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The Expatriate
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Employers
and employees alike should consider financial implications of overseas
assignments.
By William Poe
London, Paris, Hong Kong, Sidney, Rio de Janeiro, Amsterdam, Bombay.
The lure of cities like these can be irresistible, and today’s worldwide
marketplace is prompting more and more employers to place U.S. citizens
in foreign posts. But local tax experts say employees considering
such a move—and their employers, too—should carefully consider the
financial and tax implications before packing their bags.
“When someone gives you the opportunity to serve the company overseas,
that is by and large a good career move since the future for many
companies lies outside the U.S.,” says Ron Kanterman, a partner
with the accounting firm Brown, Smith, Wallace, LLC. “But the employee
needs to ask himself or herself, ‘What does this really mean for
me in terms of the cost of housing, goods and services and taxes?’”
Gene Morgenthaler, tax director of the St. Louis office for the
accounting firm Baird Kurtz and Dobson Certified Public Accountants
says he advises workers considering an overseas posting to “make
sure they remain in the same financial position as if they were
working in the U.S. There are many financial and tax implications—some
good and some not so good.”
U.S. citizens, who take out-of-country postings while continuing
to work for their U.S.-based employer, are known as expatriates,
and most take three to five year foreign assignments, says Kanterman,
who has over the years advised hundreds of expatriates. Most large
St. Louis companies, including Boeing and Emerson, have tax equalization
programs and so-called “gross up” programs that essentially keep
an employee’s compensation and tax burdens on par with what they
would be if the employee held a similar position in the U.S.
“The idea is that the employee would not have to pay any more in
taxes than he or she would living in St. Louis,” says Kanterman
who adds that tax rates outside the U.S. are generally higher. Smaller
companies, though, often do not have equalization programs in place
and do not know how to handle compensation and allowances when sending
an employee overseas, experts agree.
“In today’s economy where more and more companies, even smaller
ones, are getting involved in international business, they may send
one or two employees overseas before thinking through the various
financial and tax issues,” Morgenthaler says. “They kind of stick
their big toe in, test the waters and work through the issues as
they go. But it’s best to understand these issues up front so the
employer and the employee know how the issues will be handled. It’s
also important that the policy be consistent from one employee to
the next.”
Kanterman advises client companies with foreign employees to “establish
policies and programs to deal with the needs of expatriates so there
is consistent treatment. The plan needs to be thought out well enough
and implemented well enough that the employee can concentrate on
what he needs to do on the job. After all, that’s why the employee
is there.”
Two main provisions of U.S. tax law impact expatriates, according
to Kanterman and Morgenthaler.
The first is the foreign earned income exclusion that protects certain
amounts of income from U.S. taxation. For Year 2000, the exclusion
amount is up to $76,000, which rises to $78,000 for 2001 and $80,000
for 2002.
“The U.S. is one of only a few countries that has worldwide income
taxation,” says Stephanie Maxam, principal with Arthur Andersen
LLP. “We tax all of your income if you are an expatriate but then
exclude a significant portion of that income from U.S. taxes and
then provide credits for income taxes paid to a foreign authority.”
The second provision is the housing costs exclusion, which protects
from U.S. taxes certain monies above a threshold amount that are
received for foreign housing costs. The housing costs exclusion
applies only to funds used for rent and utilities, so Kanterman
says expatriates are generally advised to rent, not purchase housing.
Expatriates who are working in countries, which tax income at a
rate lower than the U.S., are the ones who benefit from the foreign
earned income exclusion, say Kanterman and Morgenthaler. Employees
who reside in a higher tax country use foreign tax payments as credits
to offset their U.S. tax liability.
“If you pay a higher rate, you can deduct all of your taxes paid
to your host country,” Kanterman says.
But that often becomes a more expensive proposition for the employer
who may absorb additional tax costs as part of a company “gross
up” policy whereby the employer agrees to “gross up” the employee’s
compensation package to offset increases in taxes, cost of living,
children’s education, and other areas.
“The cost of sending an employee overseas can be prohibitively expensive,”
Kanterman says. “The compensation package of an expatriate can be
four to five times what it would be in the U.S. It is very important
that these companies project these costs so they know what the actual
cost of an overseas assignment is.”
And the considerations are many, Kanterman says.
“You have to consider the ramifications of the employee selling
his or her home,” Kanterman says. “If they rent the existing home,
who pays the rental management fee? You often can’t take a whole
household of furniture overseas, so you might have storage costs
and the costs of new furniture. There may be the question of cars
being sold and the accompanying loss of economic value. Does the
company pay for that? How about education? Private schools in the
host country may be involved. You may have home-leave costs, typically
once each year. There are a host of complex considerations that
are best dealt with by way of a comprehensive expatriate policy.”
William V. Poe is principal of Poe Communications, a St. Louis
advertising and marketing communications firm. |
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