DIY Expats – Tax Support for Off Program Moves

    

Permanent Relocation Moving

It’s been over twenty years since I made my own global mobility move, relocating from the UK to the US. Back then, I was a lowly minion at one of the accounting giants at that time. To say my relocation package was sparse would be an understatement. I received a bit of temporary housing support when I first arrived and that was pretty much it. Off I went. Even from a distance of over two decades, I still remember the stress of the move and trying to get myself situated. Little did I realize that I would be the precursor to a growing trend in global mobility—the self-requested move with little or no company assistance.

Ironically, one of the few benefits that my former employer did bestow on me was the one thing I could have done myself—tax preparation. However, more and more we are seeing companies not including tax preparation as part of an assignee’s package. This is particularly true for self-initiated moves and is becoming more common for permanent transfers as well. While many companies still choose to provide one or two years of tax preparation assistance for permanent transfers, we are seeing other companies removing this benefit altogether for their expats. At a time when “duty of care” and “employee experience” are the current buzz words in the mobility industry, the trend of reducing benefits for mobile employees appears to go against the grain and makes it seem like an employee’s financial welfare is not included in the consideration of many packages today.

The challenge this creates for a transferring individual

The challenge for the individual transferring globally is that tax education is not something that is easily accessible. It isn’t just understanding the rules in both countries; it’s how those rules interact with each other. This interaction—and operation of international tax treaties—makes things even more complicated. Without proper guidance, this can put an employee at risk of financial harm.

For example, let’s assume an individual transfers from the UK to the US. Before moving he puts his UK house on the market. In London between 1996 and 2016, one study showed that UK house prices had increased by 501%. In US dollar terms, let’s say they purchased a house for $300,000 20 years ago; that property could now be worth $1.5 million. Under UK tax law, the sale of a principal residence is entirely exempt from capital gains tax. Now assume the sale closes a week after their arrival in the US. Under the right circumstances, they might be considered a US tax resident from their first day of presence in the US. As a resident of the US, the gain would be subject to US federal, and possibly state, capital gains tax. But doesn’t the US provide relief for the sale of a principal residence? Yes, it does, but this exemption is restricted to $250,000 per owner (so a married couple could exempt up to $500,000 of gain). In a state like New York or California, this could cost them in excess of 30% in unexpected tax—up to $285,000. While this is an extreme example, it is based on an actual scenario for one of my clients several years ago. For that individual, they were obviously stunned to learn that the US could tax a gain that had built up over a period of 20 years on a non-US situated property.

This example highlights one of the main financial risks that international transferees face—the assumption of similarity. Meaning that many people tend to assume uniform treatment of assets and transactions across tax borders. This is inherently not the case. Capital gains, stock options, deferred compensation, pensions and pension distributions, relocation expenses, investments, and insurance policies (just to name a few) can all be taxed in substantially different ways around the world. Incentive stock options in the US for example are rarely, if ever, treated in the same way in other countries. Often, tax effective investment vehicles in one country are no longer effective, and can even be punitive, when an individual relocates to a new tax residency.

A second unwarranted assumption that we often see is when some people assume there will be a tax treaty available to protect them from harm. It is true that there are a large number of income tax treaties that interconnect the domestic tax laws of different nations. However, in many cases, this large web of tax treaties only offers a false sense of security to the unwary taxpayer. For example, there is a comprehensive tax treaty between the UK and the US, but it provided no relief for the taxpayer in our earlier example related to the sale of their UK home.

A look from the employer’s point of view

Let’s examine this from the side of the employer. Should an employer feel duty bound to provide tax assistance to anyone relocating across any border? The answer is no, not in all cases. It is incredibly rare, for example, for tax return preparation services to be provided to employees moving across domestic borders. In the above example, the decision to sell the UK property was the decision of the employee alone, one made independently of his employer. Responsibility must be attributed to the individual. In addition, these services can be expensive to provide, particularly where the tax services are also considered taxable, such that a tax gross-up may also need consideration. Alternatively, when an individual has been asked to move to fulfill a business need, there remains a compelling case for their employer to provide tax assistance.

The rise in the number of self-initiated moves does indicate a need for an employer to introduce a consistent policy. Whether or not to provide tax support is a decision that can frankly be justified on both sides. It is also worth mentioning that providing support doesn’t have to be an all-or-nothing offering. Some companies, while they do not provide tax assistance directly, may provide a provision to offset some of the costs along with a list of recommended and trusted firms that can help their mobile employees.

As a mobility tax provider, we are responding to this growing trend by working with companies whose mobility policies do not support this off program population, by providing more education to those relocating through webinars, online tools, and accessible advice from our tax professionals. For more information about how our tax professionals can help you customize a global mobility policy or how we might be able to assist your mobile employees that are not supported by a company policy, contact us and we can help determine a course of action best suited for your situation.

Download the Foundational Steps to Establishing a Mobility Tax Program Infographic

Author Christopher Hall

 
Chris joined GTN in 2009 and serves as Managing Director of the Atlantic region and its comprehensive expatriate tax services. He has more than 19 years of expatriate tax experience, and his analytical approach to data and straightforward manner is reflected in how he handles each unique tax or program issue - logically and rigorously until he finds the right answer. +1.917.470.9132 | chall@gtn.com
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