Tax planning for expatriates.

• Author: Mattson, Andrew M.

Additional services can be provided to corporate clients who send employees overseas to work. A tax adviser can offer planning for expatriates to minimize the additional taxes to be incurred by an international work assignment. This article describes some of the planning and compliance issues for employers and employees.

Practitioners have many opportunities to provide a full spectrum of individual international tax services to their corporate clients with international operations. These services can include planning, compliance and assistance in mitigating the additional tax costs that employees generally incur during offshore assignments. Such work is tailor-made for an outside qualified practitioner. Companies generally do not have the internal expertise to handle the myriad complex issues. In addition, the tax adviser can serve as a third-party referee or arbitrator between the employer and employee.

Tax Equalization

Companies that send employees overseas ("expatriates") typically pay them certain benefits to assist with the additional costs that they may incur, such as housing, cost-of-living differentials, English-language school tuition, etc. Such benefits generally constitute taxable income and, thus, increase an expatriate's tax burden.

Expatriates can also incur additional tax burdens if a work assignment is in a country with higher tax rates than in the U.S. Many European countries, for example, impose tax rates substantially higher than U.S. tax rates.

Which party--the employee or employer--is responsible for paying these additional costs? Tax "equalization" is a voluntary system that can provide the solution. It provides a framework for the employee and employer to pay their respective shares of the employee's global tax burden.

In its simplest incarnation, a tax equalization program is a zero-based system that can provide that the expatriate will pay neither less nor more tax while on assignment than he would incur if he remained in his home state.

Advantages

A clear advantage of a zero-based equalization program is simplicity. An employee will have little trouble understanding such an easy concept, and is generally reassured that there will be no tax "penalty" as a result of the international assignment.

Another advantage is fairness. If an employer sends different employees to high-tax and low-tax jurisdictions, a zero-based program ensures that both employees receive equal tax treatment. An employee neither benefits nor is burdened by the offshore assignment.

Finally, a zero-based program actually presents an opportunity for an expatriate to help pay for the overseas assignment. Many states allow expatriates to terminate their residence for tax purposes while on assignment. Accordingly, the non-state-resident expatriate will not be subject to state tax on worldwide income. The state tax burden will be limited to state-source income only, such as wages associated with work performed in the state. Accordingly, an expatriate equalized under a zero-based plan will pay state tax (to the company) as if...