Awareness of the global mobility related tax planning opportunities is key to adding value for those managing mobility. There can be very substantial cost savings, often savings for the employer under tax equalisation, so it is vital they are not missed.
They can be very valuable. This relates in part, to how tax equalisation works.
Tax equalisation is an approach that seeks to neutralise differences in tax rates between countries to promote employee mobility. The employee usually agrees they will continue to pay the same level of tax as their home country. This may be through a hypothetical tax withholding. In return, the employer agrees that they will settle the actual taxes due.
As the employer is settling the taxes due, the compensation becomes what is known as net. Tax rates that apply on net compensation are higher because paying the tax for an employee is, a benefit on which tax is then again due. As a result, grossed-up tax rates apply.
The top rate of income tax in the UK is 45%. If the employer will be pay the tax (meaning the tax has to be grossed up) then the tax rate becomes 82%. As a result, £82 of tax is saved by the employer for every £100 of income that is removed from taxable income, using mobility tax planning.
If £50,000 is removed from taxable income, then £40,000 of tax is saved by the employer. If you have 10 employees to which this applied over five years, the savings could be £2 million.
The rules differ from country to country so local tax expertise is necessary. There are specific tax breaks that apply to globally mobile employees. There are also other tax breaks that were not specifically designed for globally mobile employees, but nonetheless these tax breaks could still apply to them.
The tax breaks could apply to all forms of globally mobile employees including long term assignees, short term assignees, local hire employees, business travellers, Directors, commuters, and those with regional or cross border roles.
The rules and conditions really do vary location by location. Broadly, they fall into one of the following groups.
Local expert tax assistance is vital, although there are overall themes, the rules and process are always country specific. As a result, it is necessary to understand what procedural steps there are to consider, to ensure the tax breaks apply. There may also be claims that have to be made on an employee’s local income tax return.
In short-term assignments, there can often be ongoing tax considerations in two countries. As a result, care needs to be taken not to focus exclusively on one location only. What is tax efficient in one country may lead to a worse impact in the other country, so it is important to keep an eye on the overall cross border tax position.
Taxes due by employers for a globally mobile employee can be an incredibly significant part of the overall cost of an assignment or cross-border work arrangement. Utilising mobility tax breaks is key to optimising the overall costs and ensuring a business does not incur unnecessary extra cost. Equally, it is crucial to explore early on the requirements and procedural aspects so that key set-up steps are not missed.
For further information, please contact Kenny Law, or your usual Crowe contact.
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