Four steps your company can take to reduce global mobility risks
By Paul Rubino, Senior Director, U.S. Expatriate Tax
Sending an employee on assignment to another country is financially and administratively burdensome. Many estimates put the cost of employing an expatriate worker at two to three times the cost of compensating a traditional worker. Expenses include those related to visas and work permits, relocations, shadow payrolls, tax equalization, repatriation and more.
For many multinational companies, these costs are simply a necessary part of doing business in our global economy. But during the ongoing coronavirus pandemic, businesses and their employees are reconsidering the benefits and risks of expatriate assignments in light of health concerns, travel restrictions, tax incentives, the rise of remote working and more.
This blog post describes some important steps your organization can take to reduce its global mobility risks. These steps could put your company in a better position to thrive as our global economy recovers.
Recalculate your cost-of-assignment projections
Many companies with existing expat employees made cost-of-assignment (COA) projections before the coronavirus pandemic was declared in late January 2020. Others employers may have calculated the costs of future or contemplated assignments before the declaration.
As such, these projections could be based on assumptions that are no longer valid, pushing them significantly wide of the mark. Companies in this situation should consider recalculating their COA projections based on current regulatory realities, and update their budgets, strategies and policies accordingly.
Each expat assignment is unique, but here are a few factors to consider when making your new projections:
- The location of your expat employee. In some cases, this may be the home country (i.e., the expat has temporarily relocated back to his or her home country), in others, the target country. The location will affect taxes due to home- and host-country authorities. Any hypothetical taxes will have to be recalculated and tax equalization amounts adjusted in light of any unforeseen relocation.
- Applicable U.S. foreign earned income exclusions may need recalibration. Even if an expat has temporarily relocated to the U.S., he or she may still be eligible for the exclusion.
- Cost reductions from temporarily repatriated expats, for example those related to cost-of-living (COLA) and housing allowances.
- Additional costs to expats for hardship or adverse conditions due to lockdowns or for other reasons.
- Any change in the expat’s equity value in light of slumping stock prices, new tax incentives or other tax-triggering events.
- Any additional scenarios unique to your expat that may affect costs, such as changing the status from a long term assignment (LTA) to a short term assignment (STA).
Calculate the real costs of expat employment severances
The global economic contraction caused by the pandemic has left many multinational companies with little choice but to lay off some of their workforce. Some of these employees are of course expats on assignment.
This rather unusual situation of terminating an assignment while also severing ties with the expat creates at least one notable challenge for the employer. That is, when the expat employee has had his or her taxes “equalized” (i.e., when the employer has ensured the employee has not incurred any tax losses or derived any tax gains from the assignment), the employer is left holding hypothetical taxes from the expat employee. That employee will need to reconcile those taxes against the true tax for the year when completing his or her 2020 tax returns.
In such cases, the employer and the terminated employee may decide to estimate a tax-equalization settlement, paying the employee upon termination for taxes that will come due in the next calendar year. The company may also decide to estimate what it will cost the terminated employee to prepare and file his or her tax return, and also include that amount in the termination settlement.
Consider tax equalization policy caps on equity rewards
Many employers provide their expat employees with equity stakes in their companies as an incentive. You may want to consider putting caps on these incentives, so you put your company in a good position to thrive as the global economy recovers. A cap will not only reduce total employee compensation costs, it will also limit the employer’s future exposure to host-country taxes, especially in high-tax jurisdictions.
One good option is to base an equity cap on an average fair market value (FMV) of equity earned over 2020. The cap would only apply to employee-initiated transactions, such as option exercises on incentive stock options (ISOs) or non-qualified stock options (NQSOs) or employee stock purchase plan (ESPP) sales. (Restricted stock units, or RSUs, should be excluded.)
Imposing such caps will of course potentially reduce employee engagement, but (depending on the company’s situation) a cap may be fully justified by the current, unprecedented global economic situation. Employers should in almost all cases implement such a policy across the organization so that it applies to all expats, to avoid charges of favoritism and to promote employee engagement.
Understand your risks when employing remote workers in another country
Due to the pandemic, employers across the globe have asked their employees to work from home. Indeed, the practice of remote work may become our “new normal” long after the pandemic fades. In the meantime, companies must understand that there are significant compliance risks related to employing workers remotely, especially when they’re working across borders.
For example, I recently heard of a U.S. expat who was laid off from her UK-based job. Due to travel restrictions, she remained in the UK, and was quickly hired by another U.S.-based employer. The new employer is now paying her on a U.S. payroll, and not paying any income or social security taxes to UK-based authorities. This is of course in direct violation of local law.
Some employers and employees may feel that, because travel is now severely restricted, tax laws and enforcement have been relaxed. This is not the case, however, and in our example the employer and employee are putting themselves at risk of fines and reputational damage.