05 Nov Explaining Taxes to Your Assignee? Hand-holding is Mandatory
Talking about taxes to your assignee is like taking your child or even your spouse to the dentist. The details are never pleasant, and the procedure itself is arduous. However, the entire process is necessary if you are to ensure the wellbeing of your loved one. In the dental case, it’s the health of your kid or significant other. When it comes to taxes, it’s the financial reward of your assignee and its possible impact on his morale.
The hand-holding is mandatory at the risk of incurring dire consequences. For example, as narrated by a corporate lawyer from Baker & McKenzie in Lexology, one American executive assigned to Germany solely computed his taxes, basing them on his knowledge of the tax laws both in the U.S. and his country of work. In retrospect, the man should have gotten professional tax advice, instead. His wrong interpretation of the tax laws, along with the eventual inaccurate computation, got him into hot water with both governments. He ended up paying penalties that took a lot from his premium salary.
First of all, as a global mobility specialist, you do have to study up on these subjects. However, it would reduce your margin of error if you were to contract a global tax specialist who knows the finer details. It is his job to guide you and point out the hidden technicalities that can cost your assignee unnecessary payments, or possible contradictions in the tax laws of both countries that should be resolved.
As Tax Back International describes a few of these important aspects, they include multi-jurisdictional compliance around local employment tax rules; consistency in tax rules as they adhere to global standards; the effect of different multiple reporting structures on the tax laws in each jurisdiction; and the ensurance of compliance in each jurisdiction.
Second, you must give keen attention on the personal tax returns in both home and host countries, and foreign tax credit claims. What are the dues owed both countries? Are there exemptions and under which conditions? Is there a possibility of tax refunds later in the year? What are the assignee’s liabilities in his taxes and his accountabilities for social security and other safety nets like insurance in his host country?
Third, is there a way by which you can make the tax burden on your assignee lighter? For example, Global Mobility Solutions says that reimbursements that the employing company gives to the assignee for the sale of his home are taxable under the law. Many corporations use the gross-up system to help the assignee offset the impact of said taxes. A relocation management company (RMC) mediates by buying the home from the assignee and transferring the sale to the third-party purchaser. It then pays all the realtor costs and commissions and bills them to the employing company. The reimbursement to the assignee, then, is no longer required because the RMC’s mediation prevented him from making any home-related expense. Without the reimbursement, taxes on the assignee could be nil or minimal. For the latter, we strongly suggest consulting with a professional.
In cases like these, global mobility specialists can ask the help of long-time organizations in the region that deal extensively with assignee cases. Relocation management companies and California Corporate Housing lend an arm to help or provide advice.
Finally, after all the pencils have been pushed, give your assignee a clear idea of what he can expect before and after taxes have been withdrawn from his pay. Gross-to-net compensation and net-to-gross compensation have to be explained clearly. At the end of the day, your assignee just wants to know how much of his pay he can take home after a hard day’s work.