Short-Term Assignments - When Your Employees Are on Assignment, Then Repatriating: Key Considerations (video)
Jun 29, 2016
From the KPMG TaxWatch
(June 2016) This video from KPMG’s Global Mobility Services (GMS) practice continues the look at short-term international assignments that began with our earlier video released in mid-May “The Value of Planning for Short-Term International Assignments,” featuring Alison Shipitofsky and Glen Collins, both senior managers with GMS’s Mobility Consulting Services group.
When assignees go on short-term international assignments (STAs), there is a great deal of preparation, coordination, monitoring, tracking, communication, and planning and the tax, immigration, and HR/global mobility considerations can be tricky. STAs have their own set of peculiarities that make them as challenging and potentially complicated as long-term international assignments. In this video, Bob Rothery (with KPMG’s Washington National Tax-Global Mobility Services group) joins Alison and Glen to highlight the tax implications of STAs as we complete the discussion of the “during/on assignment” and “post-assignment” phases of the international assignment lifecycle for STAs, with a focus on the assignment policy and talent engagement/retention aspects of these assignments.
Scott Shaughnessy: Hi, and welcome. I'm Scott Shaughnessy, and with me today are Glen Collins, Alison Shipitofsky and Bob Rothery. Thanks for being here. Today we're going to be continuing our discussion of short-term assignments that Alison and Glen began in an earlier video that we released the week of May 16th.
In that video, Alison and Glen pointed out that short-term assignments make up a significant portion of global mobility. KPMG's Global Assignment Policy and Practices Survey, otherwise known as the GAPP Survey, which is showing on your screen, indicates that short-term assignments, or STAs, represent 81% of total assignments for an organization. Alison, why are short-term assignments so important for multinational organizations?
Alison Shipitofsky: Well, Scott, increasingly, we see that short-term assignments are just great because they can fill so many needs, like a business emergency, a short-term technical skills gap or support a discrete project. You know, it's also a good fit for talent management goals, so you can support training, you can support sales and marketing activities.
Scott Shaughnessy: So in situations like these, STAs just seem to make good business sense. But Glen, as you pointed out in the earlier video, STAs come with risk.
Glen Collins: That's right, Scott. All too often, the employee going on short-term assignment -- you know, the HR manager or the -- or the business manager might think that this is simply just a question of booking a ticket, arranging lodging for the employee while they're abroad or submitting expense receipts.
But the employee could really obviously have varying living needs and possibly even create a certain tax liability, and certainly require a visa or work permit.
Bob Rothery: That's absolutely true, Glen, that taxes are a big impact on short-term assignments. One of the appealing things about short-term assignments is that they can be tax-free in the host country, but it has to be structured right. And if it's not, it can attract unexpected tax, maybe even on the personal income of the person going on assignment.
So pre-assignment, it's absolutely essential that there's consultation both with the potential assignee as well as with corporate tax to be sure that there aren't corporate tax implications that arise, as well.
Alison Shipitofsky: And where there are potential risks, HR and corporate tax professionals who understand these risks, it's imperative that they go to the top of the organization and try to -- to lobby to enhance global compliance needs.
Bob Rothery: That's right, Alison.
Glen Collins: No one wants to be the business manager who sent an employee on a short-term assignment that results in a costly exposure or even perhaps bad press for the organization.
Alison Shipitofsky: Right.
Scott Shaughnessy: This is why pre-departure counseling is so important, as Bob noted earlier. The assignee, his HR or global mobility manager, in conjunction with the tax advisor, can get a handle on what lies ahead from a tax perspective, as well as the HR and immigration perspectives.
Glen Collins: Right, we can’t forget about immigration. Whether it's in-house counsel or an external qualified immigration professional, those individuals need to be consulted for -- for an employee before they start the short-term assignment.
Scott Shaughnessy: It seems we have rounded out our discussion of the pre-departure phase of the international assignment life cycle, which is showing on your screen now. Why don't we move on to a discussion of the on-assignment phase and the post-assignment phase, or repatriation phases, of the life cycle?
Glen Collins: So, why don’t we touch on some of the key policy areas covering support for short-term assignees during these two phases, Scott? And maybe we can also talk about some of the potential tax impacts, Bob.
Another area where we see varying approaches under short-term assignment policy while on assignment is addressing the differences in the costs of living between the home and host country locations. Organizations often address this under policy by paying a per diem or providing a cost-of-living or goods-and-services differential allowance.
Alison Shipitofsky: Glen, before we get into policy approach examples, could you perhaps define per diem and cost-of-living allowance?
Glen Collins: Sure, Alison. Well, a per diem is a cash payment to an employee to cover certain temporary away-from-home living expenses. The components comprise lodging and meals and incidental expenses, which are expressed as a daily rate. When delivered at a government-determined rate to cover business travel expenses, the per diem can often be provided to an assignee tax-free, depending on home and host country tax laws or treaty agreements.
Now, a cost-of-living adjustment, COLA, or a goods-and-services differential allowance is a differential payment to, or perhaps a withholding from, an assignee to address differences in purchasing power between home and host countries. It is usually delivered by applying a cost-of-living index to an employee's home country spendable income.
Bob Rothery: You know, Glen, I should point out that generally the company does not send family members together with the employee on a short-term assignment. But sometimes they do, and sometimes there'll be an additional per diem for the family members. And even if the per diem for the employee is tax-free, the per diem for the family members probably will be taxable.
Glen Collins: Good point, Bob. Now, under some short-term assignment policies, and often, depending on assignment length, some organizations also may offer a similar short-term allowance, like a COLA, which is calculated through a third-party data provider. And it's tailored to the spending patterns and nuances of a short-term assignment.
The difference between these -- these two approaches is that a per diem recognizes that the associated expenses of an assignee's home spendable are still tied to the home country and, as a result, gives the assignee assistance for each day while living abroad to cover certain -- expenses for meals and incidentals.
Alison Shipitofsky: Let me bring this to -- to life with an example. An unaccompanied STA assignee whose family remains at home, in the home country, is still maintaining a household. Therefore, a portion of the assignee's spendable income is still at home in the home country and active. So when you have a short-term assignee that's in a hotel, though, they don't have food, and they don't have household items that they typically would, so they need to make these purchases abroad, and then they get a per diem.
You know, in some cases, if the short-term assignment is longer in nature -- say, eight months -- then it may make sense to give them a cost-of-living allowance or a short-term COLA, because they'll be purchasing items for a longer stay.
Glen Collins: Yeah, that's right. Short-term assignment policies usually differentiate the allowance provisions and those associated amounts by the assignment length --
Alison Shipitofsky: Right.
Glen Collins: -- as a starting point. However, regardless of policy, other facts and circumstances may make this unfeasible. For example, if the hotel or the extended-stay accommodations are more practical in the host location and do not have a kitchen setup --
Alison Shipitofsky: Right.
Glen Collins: -- then providing a per diem is probably the best option.
Alison Shipitofsky: You know, Glen, I think the lesson here is that when you're looking at policy provisions and looking at a short-term assignment, you need to really look at the nuances and the length of the assignment, because there may be some reasons to make some changes in what you're providing and the different nuances. You know, there may be external forces that may -- may not make it as simple, so, you know, I understand you have to make some changes.
But another area where we typically see a differentiation based on length for a short-term assignment is home leave. So if you're on a short-term assignment and you're there for ten months, you might get two home leaves so you can visit the home location. But if you're on a short-term assignment for, say, four months, you may only get one.
Glen Collins: Right. Yeah, I think it's always important to consider the facts and circumstances of each --
Alison Shipitofsky: Right.
Glen Collins: -- employee's situation.
Scott Shaughnessy: Okay, these are great examples of differing approaches. But Bob, are there some other key takeaways concerning the potential tax impacts on STAs?
Bob Rothery: Well, sure, absolutely. First of all, one of the main attractions of short-term assignments is that they're often tax-free. But in order to do that, there are requirements that have to be met, and that means that days have to be counted.
So it's essential that somebody on assignment of any length keep track of what days they're inside the U.S. as opposed to outside the U.S., and what they do on those days, whether or not they work. So those records need to be kept contemporaneously. It's much easier to do that than to go back and recreate them after the fact.
Scott Shaughnessy: Right. Well, speaking about tracking travel and counting days, we hear a lot about the 183-day rule. Isn't it true that many people think that just because a short-term assignment lasts less than 183 days that there will be no tax liability in the host country?
Alison Shipitofsky: Yes. There's a general line of thinking by many business managers that if it's 183 days or less, it's nontaxable. Well, that just simply is not the case. There are many other factors besides days in this analysis. And in fact, some -- in some cases, countries have a lower-day threshold.
And then there's the other issue, that if the home and host country do not have a tax treaty, then the 183 days may not even be an option.
Bob Rothery: That's absolutely right. In fact, if there's no treaty, an assignee to the U.S. could attract U.S. tax after earning as little as $3,000. So where there is a tax treaty, it's important to note that the day counting is different depending on which treaty we're looking at.
And it's not just the days on the assignment. We need to track every day that the person is present in the home country for the entire year, and in many cases, we also need to look to the prior year and the year after the assignment, as well.
In addition, in many cases, the nationality of the employer matters. If you have, for example, a worker in the United States on a short-term assignment under a treaty, if they're -- if they're paid by a foreign employer, they may not be subject to tax in the U.S. But if they're paid by a U.S. employer, they probably will be subject to tax.
Scott Shaughnessy: Right, okay, okay. So now it's time for the assignee to return home and resume his role with his company. But Alison, I understand sometimes this is where things can go terribly wrong for the assignee as well as for the organization.
Alison Shipitofsky: Yeah. Surprisingly, that can happen. I think people think of a long-term assignment, they have to prepare more for repatriation. But that's not the case. For short-term assignees, you need to care as well. Many organizations will look at just the logistical part, and they'll just tick the box of the relocation and get them home. But there needs to be more focus from global mobility, from HR, from line managers well before the employee comes back home.
Glen Collins: Yeah, you're so right, Alison. I mean, the reality is, as you said, this is more than just a check-the-box exercise in getting an assignee home. Talent engagement and retention is also quite critical throughout an international assignment.
We need to remember that the assignee has just had quite an experience, deepening his or her skill set, broadening and deepening their network of colleagues abroad. As a result of this experience, the assignee has added value for himself as a professional, but also for the organization. Unfortunately, we have seen a lot of organizations losing assignee talent from a lack of proper planning for repatriation.
Whether it's a three-month or ten-month assignment, the employer still has invested a lot in that employee. A successful reintegration and having the ability to apply those newly acquired skills is just as important. From an employee engagement perspective, the assignee certainly has a lot to share with colleagues. These employees could visibly represent the organization essentially as brand ambassadors linking other global offices.
Alison Shipitofsky: No, you're right, Glen. And I think employees who go on short-term assignments, they're excited, and they want to come back and do something. So, you know, this could be as simple as a brown-bag welcome-back lunch, or it could be as big as maybe a promotional video that promotes the, you know, organization's talent goals.
Scott Shaughnessy: It's so important to appreciate the significance of the assignment, the value-add that the returning employee brings, and leverage that to enhance the company's business strategy, bottom line, as well as the employee’s career.
Bob, are there any tax tips that the returning assignee, his HR or global mobility manager and the international assignment tax service provider need to pay particular attention to?
Bob Rothery: Well, sure. In fact, if the assignment was not a taxable assignment, if the person wasn't taxable under a treaty, then it's very important to continue to track the person's movements. If the person continue -- continues to return to the other countries or the host country after the end of the assignment, that could retroactively make an assignment that wasn't supposed to be taxable attract a tax liability in the foreign country.
Now, on the other hand, if the person was subject to foreign tax, they may have accumulated foreign tax credits that continue to be -- can be used in future years, and, and -- and result in a tax benefit to the employee. And the company may want to be tracking the person's future movements to foreign countries in order to be able to recover those.
There seem to be a lot of moving parts during the various phases of the international assignment lifecycle. So here -- here are my takeaways. An integrated approach that considers the tax, HR-slash-global mobility and immigration perspectives of the STA is ideal. Getting the stakeholders working together, communicating openly to ensure assignment success and proper compliance is key. And understanding the employee and the assignment he or she is about to embark upon on is elemental.
Alison Shipitofsky: You know, like we discussed in the first video on pre-departure phases of assignment, you know, that's why we keep going back to the assignment initiation form. The more you know about the employee, the home and host country combination, the policy, all of these things from the very beginning of -- of the assignment, that's the best, because it often pays off in the long run.
Scott Shaughnessy: I totally agree, Alison. And you can get a glimpse of a typical assignment initiation form by going to the first video we've been referring to throughout this video.
Well, this has been a fascinating discussion. Glen, Alison, Bob, thanks so much for being here, and thanks to you for joining us.