United States

US companies with expatriates should consider the new tax proposals

TAX BLOG

As the tax bills are proposed and debated, U.S. companies may want to explore the effect on their expatriate workforce, particularly with respect to global mobility. The potential effects will be different for each company and each individual but below we discuss some of the major concepts and ideas to start thinking about in preparation for changes in the tax code

Lower personal tax brackets and increased deductions could result in lower tax costs to the assignees. The assignees hypothetical taxes could be reduced for 2018 which is a tax saving for them. Consider re-running hypothetical tax calculations in order to reflect the lower tax burden for the individuals. Unfortunately this saving to the expats could result in higher global tax costs to the company. The share of the tax burden increases once the assignees hypothetical taxes reduce. Companies may want to plan and adapt budgets now so you are not surprised by the extra tax burden.

The loss of state and local tax deductions could detrimentally effect expats from or assigned to high tax states.

Moving expenses may no longer be deductible from taxable income. This is a direct impact on an employer who tax equalizes their expats. Should this provision remain, the employer will have to gross up the moving expenses adding to the cost of the assignment.

Under the proposals, deferred compensation may have an earlier taxation date potentially resulting in accelerated timing of taxation in the US and also a mismatch of timing of taxation with the home or host country.  Delay of taxation to the time of exercise will only occur where there is substantial risk of forfeiture related to future performance of substantial services. Non-compete covenants and conditions that do not relate to future performance of services would not be treated as substantial risks of forfeiture.  This would only be effective for amounts attributable to services performed after 2017.  Companies should plan now if this will affect their expats and proactively plan the vesting of deferred compensation to minimize tax liabilities. 


Sarah Waters

Partner