Magazine article The CPA Journal

Navigating the Tax Aspects of Overseas Employees: How CPAs Can Help

Magazine article The CPA Journal

Navigating the Tax Aspects of Overseas Employees: How CPAs Can Help

Article excerpt

As the global economy becomes increasingly interconnected, the importance of having employees assigned overseas has risen. For example, Africa-with 10% of the world's oil and 60% of the world's arable land-is now a hot spot for the natural resources industry. Companies in other countries are increasingly sending employees there to capitalize on these extraction opportunities. In fact, the total trade between the United States and Africa was worth $72 billion in 2012.

Although sending employees abroad can help advance companies' strategic business objectives, it can also be costly, with repercussions on the bottom line. Companies should consider a variety of factors when moving employees overseas. The company must usually cover employee allowances, such as household goods and the cost of living. To take one example of how expensive this can be, Intel has invested $2.5 billion in an "expat ecosystem," which includes state-of-the-art medical and education facilities for its employees in Dalian, China.

International moves result in tax issues, not only for the individual, but also for file employer. CPAs-whether internal or external advisors-are often called upon to help with such moves by supporting tax reimbursement policies; accounting for the difference in the home and foreign countries' taxes imposed on assignees; managing corporate tax issues, such as permanent-establishment risk; and ensuring that file employer is compliant with tax withholding obligations.

biternational Tax Issues

The most common employee tax reimbursement policy is tax equalization- that is, when an employer covers an assignee's total tax costs and receives a "hypothetical stay-at-home tax" in return. Through salary adjustments, the assignee pays tax as if he had stayed in the home country. The employer pays all of the assignee's actual taxes, such as home and host country income tax, social insurance taxes, and even payroll taxes, if applicable. Several other tax reimbursement policies exist, such as tax protection and immediate gross up. In the end, all of these policies are designed to keep the assignee financially whole.

CPAs often play an instrumental role in implementing these policies, because other members of management might not have the technical knowledge needed to implement a tax-reimbursement policy and perform the related accounting. Many human resources and business leaders mistakenly believe that employee tax exposure can be limited if an international assignee spends fewer than 183 days in a host location. Furthermore, most tax treaties with the United States support that assumption. But it is often also true that a tax treaty exemption for an employee generally requires that three conditions be satisfied: 1) that the assignee pass the 183-day test, 2) that the host location bears no costs, and 3) that there is no permanent establishment in the host country.

Example

CPAs are in an excellent position to assess permanent establishment and corporate income tax risk, as well as to know where deductions are being taken. Consider the hypothetical example of a major food or consumer-packaged goods manufacturer and distributor that has a subsidiary overseas. A top executive stationed there is employed by the U.S. parent company and compensated through a split U.S. and local payroll; however, it turns out that the executive is not a U.S. person, but the U. …

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