Employee Mobility

Global Employee Mobility

Each year thousands of employees take part in international assignments to a subsidiary or a foreign branch. The cross-border movement of the workforce has an immediate impact on business, strategy, networking, and tax compliance. Overseas assignments are often so short in nature that no tax nexus is created, yet the presence of employees abroad may also span over a year or more. To relieve the tax compliance burden for multinational companies with foreign assignees, we have developed services to address the tax complications that arise in

Assignment of Foreign Citizens in the United States

US Citizens and Residents on an Assignment Abroad

Some of the most common strategies utilized by multinational corporations with employee mobility programs in place include cost-of-living adjustments, tax equalization, and tax protection plans. We have highlighted the aids and pitfalls of each.

Tax Neutrality & Cost-of-Living Allowance

Under the tax neutrality concept, the employer remains neutral to the differences between the tax laws of the home and host country jurisdictions. Many companies adopt a tax neutrality approach as it is relatively simple to implement and requires a minimal involvement. The tax neutrality efficiently shifts tax compliance burden to the employee in exchange for various stimuli.

For instance, the employer may offer a cost-of-living adjustment, an allowance, or other monetary incentives to encourage employment abroad. The stimulus payments absorb the differences in the tax rates and the cost-of-living, thus, the employee might end better off compared to a stay-at-home-country employment.

Nonetheless, the tax neutrality approach requires an understanding of the host country environment, including the tax legislation, to ensure sufficiency of the salary adjustments. This notion is particularly true if the assignment is from a low-tax jurisdiction or a developing country to the USA. Otherwise, the transfer might "penalize" the employees if the salary increase is insufficient to compensate the higher tax rates and the increase in the cost-of-living.

Tax Equalization or Hypothetical Tax

To mitigate the downsides of the tax neutrality approach, many employers maintain a tax equalization policy. The tax equalization ensures employees would not bear the burden of the changing tax rates as if the host country employment had never taken place.

Under the tax equalization approach, the employer covers the host country income and social security taxes of the employees. In exchange, a "hypothetical" tax deduction is made from the assignees' paycheck to account for the tax that would have been due if the employee had worked in the home country. Constructively, the tax equalization places the international assignee on the same stand with home country employees.

A disadvantage of the tax equalization approach is the requirement to implement and utilize a comprehensive tax equalization policy. The policy must be contemporaneous enough to account for prospective tax law changes that affect various payroll tax deductions. Moreover, additional complexity arises when the employees' salary is paid out in currency other than the US dollar. Consequently, it is advisable to use a fixed or an average exchange rate and make year-end reconciliation to compensate for exchange rate fluctuations.

Tax Protection & Tax Compensation

The tax compensation or protection plan is a combination of neutrality and equalization. Under this approach, the tax compliance burden in both home and host country jurisdictions remains with the international assignee. However, the employer agrees to compensate the excess taxes paid by the employee after year-end.

The tax protection requires current deductions and payments of all home and host country taxes and applicable social insurance from the employee's wages. Next, the employee files tax returns in both countries to claim any tax refunds due or cover any remaining tax liability. Finally, the assignee provides copies of the tax returns to the employer and receives reimbursement for the excess taxes paid.

Though practical and more accurate in nature, the tax protection plans have some disadvantages too. If the employee is assigned to a high-tax jurisdiction, the additional tax costs would significantly reduce net disposable income. The compensation of the excess taxes takes place after year-end, which creates incentives for non-compliance with the tax laws and violates the matching principle. Finally, many countries, such as Australia, New Zealand, the United Kingdom, or South Africa, have a tax year other than the calendar year. In such an event, another "hypothetical" tax return might be required to compute the amount of excess taxes if the assignment is to a calendar year country, such as the USA.

Foreign Citizens Transferred to the United States

Under the internal revenue laws, the performance of personal services in the USA constitutes a US source income. Consequently, international assignees to the USA will be required to file an income tax return. A tax return filing exemption is available to employees with gross remuneration of less than $3000.00 and physical presence in the USA of 90 days or less. The exemption applies to residents of all countries to the extent the remuneration comes from a foreign employer.

Different rules may apply under the tax treaty provisions of Article 14 "Income From Employment". Most tax treaties exempt from US federal tax salaries, wages and other work-related compensation paid to a foreign resident, if the assignee is present in the USA for less than 183 days, the compensation is paid by a foreign employer and no US permanent establishment exists. Still, the international assignee must file a tax return to claim the benefits of a tax treaty. Moreover, many states do not conform to federal rules, and the compensation might be taxable under state tax laws.

We offer employee mobility services to foreign corporations that transfer employees to the USA. Our services include

  • Assistance with tax neutrality, equalization, and protection plans
  • Application of tax treaty provisions, Social Security Agreements, and assistance with the US transfer pricing regulations
  • Various payroll and accounting services
  • Complimentary preparation of income tax returns for your business and employees
  • Assistance with residency requirements for E, H, L, O, and P visa holders
  • Preparation of Form 8233 "Exemption from Withholding"
  • US income tax advisory services, determinations, and appeals
  • Preparation of payroll returns, W-2 forms, 1042-S forms, and other information statements and returns
  • Assistance with ITIN applications for employees who do not qualify for a Social Security Number

US Citizens and Residents on an Assignment Abroad

US citizens and residents remain subject to the US income tax even if they relocate abroad. Consequently, American citizens and residents are required to file a US tax return even if they have no US source income. The US tax return filing requirements are in addition to any host country reporting, which increases the compliance burden for both the employer and the international assignee.

Our global employee mobility services designed to US businesses with employees abroad encompass

  • Assistance with tax neutrality, equalization, and protection plans
  • Application of tax treaty provisions and Social Security Agreements
  • Complimentary preparation of all federal and state income tax returns
  • Assistance with Form 673 and exemption from withholding under Section 911
  • US income tax advisory services, determinations, and appeals
  • Assistance with host country tax provisions

Should you wish to register for our employee mobility services, you may do so at any time. Did not find what you were looking for? Ask your questions and get a free quote with more information about how we can assist you further. You may also contact us directly.