Whenever a company expands its operations internationally, employees invariably move as well. There are an amazing number of issues to be considered in sending an employee on an international assignment. In such circumstances, many firms naturally look towards their auditor for assistance. However, following much-publicised concerns on auditor independence, alternatives may well be desired.

Assignment projection costs
One of the most frequent comments about expatriates is their cost relative to an equivalent domestic employee. The line manager who requested their transfer may have little appreciation of the costs that can be involved in sending an employee on international assignment.

In order to obtain sign off, it is helpful to have a rough idea of the costs at the outset. A cost calculation and overview can quickly determine whether an assignment will exceed the expected project return or it will at least inform all necessary parties of the cost of the decision. This will certainly help to prevent later discussion on cost overruns.

Immigration issues
When choosing an assignee, you need to be able to ensure they have the right paperwork to be able to enter the host country freely and conduct business. The UK currently has one of the most liberal business immigration regimes in the world and decisions on applications can usually be made quickly. In selecting an immigration advisor, you should choose a firm registered with the OISC, such as WJB Chiltern plc, which will provide guidance on the most appropriate application to file. This can range from inter-company transfers for established companies, to sole representatives for a company at the initial stages of establishing an international presence. The last thing anyone wants is that the expatriate and their family are refused entry!

Tax planning
Once you have selected the expatriate, you need to consider the assignment contract and period. This is where tax planning can save money. Who will be the employing entity, the UK or the US? For example, employment by the US corporation may allow continuation in US retirement or section 401(k) plans and can still obtain UK tax relief on contributions.

The assignment length will also have a bearing on both the UK and the US liability. For example, an assignment of less than one year is unlikely to qualify for the foreign earnings exclusion whereby approximately $80,000 plus a portion of housing costs can avoid US tax. In addition, an assignment of more than three years can result in all earnings being assessable to UK tax, including all those workdays in the rest of Europe that could avoid UK tax through a shorter assignment and the proper structuring of payroll arrangements.

You also need to decide what your employees’ tax obligations will be whilst they are on assignment. Are they responsible for tax on, for example, the provision of accommodation in the UK? Most US corporations operate tax equalisation for assignees. This means that the individual pays to the company what they would have paid had they remained in the US while the company pays the actual US and UK tax liabilities. How does your company intend to address this issue?

It is important that opportunities are maximised and this is best addressed before the assignee arrives in the UK.

Social security planning
Due to the US/UK social security agreement, an employee and employer generally pay contributions in either the US or the UK, not both.

Providing the employee has a history of paying social security in the US, continuing employment in the US and an assignment of less than five years results in a continuing US social security liability.

A certificate of coverage should be obtained from the US social security authorities to prevent the need to deduct UK social security (National Insurance Contributions). If the individual does not qualify for a certificate then UK contributions may be due from the outset.

Withholding taxes
Both the UK and the US have wage withholding. In the UK it is referred to as PAYE (Pay As You Earn). In the vast majority of cases UK PAYE will be due, even if the employee remains paid and employed by the US entity.

US withholding taxes generally cease where the individual is subject to a foreign withholding regime, ensuring optimal cash flow. The US payroll may, however, have to continue deducting US social security, contributions to US plans and possibly tax equalisation.

Failure to comply can lead to interest and penalties so it is important both the US corporation and the UK receiving entity know their obligations.

Compliance
US citizens and US residents, generally including green card holders, are liable to US taxes on a world-wide basis and will continue to have to file US federal tax returns while on assignment. State returns may also be due depending on the individual’s circumstances. Assignees’ US tax returns will be different to a “domestic” return due to foreign earnings exclusion, away from home expenses and double tax credits.

Individuals are also likely to have to file a tax return in the UK. The UK works on a fiscal year basis (April 6 to April 5) as opposed to the US calendar year and does not allow joint filing. In short, it is very different to US returns, although the imposition of penalties and interest bear similarities to the Internal Revenue Service regime.

Arrival and departure tax documents need to be completed and the manner of their completion will have a bearing on the UK tax treatment of the individual and, ultimately, the company, if they are tax equalised. Most employers will provide tax support assistance for the assignee. This will mean that they can focus more on their job and the reason for their assignment, as opposed to tax issues!

Other issues
This article has not attempted to consider other important issues such as the selection of the assignee, dual career implications, cultural adaptability, relocation and the provision of schooling and accommodation. It is essential that time is invested in addressing such issues in order to give the assignment every possible chance of success.

Summary
Limited space has meant that we cannot explore each issue that can arise from international assignments at length, so it has only been possible to raise general awareness of them. In order to get the best return on your investment, these issues need to be addressed in detail.

For further advice or information on how our specialist tax and associated skills can assist you:

WJB Chiltern
WJB Chiltern plc
3Sheldon Square, Paddington, London
W2 6PS
E-mail: eas@wjbchiltern.com
Website: www.expatsolve.com