Cost optimised mobility

Cost has always been a priority area for mobility and international HR teams to proactively manage. It is without doubt a major focus now. Taxes are often associated with complexity and compliance and is traditionally seen as a particular difficult area of the mobility process. Taxes are, however, also an area through which substantial cost savings can also be accessed.

Awareness of the global mobility related tax planning opportunities is key to adding value for those managing mobility. There can be very substantial cost savings, often savings for the employer under tax equalisation, so it is vital they are not missed.

How valuable can cost savings be?

They can be very valuable. This relates in part, to how tax equalisation works.

Tax equalisation is an approach that seeks to neutralise differences in tax rates between countries to promote employee mobility. The employee usually agrees they will continue to pay the same level of tax as their home country. This may be through a hypothetical tax withholding. In return, the employer agrees that they will settle the actual taxes due.

As the employer is settling the taxes due, the compensation becomes what is known as net. Tax rates that apply on net compensation are higher because paying the tax for an employee is, a benefit on which tax is then again due. As a result, grossed-up tax rates apply.

To whom do mobility tax breaks apply?

The rules differ from country to country so local tax expertise is necessary. There are specific tax breaks that apply to globally mobile employees. There are also other tax breaks that were not specifically designed for globally mobile employees, but nonetheless these tax breaks could still apply to them.

The tax breaks could apply to all forms of globally mobile employees including long term assignees, short term assignees, local hire employees, business travellers, Directors, commuters, and those with regional or cross border roles. 

What kind of mobility tax breaks are there?

The rules and conditions really do vary location by location. Broadly, they fall into one of the following groups.

1. Mobility tax concessions
   Talent attraction is key to a number of major economies. Mobility tax concessions provide preferential lower tax rates and/or significant exemptions from tax. China, Spain, Italy, France, Netherlands, Russia, Sweden, Portugal, Ireland are just some of the examples.
   
   There are usually specific requirements on the type of employee who can qualify, for how long and there may be procedural rules to consider e.g., an application must be made by a certain date in a certain way. Therefore, early identification of these is critical.
2. Housing
   This is a large part of the overall cost of a globally mobile employee. Grossed-up for taxes it is even bigger. There is a number of countries have the concept of a temporary workplace or dual household cost which provides tax exemptions in respect of housing related costs. The UK, Germany, USA are just some of the examples. If you have short term assignments, just check if the host country housing, travel, and subsistence costs will be exempt, to ensure cost savings are not overlooked.
3. Pensions
   This is a key part of a globally mobile employee’s compensation. Some countries provide ‘matching’ rules to exempt foreign pension contributions, if those foreign plans broadly align with local plans that qualify for local tax advantages. Checking how foreign pension participation is treated locally for tax purposes should be a key step. Applying these matching rules can really have influence on the overall assignment costs.
4. Non-host workdays/time apportionment calculations
   A number of countries will not tax compensation attributable to duties not performed in the host location, provided certain conditions are met.
   
   Depending on the number of non-host workdays, this can be a significant tax saving. How many globally mobile employees in your company constantly work in a number of countries, not just the host country to which they have been formally deployed? This is a key potential cost saving to explore when you know the employee will be working in more countries than just the proposed host location. A systematic review is crucial to keep costs down.
5. Tax efficient benefits delivery
   How particular compensation is delivered can change how it is taxed. Allowances tend to be less beneficial than reimbursements unless the allowances are paid in accordance with locally set tax-free limits.
   
   In some locations, certain benefits can result in lower taxable values (different to the actual cost) if the employer directly pays, or contracts, for the benefit. This could apply for example to large costs like accommodation and education. It is important to check if this applies to all the costlier benefits forming part of a globally mobile employee’s assignment package.
6. Travel and home leave
   Travel to, and from, the host country and home can benefit from tax exemptions in a number of countries. Care needs to be taken to understand the local specifics. For example, are there time limits, limitations to the number of trips, or do they have to be reimbursed rather than paid directly by the employee or as an allowance?
7. Timing and type
   The timing of a globally mobile work arrangement and its type – assignment, local, local plus, commuter can significantly impact the tax costs for employers. It could be that by changing the start date of the work arrangement, or by managing the number of days in the host country. This could help to manage the tax status of the employee in an advantageous way.
   
   The advantage can be multi-year in impact and not just relating to the initial year. For example, if an employee is not-resident in a country for the initial tax year (proactively managed to be so) then the tax rate in that first year could be reduced. That may allow tax breaks applicable for subsequent tax years to start later and therefore extend the applicability of such tax breaks, resulting in greater cost savings.
8. Relocation expenses
   There are often exemptions for key relocation related expenditure such as shipping, temporary accommodation, replacement furnishings etc. Some countries will regard certain reimbursements or lump sum allowances as exempt from tax. Checking the rules and then structuring the relocation support accordingly can be an effective way of reducing assignment costs.
9. Social security
   Social security rates vary greatly around the world. Employer and employee contributions usually apply and it can be a significant cost aspect of mobility. As employees are deployed and work across borders, the applicable rules can change. It could be that an employee working outside their home country removes or reduces the social security due. Not understanding when these changes occur could result in unnecessary costs. Where social security is paid can also be driven by the assignment structure that is adopted – the length, the employing entity etc. Proactively reviewing these aspects during the planning stage can deliver savings.
10. Tax policy and process
    Globally mobile employees trigger taxation that is often borne by the employer that could be payroll taxes and liabilities on tax returns for example. Unless good policy and process is applied the costs cannot be proactively managed or legitimately mitigated. For example, most countries provide some mechanism to prevent double taxation. If tax preparation support and process is not enabled which double taxation cannot mitigate. It can be as simple as ensuring that the payroll taxes in the host country are correctly treated on home country tax reporting and through the right process to ensure that tax refunds or tax benefits are correctly returned or refunded to the employer but not kept by the employee. In some countries, doing this in the right way may also result in lower tax rates applying to the payroll taxes due by the employer.   

What are the complications?

Local expert tax assistance is vital, although there are overall themes, the rules and process are always country specific. As a result, it is necessary to understand what procedural steps there are to consider, to ensure the tax breaks apply. There may also be claims that have to be made on an employee’s local income tax return.

In short-term assignments, there can often be ongoing tax considerations in two countries. As a result, care needs to be taken not to focus exclusively on one location only. What is tax efficient in one country may lead to a worse impact in the other country, so it is important to keep an eye on the overall cross border tax position.

Conclusion

Taxes due by employers for a globally mobile employee can be an incredibly significant part of the overall cost of an assignment or cross-border work arrangement. Utilising mobility tax breaks is key to optimising the overall costs and ensuring a business does not incur unnecessary extra cost. Equally, it is crucial to explore early on the requirements and procedural aspects so that key set-up steps are not missed. 

For further information, please contact Kenny Law, or your usual Crowe contact.