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Feature Tax as a factor of executive mobility
Upward and
outwardly mobile
Global business leaders need to be mobile, but this brings real costs,
not least in terms of potentially higher personal taxes. Employers also need
to manage their risks from increased mobility.
33%
Percentage of companies
that have at least one
percent of their workforce
on an assignment
away from home.
• By Nigel Gibson
Summary
A growing number
of business executives
are spending much
of their time in jobs
away from home, as
business becomes more
globalized. Employers
need to address the tax
and financial challenges
this presents.
Despite worries about the strength of
the world economy the number of
employees working in a foreign country
on a long-term contract has also remained
buoyant. Indeed, it has hardly been affected by
the dark days of 2008. What does this mean?
First, it suggests that companies realize the
benefits of deploying people with
the skills and experience required
in promising, new markets.
Second, it means that firms are
more efficiently managing a
number of considerations best
coordinated centrally - from
unequal rates of tax to domestic
pensions and complicated
systems of social security – which
can deter executives from
accepting an assignment, long or
short, in another country.
Michael Dickmann, Professor
of International Human Resource
Management at the UK’s Cranfield University, and
the author of Global Careers, a new book on the
subject, explains that global careers are
becoming increasingly important. “This is
because we all know that the world is becoming a
smaller place in one sense. We all see the rising
multinationals from developing countries. We
know that they operate much more globally, but
even small organizations nowadays have global
issues to master.”
Assignment challenges
Having worked with many well-known
multinationals, Dickmann and his co-author,
Yehuda Baruch, are under no illusions about the
need for change. Although more companies now
Credit: Uwe Noelke
employ more people on assignments in more
places around the world, there are no easy
solutions to the problems it creates. “What it
means for organizations is that they have to
start thinking about different patterns of
international work and to understand their
individuals better, as well as the tensions in the
whole process,” says Dickmann.
Chief among which obstacles is tax. Moving
from a country with a high rate to one where
they pay little or no tax may seem straightforward
to an employee. But expecting executives to
move between destinations with markedly
different rates of tax, not to mention social
security and other changes, can lead to strife,
disillusion and, sometimes, even defections.
To overcome these problems, some 85% of
multinational companies adopt what is known as
tax equalization. This aims to create a level base,
so that all mobile executives feel part of the same
team. Chris Debner, Senior Manager for Human
Capital at Ernst & Young in Zurich, explains: “If
you go abroad with a company, the amount of tax
you pay is equalized in such a way that you do
not lose out. There is often something called a
net promise which means that, as an employee,
you do not suffer from a higher rate of tax and
neither benefit from a lower one. Especially in
financial services the amount of tax that needs to
be paid is a factor in how mobile some executives
are prepared to be.”
Taxing alternatives
There are two other main ways to manage an
employee’s liability when on a foreign
assignment, which are hardly used anymore. One
is tax protection, under which the employee is
subsidized if they pay more tax than at home, yet
enjoys a windfall if the posting is to a destination
with a lower rate. The second is laissez-faire, in
16 T Magazine Issue 07 Ernst & Young