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Feature Tax as a factor of executive mobility Singapore’s steady rise as a global hub for international expansion has been partly fuelled by its wide-ranging steps to attract expatriate workers. Today, nearly one in four people in the city-state are foreigners. Migration mix Deutsche Bank now has 180 sets of country combinations between which employees migrate on a mixture of short- and long-term contracts, a growing number of which are located in emerging markets. Singapore has been one of its Asian expansion hubs, ever since setting up operations there in 1971/2. It now employs over 1,900 staff there. __ Does your company have more and more employees working in different parts of the world? Is the administration of masses of contracts, currencies and assignments causing a headache? Then the answer may be to set up what is known as a global employment organization (or GEO). Besides the above reasons, many companies find other valid business cases for changing the employment structure of their mobile employees. Such entities have long been popular among multinational companies in the oil and gas and mining industry. The idea is that a peripatetic executive is employed not by the company in their home country, nor by a subsidiary elsewhere, but centrally by a GEO. Not only does this reduce the number of country combinations and therefore complexity; it may also Credit: Digital Vision / Jeremy Woodhouse Alternative solutions to managing a global workforce Going GEOpolitical enable all expatriates, wherever they happen to be, to be treated equitably and compliant with local legislation. The parent company may also find it easier to standardize the salaries, pensions and other benefits of those employed by the GEO. Indeed, many international firms look upon a GEO as a center of excellence that hosts and manages much of the company’s talent. There are drawbacks, of course. One is the effort that goes into the setup of such a structure. Another is that the employees have to change their existing terms of employment. Employees of the GEO could also find they are ineligible for social security at home unless their employer has a subsidiary registered there. For many international employers, however, the advantages are sufficiently convincing. 18 T Magazine Issue 07 Ernst & Young
which the employee is left to fend for themself. Unsurprisingly, the latter is an option that can prove tempting in countries where there is little or no tax to pay, but unpopular elsewhere. A further approach – known as “net to net” – adjusts the employee’s net income for the cost of living in the new country and may be used in conjunction with one of the other approaches. As Peter Ferrigno, Leader of Ernst & Young’s Human Capital practice for EMEIA, points out, the aim of equalizing liabilities between destinations is to remove tax from the question of whether or nor to accept the assignment. “Large companies don’t want people to determine whether they move or not based on the rate of tax. Tax protection, on the other hand, to cover the cost of higher rates but giving someone the benefit of lower ones, becomes more and more difficult to justify on the grounds of fairness.” A global approach Small wonder therefore that a growing number of firms, particularly larger multinationals international, have chosen to set up what are known as “global employment organizations” (see box). These seek to lift executives clear of disagreements over the rate of tax, as well as problems over entitlements to pensions, by creating an international entity that hovers over all destinations. Often domiciled in an offshore location, such organizations are popular with oil companies and firms that need to move skilled people from one site to another, often at short notice. Instead of providing a fresh contract each time an employee moves from one country to another, all those within the global employment organization are employed on similar terms. Such an approach may have its advantages but it does not suit all, not least because of the cost of managing offshoots. Take Deutsche Bank, a global financial services organization headquartered in Germany that has no fewer than 180 “country combinations” – sets of nations, in other words, between which employees migrate on a mixture of short- and longer-term contracts. With developing markets making much of the running within the world economy, many of the destinations are big cities in Asia. “Five years ago,” says Matthew Ozburn, Deutsche Bank’s Director of Human Resources International, “the number of executives moving from job to job around the world was probably 1% of the workforce. Today it may be double that number, even allowing for a rise in the number of employees in Germany brought in by the acquisition of a domestic operation such as Postbank. “We use an approach which we call host-based”, says Ozburn. “We start from the premise that the executive has a pay package which looks like those of his or her peers. Then, considerations as to whether or not the employee has a family, children and so a need for schooling, etc. are introduced on top.” “Within each market, we must remain competitive. So an assignment in, say, Singapore will be different from one in Frankfurt. We do a calculation at the outset, which addresses whether there is an advantage or disadvantage for the employee. We look at the difference between what an executive would have received in their home country and what they stand to get in the new one. The result is a system of equalization that allows for the combinations of pay found in the financial services industry: a mixture of salary, bonus and deferred equity.” Deutsche Bank also uses a system called “local to local”. Under this, an employee would complete an assignment on local terms in one place and then move to another on similar terms. That such an arrangement is used more and more reflects, among other things, the growth in banking in and around offshore and what are known as near-shore locations. Many such centers require the same kind of skills, experience and knowledge, so executives can move easily from one to another. Pensions pose a problem Within the European Union, of course, individuals assigned from one country to another can remain under their home state’s system of social security, subject to certain conditions. This can be done for up to five years. So, for a typical assignment, it may not become an obstacle to a job abroad. By comparison, says Ferrigno, pensions remain an issue. In part, he says, this is because each country’s legislation is different, but also because of a philosophical difference between private vs. state, and employer vs. private provision, in different places. “Long term, the trend away from final salary systems in countries like the UK and the US will probably accelerate a simplification towards schemes based on defined contributions,” he explains. Even so, the appetite for mobility among international executives will still pose difficulties for companies, not least because of the risk of getting it wrong. Firms are in danger not just of leaving employees disgruntled and so losing them altogether, but also of making mistakes that can undermine their reputation at home as well as abroad. As Debner points out, out that there is a risk of an employee choosing to do it themselves, making a mistake and thereby failing to comply, and so causing trouble for their employer. “The risk of an investigation by the tax authorities has increased in recent years. This can damage a company’s reputation. The danger of being dragged into the headlines for alleged wrongdoing is one of the worst.” The secret, it seems, is to be aware of such risks from the outset and to manage them as they arise. Percentage of employees that are short-term assignees (
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Feature Tax as a factor of executive mobility<br />
Singapore’s steady rise as a global hub for international expansion has been partly fuelled by its wide-ranging steps to attract<br />
expatriate workers. Today, nearly one in four people in the city-state are foreigners.<br />
Migration mix<br />
Deutsche Bank now has<br />
180 sets of country<br />
combinations between<br />
which employees migrate<br />
on a mixture of short- and<br />
long-term contracts, a<br />
growing number of which<br />
are located in emerging<br />
markets. Singapore has<br />
been one of its Asian<br />
expansion hubs, ever since<br />
setting up operations there<br />
in 1971/2. It now employs<br />
over 1,900 staff there.<br />
__ Does your company have more and<br />
more employees working in different<br />
parts of the world?<br />
Is the administration of masses of<br />
contracts, currencies and<br />
assignments causing a headache?<br />
Then the answer may be to set up<br />
what is known as a global employment<br />
organization (or GEO).<br />
Besides the above reasons, many<br />
companies find other valid business<br />
cases for changing the employment<br />
structure of their mobile employees.<br />
Such entities have long been popular<br />
among multinational companies in the<br />
oil and gas and mining industry. The<br />
idea is that a peripatetic executive is<br />
employed not by the company in their<br />
home country, nor by a subsidiary<br />
elsewhere, but centrally by a GEO.<br />
Not only does this reduce the number<br />
of country combinations and<br />
therefore complexity; it may also<br />
Credit: Digital Vision / Jeremy Woodhouse<br />
Alternative solutions to managing a global workforce<br />
Going GEOpolitical<br />
enable all expatriates, wherever they<br />
happen to be, to be treated equitably<br />
and compliant with local legislation.<br />
The parent company may also find it<br />
easier to standardize the salaries,<br />
pensions and other benefits of those<br />
employed by the GEO. Indeed, many<br />
international firms look upon a GEO<br />
as a center of excellence that hosts<br />
and manages much of the company’s<br />
talent.<br />
There are drawbacks, of course. One<br />
is the effort that goes into the setup<br />
of such a structure. Another is that<br />
the employees have to change their<br />
existing terms of employment.<br />
Employees of the GEO could also find<br />
they are ineligible for social security<br />
at home unless their employer has a<br />
subsidiary registered there.<br />
For many international employers,<br />
however, the advantages are<br />
sufficiently convincing.<br />
18 T <strong>Magazine</strong> Issue 07 <strong>Ernst</strong> & <strong>Young</strong>
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