| Whenever a company
expands its operations internationally, employees move
as well. There are an amazing number of issues to consider
before 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 and the
ensuing Sarbanes-Oxley Act, 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 requests their transfer may have
little appreciation of the costs that can be involved
in sending an employee on an 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 assignment overview is vital
to determine whether an assignment will exceed the expected
project return or at least inform all necessary parties
of the cost of the decision. This will 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, often within days.
In selecting an immigration advisor, you should choose
a firm registered with the Office of the Immigration
Services Commissioner (OISC), such as WJB Chiltern plc,
who 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
company 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 will not qualify for the foreign
earnings exclusion whereby approximately $80,000, plus
a portion of housing costs, can be excluded from US
taxable income.
An assignment of more than three years can result in
all earnings being assessable to UK tax, including all
those non- UK workdays in the rest of Europe and elsewhere.
In contrast, an assignment of less than three years
can result in income attributable to non-UK workdays
not being taxable in the UK, providing payroll arrangements
are structured properly. Furthermore, assignments of
less than two years can be even more favourable as,
in certain circumstances, accommodation and subsistence
expenses may not be taxable in the UK.
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 companies 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 whilst 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 was normally employed in the
US before the transfer and is assigned for less than
five years, a continuing US social security liability
can be agreed. 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’s 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 that all parties know their obligations.
Compliance
US citizens and US residents, generally including green
card holders, are liable to US taxes on a worldwide
basis and will continue to have to file US federal tax
returns whilst on assignment. State returns may also
be due depending on the individual’s circumstances.
Returns need to be prepared in accordance with US tax
rules. However, 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’s 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 matters
in order to give the assignment every possible chance
of success.
Summary
We cannot explore each issue that can arise from international
assignments at length here, but we hope we have at least
raised general awareness of some of the main areas for
consideration. These issues need to be addressed in
detail in order to get the best return on your investment.
For further advice or information on how our specialist
tax and associated skills can assist you, e-mail
eas@wjbchiltern.com
or visit www.expatsolve.com
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