Expat Tax Implications for the International Assignment

Gregory had always looked forward to an overseas assignment when the timing was right. He and Anna decided to stay close to family when the boys were young. They had ignited the boys love of travel when they had taken the boys to London when they were in elementary school. The boys were older now and he had hoped the right technology integration assignment would surface.

The time has come: Gregory is ready and so is the family. He has accepted a two-year Prague assignment that begins before school starts. Gregory and Anna will return to Prague next week for an interview for the boys at the American Academy and a house-hunting adventure. Gregory is trying to cross T’s and dot I’s on the expat opportunity; however, he has only scratched the surface on Expat tax liability. How can he ensure that what he doesn’t know won’t hurt him?

The Company has streamlined the process of managing mobility and its focus seems to be on minimizing disruption by assuming the administrative burdens for the expat executive. Gregory had expected a larger comp package than what the Company offered for a big family move like this, and instead he has been reading about a term called tax equalization.

Robert Cinberg, Partner at Vialto Partners, mobility tax specialists, recalls when companies offered rich rewards to executives who were willing to accept overseas posts. In the 1980s, such assignments were less sought after and considered almost a sacrifice to accept. Expat executives would often live off these allowances and benefits and bank their salaries. In the last five to 10 years, companies realize that they don’t need to incentivize people to take assignments to countries like the U.K., Japan and Singapore. And they are whittling back some of those allowances,” Cinberg said.

As global mobility has become more commonplace, the new standard is tax equalization, which is defined by the Forum for Expatriate Management as, “the process by which an employer seeks to leave the expat employee in a neither better nor worse financial position for having gone abroad by deducting the value of the US taxes that the employee would pay if they were working in the US from their paycheck, and then paying the taxes due to both the US and the host country directly, as applicable.”

Cinberg says simply that companies strive to have the executive pay similar tax to what you were paying before you went on assignment. As an example, Japanese tax rates can be upwards of 50%. A Pennsylvania executive may be subject to a 30% tax rate. Once the same executive is working in Japan, the company will make up the difference between the 30% state tax and the 50% rate in Japan, a 20% difference. That example illustrates tax equalization, which is more complex in practice.

The Company’s tax subsidy is taxable to the executive, which makes tax equalization a continuous dribble of payments and reporting to ensure the “similar tax” standard is met.

In an annual survey of 400 companies and organizations surveyed by Vialto Partners, about 90% will provide tax equalization in order to stay competitive. “The rest are not being competitive and may lose talent,” he said, which is really important in today’s marketplace where talent is so hard to find.

Occasionally, the overseas compensation trail can provide unwelcome surprises. SFG’s Chuck Steege notes that stock options that may have vested while you were in-country and eventually sold may trigger a residual tax impact. These and other issues can be resolved if you are still with the company and problematic if you are not.

Steege reports his clients look to their employer (and the employer’s tax providers) for help with the complexities of tax equalization due to the complexity. “It may make sense to have a second set of eyes on how your taxes are actually calculated, with an eye toward tax equalization, he added.

The picture gets more complicated for long-term assignments, defined as one to five years. “U.S. residents are entitled to benefits, such as foreign tax credits, exclusions on their return, and the use of treaties may help to avoid certain double-tax issues,” Cinberg said.

Mobility tax specialists such as Cinberg and Vialto Partners strictly follow the Company policy in advising executives on tax equalization, such as allowable income and deductions to be tax equalized. An executive may acquire a second opinion if they are concerned about a significant balance due on the equalization.

Tax equalization is a specialized field. An executive may incur “trailing liabilities” in certain stock-based compensation, particularly when moving from country to country, where countries have varying tax triggers: some may tax at grant date, vesting or when the stock is sold. Cinberg cautions, “the problem with that is, if you move around a lot, you could end up being taxed by various countries on the same security, if you are unlucky.”

The Company has withholding obligations as well in those countries, which can be a complex stream to track and maintain.

Executives like Gregory need to be aware that you can incur a liability even after you leave a country. “U.S. executives will report their equity comp on the U.S. return, and now you have paid tax in all the jurisdictions on your trailing tax. Then you need to calculate and get a foreign tax credit in order to avoid paying double tax,” Cinberg notes.

Non-U.S. executives coming into the U.S. adhere to the same global policy in reverse, he says. “For people coming into the U.S., there is much more planning to be done around the timing of coming into the U.S., can we make them a non-resident in their first year (based on when they arrive), use of treaties, complications of foreign pensions.”

There is nothing simple and straightforward about tax equalization and Expat tax compliance. Fortunately, the Company is equipped to help you.

*The name, likeness, and circumstances in this example are a fictional composite of facts from executives similar to actual SFG Clients. SFG Investment Advisors does not provide tax or legal advice and individuals should seek guidance from their own tax and legal advisors.

Executive Compensation, Non-Qualified Deferred Compensation, Restricted Stock Units, Stock Options, Expatriate Executive Planning

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