Tax Planning for Expatriates

he need for corporate tax planning, particularly for companies with international operations, is fairly obvious, and information on the various strategies is readily available. CPAs will find, however, that providing these corporate clients with individual tax planning and services for their U.S. employees assigned to foreign countries is less widely discussed.

TAX EQUALIZATION PROGRAMS

Companies that send employees overseas typically assist them with the added costs they may incur (for example, housing, cost-of-living differentials and English language school tuition). Such benefit payments generally are taxable income to the employee and may increase his or her individual tax burden.

Transferred employees may incur additional tax burdens if the work assignment is to a country with substantially higher tax rates than in the United States (many European countries fit this description).

The question arises as to who will be responsible for these additional tax burdens: the employee or the employer.

A tax equalization program is a voluntary system by which both the employer and the employee pay their respective shares of the latter’s global tax burden. The program, in essence, provides that the employee will pay neither more nor less tax while on assignment than if he or she had remained at home.

ADVANTAGES

A tax equalization program provides a company with several advantages.

Simplicity. The employee generally will not suffer a tax “penalty” as a result of the international assignment.

Fairness. Employees sent to different tax jurisdictions will be treated equally (in terms of taxes).

Certain employees will have the opportunity to offset a portion of the costs of the extra benefit payments they received while on assignment. (This opportunity depends on the state in which the employee lived before the assignment and how that state taxes international income.)

DIS ADVANTAGES

At the same time, these programs have drawbacks.

The cost to the employer can go up, especially if the employee is sent to a country with a much higher tax rate.

Cost exposure for the employer may increase if the employee incurs a high level of “personal” taxable income (for example, from stock options) while on the assignment. (This can be limited by capping the amount of “personal” income the program covers.)

A potential nexus issue: In general, a U.S. employee working abroad should not be placed on the payroll of the foreign affiliate at which he or she is working. (By staying on the U.S. company’s payroll, the employee remains eligible to participate in its benefit plans and continues to accrue benefits under Social Security.) However, keeping an employee on its U.S. payroll can expose the company to corporate income tax in the host country if it does not already have a taxable presence there or if a tax treaty does not cover the situation.

For a detailed discussion of the issues in this area, see “ Tax Planning for Expatriates ,” by the AICPA International Taxation Technical Resource Panel, in the April 2001 issue of The Tax Adviser.

—Nicholas Fiore, editor
The Tax Adviser