the US).
On this basis, it is possible to significantly reduce, if not eliminate, actual home taxes arising and accordingly it is usually possible to reduce the actual home payroll withholdings (by adjusting the W4 US tax code applied to US payroll in the case of the US).
This means that the actual payroll can be run and physically paid through the home country.
This will enable social security contributions (such as FICA, Medicare, 401K in the US) to be calculated and paid over, but the actual income (federal and state) taxes will be substantially mitigated / eliminated on a month by month basis.
Clearly, it is a fairly complicated mechanism to manage and run for a company not accustomed to dealing with expats payrolls.
Nonetheless, it is all part of expatriate management best practices.
The final piece of the expatriate management process is choosing the most suitable inter-company service agreement (ISA) and intercompany accounting treatment.
Both sending and receiving entities need to agree on mutually convenient adjustments and recharge of costs for the expenses incurred in connection with the expatriate working abroad.
An exchange rate policy will typically also need to be agreed.
The reason why this final step is an important piece of the expatriate management process is because there are potentially various factors at stake depending on the decisions taken.
An individual may prima facie not be taxable in a foreign country if working there for less than 183 days unless there is a recharge of costs to an entity or a Permanent Establishment (PE) in that country.
An another example of how the recharge of costs (or lack thereof) might have an impact on both company and individual is to do with the obligation to operate a UK payroll for a Short Term Business Visitor (STBV).
Once the assignment is nearing its end, both companies and individuals are often just as anxious about repatriating as they were when they were jetting off to work abroad for the first time.
Repatriation is the last step in the expatriation management lifecycle but it needs to be carefully managed, like any of the other steps discussed in this article, due to the emotional and mental readjustment both employees and their families will have to go through.
The delicate process of repatriating an expat might also happen not only at the end of the assignment but also during the middle of it.
This is why a carefully crafted expatriate management plan should also include a detailed policy around:
This final point of the expatriate management process therefore should not be overlooked.
Given the complexities around expatriate management, it is recommendable to engage the expertise of a niche expat tax and global mobility specialist to advise on the best approach to follow for each individual circumstance.
Contact us should you require further clarifications on expatriate management process best practices. We offer a free ½ hour consultation.
Limited situations do exist where an individual can work overseas without triggering a tax liability.
The trigger point is usually 183 days spent in the overseas country, providing that no costs or salary are borne / recharged to a local entity or PE.
However, as in the case with the UK and STBV rules, there might be circumstances requiring a UK payroll to be operated even when total workdays in a tax year do not exceed 183 days.
Furthermore, even if, no tax or payroll requirements arise, there are still other points discussed in this 9 steps expatriate management guide which would be applicable and therefore, require a detailed analysis.
Immigration is always a relevant factor that requires considerations unless the individual is a national of the host country or an EU citizen doing work in another EU member state.
Social security is another one which more often than not requires the application of a Certificate of Coverage / A1 Certificate in the home country even for short term business trips.
Permanent Establishment risks should also not be underestimated to avoid inadvertently triggering a de facto PE in the host country by virtue of the activities carried out by the employee.
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