Author: Sowmya Rao – Manager in GTN’s South Region
COVID-19’s impact on world economies has been devastating, and mobility programs will no doubt need to evolve as a result of the pandemic. As countries begin to recover and hopefully begin to ease travel and other restrictions, companies will need to continue to take a hard look at the cost of running a business and innovate in ways the world has not seen before.
This innovation has already been reflected in the evolution of new mobility policies supporting employees working from outside of their usual office locations, including “Work from Anywhere” or “Virtual Assignment” policies. Many companies have also increased their use of non-traditional assignment types such as business travelers or short-term rotations.
Based on these rapidly evolving trends, it may be easy for organizations to overlook the use of more traditional mobility arrangements to support their business growth and talent management goals. However, long-term assignments, short-term assignments, and permanent transfers each have attributes that warrant consideration when determining the most appropriate way to meet the objectives for your company and employees. So, as mobility programs continue to evolve, it is important to understand the advantages and disadvantages of traditional assignment types and permanent transfers.
Traditional assignment types – long-term and short-term assignments
One of the most commonly used relocation types is an “assignment.” An assignment is the relocation of an employee from one country to another for a specific period of time. A long-term assignment will generally exceed one year, where a short-term assignment will generally be shorter than one year. Below we have outlined some of the benefits and drawbacks for these assignment types.
Benefits and drawbacks of long-term assignments
Long-term or expatriate assignments have long been a popular option for companies who need to transfer or obtain expertise, set up new entities/markets, or provide career development opportunities, especially for future global leaders within the organization. Here, the longer-term nature of the assignment lends itself to building better long-term relationships and in-depth knowledge that can be invaluable to your organization.
From an employee perspective, another benefit of a long-term assignment is the possibility of remaining on their Home country payroll. In this way, employees can often:
- Receive compensation in their Home country currency, avoiding the need to convert Host country currency in order to pay Home country expenses such as student loans or mortgages.
- Participate in the Home country benefit plans. For example, a US citizen/resident employee on a 3-year assignment to the UK can continue contributing to the Home country 401K, flexible spending plans, and will remain covered by Home country incentive compensation plans.
- Continue participation in Home country social security. In this way, there will be no break in the required time period to meet the coverage requirement for receiving the social security payments upon retirement. For employees at a later stage in their career, continued participation in Home country social security may be a deal-breaker.
As the COVID-19 outbreak has continued, some have also suggested that long-term assignments may be less risky from an employee health and risk perspective. An employee may be better able to shelter in place due to the long-term nature of the assignment, including having longer-term immigration status and housing than would be found with business travelers or shorter-term assignments.
Despite these benefits, a major drawback of the long-term assignment is often cost. Assignments can be more expensive to the company due to several factors, including:
- Providing additional allowances and benefits for the assignee. Common examples of these additional compensation elements include cost-of-living adjustments, hardship allowances, Host country housing, and moving expenses
- Meeting additional compliance requirements. Employees may now have Home and Host country tax filings. And your organization may have Home and Host country reporting and withholding obligations, including related administration expenses such as the cost of establishing and running a shadow payroll.
- Implementing a tax reimbursement policy for your assignee. Tax equalization remains the most common policy for long-term assignments.
- Handling on-going costs incurred for immigration, tax planning, budgeting, internal administration, etc.
- Failing to benefit from the expertise gained by your assignees by not retaining them as employees or finding a suitable position to use their new skills upon repatriation.
It is important to note that proper planning and policies can help to reduce or eliminate many of these drawbacks.
As many factors, including employment, tax and immigration law, and the availability of bilateral tax and social security agreements can impact the tax and payroll requirements for an assignment, it is important to consult with your mobility tax and legal advisors to make sure the long-term assignment is structured in an appropriate way.
Benefits and drawbacks of short-term assignments
Short-term assignments may allow companies to achieve several of the same benefits as longer-term scenarios, while also addressing several of the challenges. Benefits to the company of using short-term international assignments include:
- Like long-term assignments, an employee on a short-term assignment will often continue to receive compensation in the Home country payroll, seeing the same benefits as described above.
- The company may be able to offer a more modest compensation and allowance package to the employee, helping to reduce the overall tax and assignment costs to the company.
- For US tax purposes, certain reimbursements such as temporary lodging and per diems may be paid tax-free for certain temporary assignments of one year or less. Other countries may have similar rules for temporary assignments.
- Depending on the availability of income tax treaties and social security agreements, Host country taxes may be avoided or limited. For example, an employee on a 5-month assignment from the US to the UK may be able to avoid UK income tax if they will spend less than 183 days in the UK during a 12-month period, remain on the US payroll, and have their compensation expenses continue to be borne by the US entity. The availability of a social security totalization agreement would also provide for the ability to continue on US rather than UK social security through obtainment of a certificate of coverage from the US Social Security Administration.
- Short-term international assignments could result in a larger pool of potential employees for the international assignment program.
Despite these additional benefits, the shorter duration of the assignment may ultimately not provide enough time to allow the organization and assignee to accomplish all the objectives of the assignment. Additionally, the employee may not have enough time to fully “settle in” and develop relationships with the Host country office and clients.
In addition, short-term assignments, as compared to a long-term or expatriate assignment, do not always result in a lower tax and assignment cost to the company. By extending the assignment length to just over one year, the company may reduce the overall cost. Factors that may lead to additional cost include:
- Depending on location and the scenario, paying an employee under the expatriate policy may be less costly than providing a per diem and reimbursement of expenses.
- Administering a short-term international assignment may take more time than a long-term assignment. This could happen due to the length of the short-term assignment changing and requiring more constant support by the program administrator and/or tax services provider (e.g., monitoring the assignment).
- There are certain exclusions (i.e., “Foreign Earned Income” and “Housing” exclusions) and foreign tax credits available on a qualifying employee’s US federal individual income tax return that help alleviate double taxation that might occur as a result of an international assignment. These exclusions and credits may result in a lower tax cost to the company if the assignment is just over one year, rather than short-term.
- An employee on an expatriate assignment will often break state residency during the assignment period; an employee on a short-term international assignment generally will not break state residency. Thus, the state tax cost for the company will often be higher for the short-term international assignment.
Benefits and drawbacks of permanent transfers
Another commonly used relocation type is a “permanent transfer” or “transfer.” A transfer is a one-way relocation of an employee to a Host country for an indefinite period. In a typical transfer scenario, the individual will become an employee of the Host country entity, with Host country payroll and benefits.
Transferees will typically receive less company support than assignees. For example, instead of receiving allowances designed to keep an individual in a neutral purchasing position in comparison to their Home location (i.e., through provision of housing, cost-of-living, and other allowances), a transferee may receive a local pay package with limited or no allowances. Instead of tax equalization, they may only receive limited tax compliance assistance. Due to reduced support, transfer cases may initially have lower overall costs for the company than assignments.
Permanent transfers are often considered in scenarios where specific skills are needed/not available in the Host location, where the cost of an assignment is considered too high, or for employee-initiated moves. Because of the transfer to local payroll, administrative costs and complexities may also be reduced as the Host country entity would handle any reporting or withholding obligations. In addition, the risk of creating a taxable presence for the Home country entity (e.g., permanent establishment) is also reduced as the individual has severed employment ties in the Home country.
However, despite these potential benefits, a transferred employee will likely receive compensation in Host country currency, and Host country benefits may differ from Home country benefits. Transferees are generally not eligible to contribute to Home country retirement/benefit plans such as the 401K plan for US employees, or contribute to Home country social security, which may be a significant drawback for those that are at senior or executive level or those approaching retirement. Additionally, employees take on exchange rate risk, potential cost-of-living issues, and potentially higher taxes.
From a talent management perspective, it may also be more difficult or costly to later relocate an employee who has been transferred rather than assigned to a location. A transferee will now be tied to a pay package and cost-of-living in the Host location, which will create a new point of reference for future moves.
What is the best relocation type for your company?
As has been shown, the type of relocation best suited for a given employee and your organization will be based on many factors. Key questions to consider include:
- Why is the employee moving? Is the move initiated by the individual or needed by the organization?
- What are the organizational goals relating to the move? Is the timeline for the proposed relocation reasonable to achieve these objectives?
- Does the employee’s career and personal goals align with the proposed scenario?
- Does the scenario support the longer-term career development objectives for the employee—e.g., will there be ongoing support to make sure the investment in the employee is not lost due to not having an appropriate repatriation plan?
Effective management of cross-border assignments can help firms that are trying to grow their business in key global markets while simultaneously reducing costs. There is no one-size-fits-all approach, hence, every assignment type and policy should be closely reviewed by the company based on the specific assignment objectives.
If you have questions about different assignment structures or how they could impact your global mobility program, schedule a call with our team. We are happy to discuss your specific situation.
Author: Sowmya Rao
Sowmya has ten years of experience in mobility tax. She joined GTN in 2018 and currently serves as Manager in GTN’s South region. Sowmya helps clients manage the details and deadlines of their mobility tax programs. In addition, she assists with expatriate tax planning, compliance, and consulting and works through the intricacies of mobility programs by supporting her clients at every step.
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