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Jeffrey Teong and
Grahame Wright
Thu, May 08, 2008 Great places for a
The Business Times festive treat

WHEN companies send their employees on temporary overseas postings, the issue of taxes inevitably arises. Travel ideas for your
Small companies first embarking on such cross-border assignments often deal with these issues on an ad hoc next holiday.
basis.
What would you
This 'laissez faire' approach, if managed carefully, can work for low assignee volumes as problems are dealt do with $50,000?
with individually by negotiations between the employer and the employee. As the company evolves, however,
and volumes increase, the laissez faire approach will usually result in inconsistency and a lack of clarity for
expatriate employees and the human resources team servicing them. ---- SPH NEWSPAPERS -----
---- ASIAONE SERVICES ----
What are the options for a consistent approach to expatriate taxes?

The principle behind a tax
equalisation programme is
that the employee should
be 'no better or no worse
off' as a result of taxes
while on a foreign
assignment.
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Tax protection
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Under tax protection, an expatriate employee is protected from higher tax costs but in the event the actual older workers
taxes imposed are lower, he retains the benefit. Therefore, an employee who is assigned from Australia to
Singapore is likely to have a lower tax liability than he would have had if he remained in Australia. He would
therefore pay his own Singapore and Australian tax liability (if any) and retain the tax savings. What to do when
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Conversely, a Singaporean employee assigned to Australia is likely to
suffer a higher tax liability due to the assignment. Under tax
What to do when
protection, he is liable to fund these taxes only to the extent of his
headhunters beckon
hypothetical Singapore tax and the company will be responsible for
the excess.
How to get fair deal when
As is illustrated from the above two examples, an arbitrage boss asks me to quit without
opportunity exists for the expatriate employee to seek opportunities cause?
in lower-tax jurisdictions and avoid those opportunities where he
does not personally benefit from tax savings. This can reduce the
mobility of employees as they wait for the 'right' opportunity. Mid-career MBA grads face
reality cheque

The principle behind a tax equalisation programme is that the

employee should be 'no better or no worse off' as a result of taxes >> RELATED STORY
while on a foreign assignment. In other words, the employer
Tax equalisation for the
guarantees that the employee's tax burden will be neither greater nor
corporate globetrekker
lesser if the employee had remained in the home country. If the tax
burden is higher in the host country, the company reimburses the The new open office concept
excess. However, if total tax costs are lower, the tax savings will pass
to the company, not to the employee. Rigid rules get a relaxing
massage

In the above example, the Australian employee assigned to work in Reach out to your customers
Singapore would be responsible for an amount equal to his Australian the smart way
hypothetical tax. From this amount, the employer would pay his Disclosure of risk as important
actual Singapore and Australian tax liabilities (if any) and if there is as potential returns
any surplus, this is retained by the employer.

The treatment of tax is but a part of the overall global mobility policy Elsewhere in AsiaOne...
of an employer. Such policies tend to try to neutralise additional costs
and inconveniences relating to an assignment, rather than to fully News: He turns hobbies into gold
fund such expenses. Three typical assignment benefits are cost of
living allowance (COLA), housing and education. How does the
treatment of these items compare to tax equalisation and tax Travel: Business as usual 30,000
protection methodologies? ft in the skies

Cost differential Motoring: Formula One is not

just for the big boys
COLA is calculated to determine the cost differential between home and host locations. It provides for the
payment of the differential percentage applied to a typical 'spendable component' of salary, to top up the Digital: What I saw... Isn't what I
amount that an individual would be expected to spend on goods and services in the home location. It does got
not, however, require an employee to pay back to the employer if the host location is less expensive than his
home (that is, a negative COLA). This can therefore be likened to the principles of protection rather than
equalisation.

http://www.asiaone.com/Business/Office/Learn/Story/A1Story20080506-63705.html 01/10/2010
Tax equalisation for the corporate globetrekker Page 2 of 2

Most companies will provide housing to their expatriate employees. Some will charge a 'housing norm', which
represents the amount that a person in his circumstance would typically spend on housing in the home
location. Exceptions may apply, for example, where the employee's family remains in the home location or the We welcome contributions,
home is agreed to remain vacant during the assignment. comments and tips.
a1admin@sph.com.sg
Other companies choose not to charge a housing norm as this policy forces the employee to either sell or let
out his private home, which is seen as too invasive. 9180 1253 (SMS)

6319 8177
Where a housing norm is charged or the expatriate continues to bear his home housing costs, this is clearly
comparable to the principles of equalisation. However, where there is no housing norm, the opportunity exists
for the expatriate to reduce or fully extinguish his housing costs and therefore derive a financial advantage
from the assignment. This result would not be comparable to equalisation or protection, however, as these
would still require the employee to bear some cost.

Schooling cost

The result described above could be described as a leakage to the principle of equalisation, as the employer's
intention of such a policy, even if not fully enforced, would usually be that the employee retains his home and
therefore incurs a 'hypothetical' cost.

Education in the form of international schooling is also typically provided where an expatriate is accompanied
by dependent children. Although many policies contain some wording around the company funding the
'additional cost' of such, this often results in full cost reimbursement due to the availability of free public
schooling in most home locations.

Accordingly, this item can also be classed as one of equalisation, albeit with a hypothetical cost of or near
zero.

It is important to compare not only the expatriate assigned to low vs high-tax jurisdictions but also the
expatriate as compared to his colleagues remaining in the home location. These employees will clearly be
subject to home-country taxes, and colleagues who are assigned overseas, benefiting from lower taxes while
staying on the home country salary, may be viewed as receiving an unfair advantage.

Tax equalisation may therefore be seen as the more equitable tax reimbursement policy. As the expatriate
pays the same hypothetical home-country tax regardless of whether he is assigned to a high or low tax
jurisdiction, the tax impact of the assignment is fully 'neutralised'. The employee is neither advantaged nor
disadvantaged in comparison to his colleagues in the home location or in comparison to expatriates to other
locations. The tax element should therefore be completely removed from the potential expatriate's
considerations for accepting the assignment.

Under tax equalisation, the expatriate can effectively consider the amount of actual taxes payable to be his
employer's concern, and not his own. This removes any temptation on the employee's part to undertake risky
tax planning, and enables the employer to implement planning and compliance procedures to manage risk to
the employee and the company whilst avoiding unnecessary or double taxation.

As taxes will usually be due on other assignment benefits that are not included in the calculation of
hypothetical tax, it is often the case that an expatriate's actual tax liability exceeds his hypothetical tax, even
where the tax rates might appear lower in the host location. A tax equalisation scheme also provides clarity
and certainty to employees, compared to other tax reimbursement methods, because they know what to
expect as the terms are defined in the policy. It also demonstrates the company's commitment and
consideration to equity since the intention of the policy is to put all international assignees on a level playing
field.

Effective method

Tax equalisation can be a very effective method of addressing the income tax element of compensation for
employees on international assignment.

However, it is important for companies to set out the exact terms and conditions of the policy that are:

broad enough to have application to all employees and all countries in which the company is doing
business now and in the future; yet

detailed enough that there is clarity and guidance to employees, human resource professionals and
tax service providers.

This article was first published in The Business Times on May 6, 2008

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http://www.asiaone.com/Business/Office/Learn/Story/A1Story20080506-63705.html 01/10/2010