Shawn Siwek, Senior Manager
GTN West Central
Phone: +1.763.252.0643 | Email: email@example.com
Short-term international assignments are increasingly being utilized within many companies' international assignment programs. A short-term international assignment is often defined by companies as an assignment of greater than 30 days, but less than one year. For US tax reporting purposes, a “short-term” assignment can be for up to one year in length. There are pros and cons that should be considered prior to structuring an international assignment.
- By utilizing short-term international assignments as an alternative or supplement to expatriate assignments, the Company may be able to offer a more modest compensation and allowance package to the employee, helping to reduce the overall tax and assignment costs to the Company.
- For US tax purposes, certain amounts (e.g., temporary lodging and per diems) can be paid tax free. In addition, host country taxes might be avoided. The taxation of allowances will vary by country.
- Short-term international assignments might result in a larger pool of potential employees for the international assignment program.
Although short-term international assignments may initially appear to be a simple solution when compared to the complexities of a longer term expatriate assignment, there are many items to consider, including home and host country human resources, payroll reporting and withholding, and tax issues including tax equalization.
- Immigration matters must still be addressed and benefit coverage may be different between home and host.
- The tax treatment of the employee in the host country may not be consistent with treatment available in the home country. For example, payments made to or on behalf of the employee that are nontaxable for home tax purposes (e.g., per diem payments), may result in taxable wages to the employee in the host country.
- Residency in the host country should also be reviewed, as taxation in the host country is often dependent upon the employee’s residency status in that country.
Will a short-term assignment always be less costly than an expatriate assignment?
Short-term international assignments, as compared to an expatriate assignment, do not always result in a lower tax and assignment cost to the Company. By extending the assignment length to just over one year, the company may reduce the overall cost as follows:
- Paying an employee under the expatriate policy may be less costly than providing a per diem and reimbursement of expenses.
- Administering a short-term international assignment may take more time than a long-term assignment. This could happen due to the length of the short-term assignment changing and requiring more constant support by the program administrator and/or tax services provider (e.g., monitoring the assignment).
- There are certain exclusions (i.e., the “Foreign Earned Income” and “Housing” exclusions) and foreign tax credits available on a qualifying employee’s US federal individual income tax return that help alleviate double taxation that might occur as a result of an international assignment. These exclusions and credits may result in a lower tax cost to the company if the assignment is just over one year, rather than short-term.
- An employee on expatriate assignment will often break state residency during the assignment period; an employee on short-term international assignment generally will not break state residency. Thus, the state tax cost for the company will often be higher for the short-term international assignment.
Other countries may have similar exclusions and credits that are available to employees on an expatriate assignment.
As you can see, there is no “one” or “correct” answer with respect to the structuring of an assignment as “short-term” or “long-term”. We recommend each assignment be reviewed, from both the home and host country tax perspective, to maximize the benefits available on a worldwide basis.
If you have any questions regarding short-term assignments, please feel free to contact Shawn at firstname.lastname@example.org or +1.763.252.0643.
The information provided is for general guidance only, and should not be utilized in lieu of obtaining professional advice.