is entitled to tax the various elements of income earned by an expatriate. The U.S. expatriate will then avoid double taxation by taking a credit for taxes paid in the foreign jurisdiction. The question becomes whether or not the employer will equalize the tax discrepancy between the two countries, (i.e., determining if the expatriate package will include a gross tax equalization adjustment is an essential part of the package). The objective of tax equalization is to compensate or eliminate any additional tax burden or benefit that arises due to the elements of compensation and taxation introduced by the expatriate assignment, (e.g., allowance paid while on assignment, tax rate differentials). Preparation of U.S. and local country tax returns and equalization calculations are services CPAs can provide to these clients. Beyond tax considerations, there are a number of other issues to consider. Expatriation tax aspects are too often disassociated from legal issues which could, to a great extent, affect the tax situation for both the company and the expatriate.
Labor Law Expatriation is often mistakenly used to describe several different legal situations: secondment, expatriation or transfer. Generally, a secondment implies that the employment contract signed between the former employer and the employee remains. The employee is sent abroad by the former employer, in general, for a temporary period of time – from a few days to several years. In most cases, expatriation involves the situation where the employment contract is only suspended and a new employment contract is signed between the employee and the foreign entity. Lastly, a transfer applies when there is a total breach of the employment contract between the former employer and the employee, and a new employment contract is signed between the employee and the foreign entity. Depending on the factual circumstances of the move, the
employee’s country of residency could be different (e.g., an employee seconded could remain a resident of his/her former country while permanently living in a foreign country). The type of visa granted to the employee is also an obvious element in determining the employee’s country of residence.
the local plan. Few income tax treaties contain provisions about the tax treatment of retirement contributions made in the former country and allow the employee to benefit from deductions based on the payment of a foreign pension plan if certain conditions are met.
Dealing with expatriate issues involves having a good overview of both the company goals and employee’s expectations. The CPA professional must demonstrate his/her ability to provide advice in a more complex international context involving foreign jurisdiction tax law and international tax treaties. Beyond the payroll and individual income tax questions, sending employees to a foreign country could raise corporate tax issues, such as transfer pricing and permanent establishment for the business enterprise.
The legal framework could also have an impact on the employee’s Social Security contribution requirements. The U.S. has signed 24 Social Security agreements. Usually, Social Security agreement provisions exempt seconded employees from participating in the local security system, as they are normally not on the foreign entity payroll. However, an expatriate or transferred employee may have to be registered on the local payroll and, thus, must pay local Social Security. Expatriate packages frequently include health insurance in the country of origin. Those premiums cannot, in principle, replace local Social Security contribution requirements which remain due. Tax treatment of these premiums needs to be addressed to determine if they are deemed fringe benefits under local tax rules.
Retirement Retirement plans are also a relevant issue and it begs the question of whether the employee should continue to contribute to his/her former retirement plan or to NEW JERSEY CPA • MARCH • APRIL 2013
Anne-Mélaine Daly-Schveitzer is a senior manager for international tax at WeiserMazars LLP. Contact her at email@example.com.
Member Benefit International Taxation: To and from the United States Thursday, April 25, Roseland Visit njscpa.org/catalog Express Code: E1209383