An employee is likely to see an offer of an international assignment as a vote of confidence from an employer and an opportunity for career advancement. However, there are a number of questions the mobile employee should ask of his or her employer prior to accepting the international assignment, especially when it comes to questions related to regulatory requirements (e.g., immigration, tax compliance) and compensation and benefits issues in both the employee’s Home and Host countries.
What Kind of Mobility Support Will Be Provided?
Mobile employees often face a number of regulatory issues stemming from their international move, including making sure that immigration and tax matters are handled appropriately for both themselves and any accompanying family members. The employee needs to determine whether he or she will be facing these matters on their own or whether their employer has a plan in place to provide them with assistance.
Many companies that regularly assign employees internationally have programs in place to ensure their employees are compliant with the immigration requirements of the Host country and the tax issues that often arise in both the Home and Host countries. However, if the company does not provide such a program, the mobile employee needs to seek clear answers as to the assistance their employer will be providing. For example, if your employer is not planning to provide support regarding tax issues while you are working internationally, you should seek the assistance of a mobility tax professional in advance of the move to ensure you understand and can take the steps needed to comply with all applicable laws and regulations. Failure to comply can result in unforeseen tax bills, reputational damage, and even legal issues.
Likewise, the mobile employee needs to inquire as to whether company support will continue once they have relocated to the Host country. Issues with a mobile employee’s residency and tax obligations may arise months or even years after they have relocated to a Host country. Will your employer provide support after you are established in the Host country, or does the company only provide support for mobile employees during their initial move? If your employment or personal income become subject to tax at a higher tax rate than you would have had in your Home country, will the company cover this increase in tax liability through tax gross-ups or a tax equalization policy that is designed to keep you in a neutral tax position during your employment abroad?
Will You Be Subject to Tax in the Host Country for Income or Social Tax Purposes?
Mobile employees may be subject to Host country income and/or social tax from their first day of work in the new location. For this reason, it is critical to understand the Host country tax rules in advance of working abroad. Here, the employee and employer should understand both the domestic rules for registering (i.e., do you need a tax identification number), reporting income, making tax payments (e.g., withholding or other payments), and filing income tax returns. In addition, there may be income tax treaties or totalization agreements (an agreement between the Home and Host location for social security purposes) that can address potential double taxation and compliance requirements.
Although many income tax treaties provide for a Host country income tax exemption for temporary employment, often for periods up to 183 days, it is important to understand if this rule will apply. The “183 day” rule is only one of a number of conditions that must be met to qualify for the exemption and the specific rule and interpretation can vary by country combination. As well, even if an income tax treaty exemption applies, it will only govern the income tax requirements and will not protect a mobile employee from other types of taxes or social security payments that may be levied in the Host country.
Rather than attempting to work through the complex Home and Host country tax rules themselves, mobile employees should consult with their company or an outside mobility tax specialist to understand how their income will be taxed and the company policies that apply for compliance support and to address any incremental tax burdens
What Are the Company’s Compensation and Benefits Policies for International Employees?
It is important for a mobile employee to understand the potential incremental costs that can apply when working abroad and their company’s policy for handling these costs. Some costs, such as housing and moving expenses are more obvious. However, there can also be differences between the Home and Host location for the cost of goods, transportation, and children’s education that may require further review.
Some companies will structure compensation packages in a manner that ensures the mobile employee will not suffer a reduction of income because of the assignment. This may include working with a data provider who specializes in understanding the differences in cost between the Home and Host location. As mentioned above, it is also important for the employee to consider the difference in taxation between the locations in determining their take-home pay. Many companies will employ a tax reimbursement policy (e.g. tax equalization) to address any difference in Home and Host tax costs.
Note that some employers distinguish between international assignments that are initiated by the company and those that are requested by the employee. The company may not provide the same degree of assistance for differences in cost between the Home and Host location for self-initiated scenarios. In those situations, an employee will find it much harder to procure a tax equalization arrangement from their employer making it even more critical to obtain professional advice in advance of the move.
Sometimes an international assignment will move a mobile employee from his or her Home country employer to a subsidiary located in the Host country. The change can have a much larger impact on mobile employees than just a change in the name of the company issuing their paycheck. The subsidiary may offer a different benefits package, including changes in medical plans, insurance, and retirement plans. The move could also cause a mobile employee to lose benefits that have been accrued with their current employer.
Here again, it is critical for the employee to understand what benefits will apply while working abroad and the Home and Host country implications. For example, there can be tax implications for ongoing participation in the Home country pension plan in the Host country or Home country tax complexities if participating in a Host country plan. If possible, a mobile employee should also negotiate to address any reduction in benefits or loss of accrued benefits as a result of accepting an international assignment.
US citizens and residents face a number of challenges when they live and work in another country. One of the most significant challenges is understanding the application of US and foreign tax laws. Download our taxation booklet designed to help US citizens and residents gain a general understanding of the unique tax provisions associated with living and working abroad.
The information provided in this article is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.