Expatriate Tax Must-Knows for Global Retail Businesses

Expanding a retail business internationally is challenging. Complying with cross-border regulations and ensuring brand continuity in each location around the world often requires the company to send employees to out-of-country locations to work. Welcome to the world of expatriate tax. There are so many things you need to be aware of with regard to staying compliant as a company and making sure your employees are in compliance with regard to individual tax withholding and reporting both in the home and host countries. These considerations include:
  • Where must the individual pay social taxes? In cases where a totalization agreement is in place between two countries it is common for an assignee to continue paying social tax to his/her home country plan and be exempt in the host country, but in many cases this may not be possible and there could be duplicate taxation.
  • Can the assignee continue to participate in their home country pension/profit sharing plans? Once an employee comes off their home country payroll it is virtually impossible to continue to contribute to the home country pension plan, so many companies have gotten creative with regard to pensions for their mobile employees.
  • Will there be duplicate taxation, and does a tax treaty exist that can alleviate that? The US has income tax treaties with approximately 70 countries in order to avoid duplicat taxation, and for the countries where no treaties exist, other contract planning can usually be done.
  • Have you captured all compensation paid globally in your wage reporting, including benefits in kind?  It is common that US companies with employees abroad do not capture all compensation paid to their globally mobile assignees, such as utility reimbursements, home leave trips for the family, or a company car and driver.  This can be a complicated process that may entail internal audits of expense reports, foreign payroll and transactions with third party vendors. The best practice is to not wait until year-end to do this.  Get started early and gather information throughout the year to avoid the holiday rush.
  • Are you tracking employee travel in order to identify short-term business travelers that may have crossed a tax filing or reporting/withholding threshold in or outside the US?  These are often referred to as “stealth assignees” who fly under the radar.  They often have tax filing requirements, but are not aware of it because no one is tracking the travel days.
  • Are withholding processes in place for wages and equity incentives in each applicable country?  If your US assignee exercises an option that vested while in a foreign country, many countries will want the tax on their part of that income—immediately.  Some countries like Belgium and Switzerland want their tax at grant.
  • Does your company have a tax policy to equalize or keep the assignee whole?  Without a written tax policy, administering these assignments can be a nightmare, with each assignee trying to cut his/her own deal.  Employees often do talk to each other about such things.  They even talk to assignees from other companies to compare their “deals”.  There is nothing that works better than to even the playing field, making managements’ job a whole lot easier.

As a global retailer, these are all real issues that you need to address.  As year-end approaches  and the US government increasingly focuses on international tax matters, it is more important than ever for companies to be in total compliance throughout the world.  Evidence of this can be seen within the details of the Foreign Account Tax Compliance Act (FATCA) of 2010. Under FATCA, beginning in 2011 certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS.  In addition, starting in 2013 FATCA will require foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

Since 2010 we have seen an increase in IRS agents dedicated to examining foreign transactions, and the number of expatriate focused payroll audits have increased.  The world is becoming a smaller place. With global entities and foreign governments “talking to” the US government, US companies need to have their internal recordkeeping and processes impeccably documented.  Your tax services provider should be able to help you manage these issues if they are truly a global provider.