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International - Global Mobility tax policy – trends, best practices, and avoiding pitfalls

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By Andrew Kelly and James Hourigan BDO in United Kingdom

Businesses that carefully consider global mobility tax policies, clearly document those policies, communicate them, and have robust processes to implement them facilitate smooth-running international assignment programs. Conversely, businesses that don’t invest time and effort in their Global Mobility tax policies spend significant and unnecessary time unravelling their position, causing significant distraction to and dissatisfaction from assignees.

What should an employer consider when deciding on policies, documenting those policies, and implementing them?

For those unfamiliar with global mobility tax policy, a summary of commonly adopted tax policies is included at the end of this article.

Current trends

During the pandemic years, employers were understandably focussed on planning and implementing domestic and international remote worker policies. Whilst some businesses have revisited their broader global mobility tax policies to reflect both preexisting and new patterns of international assignments, many have not. Additionally, as the cost-of-living crisis has impacted employees and employers alike, the movement away from tax equalisation as a default tax policy of global mobility has continued apace.

Increasingly, we are seeing businesses adopt tax policies where international assignees are ‘tax protected’, or ‘partially tax protected’ on stipulated assignment benefits such as relocation costs, accommodation, and schooling. With partial tax protection, whilst the assignee may be personally responsible for their own home and host country taxes, the employer will settle the host country tax (and home country tax where applicable) on those benefits. Under some policies, partial tax protection may be phased out over time.

Best practice and avoiding pitfalls

The concepts discussed below are not exhaustive, but address the main areas:

  • Tax policy guidelines. We have encountered some employers who reference tax equalisation or tax protection in assignment letters but have no policy document that outlines how those tax policies works in practice. It is important for employers to both reference the tax policy in the assignment letter and make a tax policy document available to international assignees.
     
  • What is covered and what is not covered. A well set out policy document will include:
    • What employment income items are covered;
    • Whether it applies only to employment income or also to personal income (typically not for the latter);
    • What taxes it applies to (typical exclusions will include CGT, estate taxes, and consumer taxes);
    • Whether it applies also to social security;
    • Who gets the benefit of expatriate tax concessions; and
    • How is spousal/partner income treated if the spouses/partners file jointly.
       
  • Matching the policy to the reason for the assignment. For example, it would be unusual to apply tax equalisation or tax protection when an employee is moving to another jurisdiction for personal reasons. When an assignee is moving from a low-tax jurisdiction to a high-tax jurisdiction for commercial reasons, tax equalisation or tax protection are commonly applied; similarly, if an assignee is moving to a low- or zero-tax jurisdiction from a high-tax jurisdiction, they are unlikely to accept being tax equalised or tax protected.
  • Policy administration, for example, payroll and reconciliations. For an assignee that is tax equalised, you would expect hypothetical tax (and potentially social security) to be deducted from their stay-at-home (SAH) income rather than having actual tax and social security withheld via the host county payroll. It is good practice to make clear to the employee how tax and social security deductions will be applied, for example, by providing a balance sheet or a mocked-up payslip. The process for how and when a reconciliation is performed, who is responsible for payments, and who will receive the refunds should be addressed in the policy. Policies will generally indicate that the assignee is responsible for penalties and interest unless there are mitigating circumstances.
  • Tax support and cooperation with appointed advisors. When tax equalisation or tax protection are adopted, a company-appointed global mobility tax advisor will be able to ensure that appropriate expatriate tax concessions are claimed, and the reconciliation undertaken in accordance with the policy. Even when you agree that an assignee may use their own tax advisor, the assignee should release a copy of the tax return(s) to the appointed advisor to perform the reconciliation. Assignees should be required to co-operate after their assignments end or after they leave employment -- there could be a large tax refund due back to the business! 
  • Interpretation of the policy. It should be made clear that when there is a dispute between the employer and the assignee, the employer’s interpretation prevails, and its decision is final.
  • Multijurisdictional policies. Tax policies tend to be written from the perspective of the business (HQ) from which assignees are sent, and often reference terms, time frames, and rules specific to that territory. When assignees are sent from multiple country entities within the group, the policy should be worded in a jurisdiction-neutral manner, or appendixes should be added that spell out specific applications of the policy for a given territory. This is commonly seen in the U.S. and in jurisdictions that do not have a withholding tax regime.
  • Reviewing and updating. The pattern of secondments changes and new taxes/levies (such as high-income surcharges) may be introduced from time to time, or expatriate tax concessions may change. It is good practice to review the policy periodically and update it as necessary.
Next steps
If you require any support assessing what type of policy is suitable for your business, designing a global mobility tax policy, or reviewing the suitability of your current policy, please contact Andy Kelly and James Hourigan or your regular BDO advisor.   
 
Common types of global mobility tax policy:

Under this type of global mobility tax policy, the employer applies no specific tax policy, and the employee is responsible for all the tax and social security due in the home and host territories on all employment and other sources of income based on the relevant tax regime.
 

Employees are naturally receptive to this approach when they are seconded to a low- or zero-tax rate jurisdiction. Whilst in theory this type of tax policy requires the least administrative effort on the part of the employee or the employer, the absence of a policy may result in employees declining assignments or accepting them only when there could be a financial windfall.

Tax equalisation aims to ensure that the employee is no better or worse off in terms of tax and social security on their employment income whilst on an international assignment. Tax equalisation will generally apply to the employee’s ‘stay-at-home’ (SAH) employment income (which excludes any assignment allowances/benefits) on which the employee will continue to be treated as responsible for income tax and social security in their home country. The employer will be responsible for all income tax and social security (if applicable) on all the employee’s employment income (SAH and assignment related) in the home and host countries. This is commonly used for short-term assignments (STA) when the employee has triggered host country tax liabilities but not broken their home country tax residency. It is also used for long-term assignments (LTA), albeit increasingly sparingly. Employees on an LTA will typically have broken their home country tax residence and so hypothetical tax is generally deducted via payroll to reflect the home country income tax and social security due on their SAH income. Employers will generally make clear that tax equalisation will apply only to employment income and not personal income, so that the business is not exposed to the tax consequences on events such as a home disposal during the assignment.
 
A tax reconciliation is undertaken at the end of each home country tax year.

There are a few variations on how tax protection can be applied, but the general principle is that the employee cannot be worse off from a tax perspective because of an assignment, but the employee can be better off. Unlike the case with tax equalisation, with a tax protection policy the employee can have a tax windfall, for example if the host jurisdiction taxes are lower than those in the home country or if an expatriate tax concession lowers their income tax liability below what they would have paid in their home country. 
 
As indicated in the article, partial tax protection is becoming increasingly common, whereby the employer agrees to settle the tax on specified assignment-related benefits, not on their full assignment remuneration package.

A reconciliation is undertaken at the end of each home and or host country tax year depending on the specifics of the tax protection policy adopted.

Under this approach, a company decides that rather than adopting a tax policy, it will deal with each assignment situation on a case-by-case basis. A drawback of this approach is that it can be time consuming to agree/negotiate an individual tax policy each time there is a secondment. We generally see this approach with employers that have only a small number of assignees, or in situations where senior executives are moving, for commercial reasons, and a bespoke arrangement is put in place to reflect the remuneration they are provided and the relevant tax jurisdictions.
 
 For larger international assignment programs, to allow flexibility of policy, a business would typically have different tax policies to be applied according to the profile of the assignments.