In recent years, there has been a growing trend of self-initiated global mobility moves, where employees relocate internationally with little or no company assistance. These types of moves, often referred to as "off program" or "self-requested," present unique tax challenges for both the employees and employers involved—especially when HR managers and companies are trying to balance cost considerations with their duty of care to employees.
As organizations shift away from providing tax support for these self-initiated moves, the implications for both parties become increasingly complex and concerning.
While many companies still provide tax preparation assistance for traditional expatriate assignments and permanent transfers, an increasing number are removing these benefits, specifically for self-initiated relocations, driven primarily by cost considerations. This shift raises concerns about the financial welfare and employee experience of mobile workers, as tax education and guidance are not readily accessible for those navigating complex international tax rules and treaty implications.
This article will help you understand the tax implications of off-program relocations and explore strategies for supporting employees who undertake these moves. We'll uncover the risks faced by both employees and employers and discuss how companies can balance cost considerations with their duty of care.
The risks and challenges for relocating employees
As the number of companies who exclude tax preparation and consultation services from their relocation packages increases, so does the stress and frustration for the employees who now must navigate the complexities on their own.
A lack of accessible tax education
A major challenge for individuals transferring globally is the lack of accessible tax education. Understanding the tax rules in each country is not enough; it's crucial to comprehend how those rules interact with each other across borders. This interaction, coupled with the operation of international tax treaties and social security (totalization) agreements, adds significant complexity. Without proper guidance, there is a risk of substantial financial harm to the mobile employees. While an online search can help provide partial information, each case is unique and direct communication with an experienced tax advisor is recommended.
Consider this extreme, real-life example of an individual who transferred from the UK to the US. Before their move, they put their UK home, which they purchased for $300,000 GBP about 20 years ago, on the market. In terms of UK home prices, there was a study that discovered that between 1996 and 2016, UK house prices surged by over 500%. Though UK home prices have fluctuated up and down since this study, for this individual, their home was worth $1.5 million at the time of the sale. Under UK tax law, the sale of a principal residence is entirely exempt from capital gains tax (unless there was a period during which it was rented out—caveats such as this are typical and essential to know and understand when providing global tax advice).
For illustration purposes, assume the sale closed a week after their arrival in the US. In certain circumstances, they may be considered a US tax resident from their very first day in the country. As a US tax resident, the gain on the home sale would now be subject to US federal and potentially state capital gains tax. While the US does provide relief for the sale of a principal residence, this exemption is limited to $250,000 per owner (or $500,000 for a married couple). Factoring in the US federal tax over the exemption amount and possible state income tax (especially in high-tax states like California or New York), this sale could result in an unexpected tax liability exceeding 30% – up to $285,000.
While extreme, this example is based on an actual client experience. Lucky for them, they avoided this surprise US tax liability by closing on their UK home prior to the move. However, the individual was stunned to learn that the US could tax a gain accrued over 20 years on a non-US property.
Assumptions of similarity across tax jurisdictions
The case above highlights a primary financial risk for international transferees: the assumption of similarity across tax jurisdictions. Many individuals incorrectly assume uniform treatment of assets and transactions globally. However, capital gains, stock options, deferred compensation, pensions, relocation expenses, investments, and insurance policies (to name a few) can all be taxed very differently worldwide.
Incentive stock options in the US, for instance, are rarely treated the same way in other countries. Tax-advantaged investment vehicles in one nation may lose their benefits or even become punitive upon relocating to a new country.
Constantly changing tax rules
Tax rules are constantly evolving, subject to change by legislative bodies. An example can be seen in the significant tax breaks associated with relocation expenses in the US, which were eliminated with the passing of the Tax Cuts and Jobs Act (TCJA) on December 22, 2017. Many of the TCJA amendments are temporary, set to 'sunset' (revert to the pre-TCJA status quo) on December 31, 2025, unless the US Congress takes action to extend the provisions or make them permanent.
This example highlights the importance of staying updated on tax law changes, as they can impact financial planning and lead to unexpected tax liabilities or opportunities for international transferees and their employers.
Misconceptions About Tax Treaties
Another flawed assumption is that tax treaties will protect individuals from harm. While a large network of income tax treaties interconnects domestic laws across nations, in many cases, this web only provides a false sense of security to the uninformed taxpayer. For example, the comprehensive tax treaty between the UK and the US offered no relief for the taxpayer in the previous home sale scenario.
Complexities of Tax Treaty Provisions
Tax treaties between countries can be complex, with clauses that override certain benefits conferred by the treaty itself. One such example is the "Saving Clause" found in many tax treaties between the US and other countries. This clause allows the US to retain its right to tax its residents and citizens, even when other treaty provisions might otherwise exempt certain income from US taxation.
For instance, consider a US person receiving a lump sum distribution from a UK registered pension plan. Article 17 of the US/UK tax treaty might lead them to expect that the distribution would only be taxable in the UK. However, if that individual is a US resident or a US citizen living abroad, the Saving Clause gives the US the right to tax that UK lump sum distribution.
Adding to the complexity, the location of the Saving Clause in the treaty can vary across different treaties, often appearing under different Article numbers in the treaty. Navigating these intricate treaty provisions can be a significant challenge, highlighting the importance of seeking professional guidance when dealing with cross-border tax matters.
The employer’s perspective of off program moves
At a time when “duty of care” and “employee experience” are considered top priorities in the mobility industry, this trend of reducing tax support for mobile employees appears to go against the grain. It raises concerns about whether an employee’s financial well-being and overall experience are being adequately considered in the design of relocation packages of all types.
From an employer's standpoint, the question arises: Should companies feel obligated to provide tax assistance to employees relocating across any border—domestic or international? The answer is not a universal "yes." It is rare, for instance, for tax return preparation services to be offered to employees moving domestically within the same country. However, international relocation support is still the norm unless the move is a self-requested one.
In the previous home sale example, the decision to sell the UK property was made independently by the employee, separate from their employer. In such cases, the responsibility arguably lies with the individual employee. Additionally, providing tax support can be costly for employers, particularly if the tax services themselves are considered a taxable benefit, necessitating a tax gross-up.
However, when an individual is asked to relocate to fulfill a business need, a compelling argument can be made for the employer to provide tax assistance. The rise in self-initiated moves underscores the need for companies to establish consistent policies regarding tax support for mobile employees. Ultimately, the decision to offer tax assistance can be justifiably made either way. When making this decision, companies should also factor in the potential costs of a failed relocation. The expenses of lost productivity and replacing an employee who leaves due to tax-related stress can often exceed the cost of providing tax support, making it a prudent investment.
It is worth noting that providing support doesn’t have to be an all-or-nothing offering. Some companies, while not directly offering tax assistance, may provide a cost offset along with a list of recommended and trusted mobility tax firms to aid their relocating employees.
As a leading global mobility tax provider, we are at the forefront of adapting to the growing trend of off-program relocations. We collaborate with companies whose mobility policies do not include coverage for such relocations, offering a range of educational resources, webinars, online tools, and expert advice from our team of tax professionals to assist individuals in these unique situations. Additionally, our dedicated Private Client Services practice provides personalized support for individuals who do not have access to company-provided tax services. Contact us today to learn how we can support your employees and help them navigate these tax complexities with confidence.
