Adapt tax policy. Enable expatriate assignments

Subscribe to the Industry News newsfeed

As more businesses pursue opportunities around the globe, companies increasingly have to revisit their expatriate programmes both in terms of cost-efficiency and tax compliance. Kemp Munnik, director: BDO Spencer Steward Tax Services, explains that putting a standard tax policy in place is one of the best ways of reducing a company's expenditure on expatriate programmes. Given the trends in international assignments however, companies would do well to revisit this policy regularly, allowing a certain amount of flexibility.

“With more companies moving towards short-term secondments, and an overall increase in the type and level of allowances being provided to employees, it's becoming more difficult to maintain a rigid, ‘one size fits all' tax policy,” says Munnik. “Companies are additionally discovering that having an adaptable approach to tax policy makes expatriate programmes far more competitive.” He adds that a flexible tax policy ensures equality among employees, legal compliance and that assignees are aware of their responsibilities.

When considering what type of policy to implement, Munnik explains that a number of issues need to be taken into account, “To create a truly flexible tax policy, employers must look at everything from the employee's residency position, to the treatment of allowances, to timeframes and how personal and spousal income will be treated.”

He maintains that while a more laissez faire approach to expatriate taxation – where employees were tasked with sorting out their own tax – is arguably still acceptable, this often deters recruitment especially in countries with a higher tax rate. “Companies are therefore moving towards tax protection or tax equalisation policies. Either may be appropriate – depending on the individual needs of one's company.”

“Tax protection policies, under which the employer undertakes to pay any tax liability higher than that of the home country, tend to be more popular when the employer has a small number of expatriates as this type of policy is far easier to administer,” says Munnik. It additionally gives expatriates the benefit of lower host tax rates, often acting as an incentive to take up assignments. On the flipside however, employees will be reluctant to move to higher tax zones – and compensation will need to be adjusted accordingly.

Tax equalisation stands in contrast to the above – essentially addressing the shortfalls of tax protection. “Tax equalisation allows employees to pay the same tax in the host country as they would in their home country. One of its additional advantages is that the employer enjoys tax savings, thereby reducing overall assignment costs.” Munnik adds that because the tax impact of assignments is neutralised, employees are more willing to move abroad.

When it comes to choosing the best tax policy for your company then, select the policy that helps you achieve your goals, whether these be reducing costs or increasing incentives for attracting the best overseas assignees. While there are advantages to maintaining a standard policy, it's vital that your policy has some flexibility and is reviewed regularly. In this way, you will ensure it continues helping you achieve your goals in spite of the dynamic legislative and competitive international environment.