Ever hear the expression “it’s what I don’t know that concerns me?” There couldn’t be a more valid “truism” than this when it comes to sending employees abroad on assignment. Most of us think our countries’ laws are too complex or the bureaucracy too entrenched. But as costly as dealing with these difficulties is, imagine dealing with them in an almost completely unknown world. . . the legal and tax environment of a foreign country. The cost and the frustration of dealing in an unknown legal world is often daunting, and fraught with risk. This leads most companies to obtain advice from an advisor familiar with the host country’s legal and tax environment.
Perhaps second only to the immigration and worker documentation requirements, of paramount concern to employers is the income and payroll tax exposure they face, both at the company and at the employee level.
At the employee level, most countries place the burden of “agency” on the employer, making it (the company) responsible to withhold and remit the proper amount of taxes, and imposing liability for the failure to properly follow the established procedures squarely on the back of the employer. Penalties and interest for noncompliance can be significant. In fact, the right to continue doing business in the host country can be jeopardized.
One thing is certain when it comes to compliance. In virtually every case, the cost of getting it right “in arrears” is many times greater than the cost of getting it right “in advance”.
Beyond legal compliance, there are significant opportunities for very real savings in properly structuring employees’ compensation, employing best practices in long-term assignment policy development, and effectively reducing double taxation. For example, a non-cash benefit in kind may be tax free if paid directly to a third party (i.e. the landlord) and fully taxable if paid or reimbursed to the employee. Any single such lost benefit can, and often does, offset the entire cost of a competent service provider.
Tax equalization, or assuring that employees pay no more or no less tax than they would have paid had they remained in their home country, can actually be another source of huge savings to the company. Failing to implement a tax equalization plan can often be among the most costly mistakes a company expanding abroad can make. Sometimes smaller companies choose not to implement such a plan under the impression that such a plan, by its nature, must be complex. While that may be the case for a multinational company sending hundreds or thousands of assignees to and from dozens of countries, it need not be particularly complex for a company with a limited expatriate assignee population. The do-it-yourself approach (or in this case the “not doing it at all” approach) often results in an unnecessary burden on the employee, the employer, or both.
Of course, the most valuable intangible asset every company seeks to protect in any international assignment is the relationship with the employee. And nothing will diminish that asset quicker than a failure to provide competent, independent, professional guidance on matters that can involve legal jeopardy for the employee or his/her family.
No single office in any country, however, can be expert in every other country’s tax laws. As a member of a global accounting network, Nexia International, The Wolf Group is able to leverage the expertise of over 250 firms around the globe within the Network to provide a seamless level of competent home and host country tax compliance and planning services to their clients.
If you have any questions or would like more information on the issues discussed in this article, please contact our New Client Representative, Joyce Chan, at firstname.lastname@example.org.