Understanding the Tax Implications of Global Retirement Plans: How to Avoid Double Taxation

August 2019

Companies managing a global workforce must understand the types of retirement plans they offer and the tax impact to the participants in those plans in other countries. Listen to BDO’s Donna Chamberlain, National Leader of Expatriate Tax Services, discuss global retirement planning in more detail:
 

The way retirement plans, such as 401(k)s, are taxed in the U.S. is not the way they will be taxed when the employee is working abroad and trying to save for retirement. If contributions, employer matches and growth in a plan are tax exempt in one country, this doesn’t mean they will be treated the same way in another. This creates potential double taxation upon future distribution of the benefits.


Example of Double Taxation

If a U.S. person is working in China and continues to contribute pre-tax deductions to his or her U.S. 401(k) plan, the person will likely be taxed in China on those contributions and the employer match, but the person won’t be taxed in the US on that match. He or she now has potential foreign taxes paid to take as a credit on a U.S. tax return but no U.S. income tax from those retirement plans to offset with the credits. These credits can carry forward for 10 years, but if the person doesn’t start taking his or her retirement distributions for 15 years, he or she will not have any foreign tax credits left to offset the U.S. tax that will occur upon distribution. This creates a mismatch of taxes and credits and ultimately double taxation on the same funds.

Similar mismatches occur when a non-U.S. person comes into the U.S. to work and could be forced to pay tax on his or her home-country pension accounts, even though the accounts haven’t been distributed and taxed in his or her home country.


Planning for Retirement Benefits for a Global Workforce

Companies need to have an understanding of treaty positions between countries, and how they can be applied to ensure that their employees and executives are getting the most out of their retirement savings, or be prepared to cushion the blow. There are alternatives to traditional retirement plans that can also be considered when designing retirement plans for global companies.

To help determine the tax implications for non-U.S. retirement plans, review our Foreign Retirement Plan Tax Decision Tree. Learn more about BDO’s Global Retirement Planning services.