Global Mobility In Practice
Enjoy our concept roundup of some practical knowledge related to global mobility.
We wanted to roundup some practical global mobility concepts, taken from our experience with MNC mobility departments and Worldly's own practice. We recommend our concept series on international taxation for additional context.
IA Policy
A company will shift from ad-hoc global mobility to international assignment (IA) policies once they get burned on an IA for the first time. A mature MNC mobility department might have a small database of IA policies corresponding to assignment types, employee roles, and particular home-host country pairs. A well-designed policy lays out assignment procedures, costing, tax concerns, requirements of the assignee, services for the assignee's family, repatriation, exception handling, and more. IA policies usually aim for "continuity", so that the employee experiences the least friction and least amount of change possible in moving, settling, and working in a new country. The assignment agreements should reference the relevant policy. As you may know, IA policy design and maintenance is central in Worldly’s mobility workflows.
"Short term assignments" are IAs that last 1 year or less, but of a greater duration and scope than business travel. For Worldly clients STAs are at least 60 days, after which jurisdictions typically have unambiguous taxation rights over the employee, although depending on the nature of the employee's activity taxation rights can happen much sooner.
"Long term assignments" are IAs lasting 1 year or more but are not intended as permanent transfers (PTs). Usually more straightforward than STAs from a compliance perspective, almost all LTA assignees will achieve residency status for tax purposes in the host country, excepting special taxation provisions for assignees.
Repatriation Agreements
Repatriation agreements (RAs) are critical in global mobility for employer and assignee. They are drafted prior to the start of an IA and specify the terms and timeline for the resumption of the previous home country employment. Ideally repatriation agreements specify the employee’s role upon return with some consideration for the newly obtained global skills. RAs help employees feel secure and connected to the home employer. IAs are notorious for employee turnover after repatriation, so RAs will help with retainment, and they are a main step on our mobility platform.
Dual Career Couples
Since family issues are the top reason that assignments fail, with “poaching” being a close contender, attention to spouses is paramount from the start in IA policy. “Dual career couples” refers to when the assignee's spouse has an active career and expects a work permit and career opportunities in the host country as well. Ideally the assignee's employer helps with work visas, placement, career development, and language and cultural training for spouses. Worldly understands the critical role of family in IAs and has put spouses and children in the middle of our service plans.
No Gain No Loss
A continuity approach to global mobility which holds that the assignee should experience neither a gain nor a loss in income due to the change of country. Hence, a costing workflow might aim to equalize taxes, adjust for cost of living and currency, and offer select allowances and accustomed fringe and healthcare benefits. The continuity strategy might even include "split currencies" renumeration. In MNC context the concept might also include convergence of company practices and culture among subsidiaries so that the assignee here too experiences less change.
Tax Equalization
Tax equalization is a continuity strategy used by the majority of MNCs such that an assignee pays the same amount of tax in the host country as they would at home. In tax equalization it's the employer who bears or benefits from the tax difference between jurisdictions. Even though employees are still “protected” from extra tax in tax equalization, there is a common variation called “tax protection” where employees gain from the tax decrease while the employer bears the increase. In MNCs tax equalization is often extended to income of the assignee's partner and sometimes to the assignee's non-organizational income, e.g. capiital gains, dividends, or rental income, but MNCs usually set pre-determined limits on reimbursement amounts for these categories.
Hypo Tax
Costing workflows and tax equalization rely on an estimation of an employee’s current tax burden (an estimate because it's impractical to get assignees' home country tax returns). Thus companies use a hypothetical tax to represent the home tax burden of an assignee or class of assignees. This amount is used to derive the net salary in a salary workflow, or to serve as the baseline in global tax reimbursement. Most hypo tax calculations used at MNCs will include any state/provincial/cantonal tax, any local/municipal tax, and social fund taxes, sometimes along with hypothetical deductions and credits. An end-of-year reconciliation may take place to reimburse or charge the difference of the hypo tax and the employee's actual burden.
The Balance Sheet Approach
The Balance Sheet Approach is the most common IA costing method for assignee renumeration used at MNCs. A simple 3-step version: 1) Take the employee’s gross salary and subtract an estimate of their tax burden (hypo tax) to get a net salary. 2) Take the net salary and add assignment-specific allowances, cash benefits, cost of living or other adjustments to get the adjusted salary. 3) Gross up the adjusted salary with the tax burden of the host country (or an equalized tax) to get the assignee’s final salary. This type of approach is sometimes called "net to net" or "net to gross", where the main idea is to reach the host country salary by grossing up the home country net salary.
Continuity or Handover
"Continuity or Handover" is Worldly’s solution to the dilemma of employment relationships when there are multiple cross-border entities involved. MNCs have at least half a dozen common configurations for payroll, tax, and economic or legal employers when an assignee moves between entities in different countries. We consolidated these practices into two options for clients: “Continuity”, where clients can choose a more seamless continuance of the current employment, or “Handover”, where clients suspend the home country employment for the duration of the assignment. While both methods would still constitute dual employment for international tax purposes, they entail differences in compliance and are suitable for different assignment types.
Secondment resists an exact definition as it refers to a set of varying practices used by companies around the globe. It is basically a form of employee loaning where an employee of one company is moved to another company through a secondment agreement. The first company often maintains its employment relationship, so that the secondee (employee) has dual employers, while some companies will first terminate the employment relationship (here the secondment agreement also serves as a rehire agreement after the secondment). In secondment the economic employer and main beneficiary of the secondee’s work is the second employer, not the first (original) employer.
International PEO
A variation on Secondment above, International PEO establishes a dual employment relationship but here the economic employer and main beneficiary of the employee’s work is the first (original) employer, not the second employer. International PEO is basically a legal employer/employer-of-record (EOR) service for companies who want to employ workers in foreign jurisdictions without first registering an entity. As a result, International PEO has to some extent gained a reputation for being a means of tax avoidance through PE avoidance. Given it does not actually offer PE protection from a legal perspective, and given the current anti-avoidance climate, it remains a risky practice.
“Global employment companies” are global entity networks created and owned by an estimated 15% of MNCs. They centralize HR operations and provide for agile global mobility of their workforce. Essentially the MNC creates a network of companies with an HQ or regional HQs, and assignees are hired by the GEC entity as the legal employer/EOR. Employees are then deployed among countries in the GEC network.
Tax Wedge
“Tax wedge” refers to the gap between the employee’s take-home pay and the employee’s cost to the employer. For example you can sum the employee’s personal income tax, employer and employee contributions, and any other payroll taxes, and express that total as a percentage of the total cost of the employee. Tax wedges are important in payroll planning and for comparison if deciding on global mobility destinations.
Split Year Returns
Split year returns are possible in some jurisdictions during the first year of an IA. Taxable income can be divided between non-resident and resident periods typically with the 183 day mark serving as the boundary. Split year returns are advantageous when there are favorable non-resident taxation rates.
Split Currencies
Some firms debate which currency to pay assignees in and how to offer compensation for currency fluctuation over time. Assignees might complain if either the renumeration currency depreciates or if the alternate currency gains value during the assignment. An elegant option is to split renumeration between home and host currencies. Typically the base salary will be paid in the home currency, while allowances, cash benefits, etc. are paid in the host currency; the assignee might likewise distribute payments among a home account in home currency for long term savings and a host account in host currency for short term expenses.
“Cost of living adjustments/allowance” or sometimes called G&S ("goods and services differential adjustments/allowance"), are salary adjustments made during IA planning to reflect differences in the cost of living between home and host countries, such as in a “no gain no loss” IA policy. They also can refer to adjustments made during the assignment: Some organizations will schedule reviews 1-2 times per year to look at changes in basket-of-goods prices or other regional cost data to make adjustments. Good data vendors here will provide variations of the cost indices to suit a company's benefits level, e.g. "cost conscious", "standard", or a "custom lifestyle" COL index. Most MNCs will not implement a negative COLA/G&S if the COL is lower in the host country. We do think COLA/G&S is often unnecessary for OECD mobility, since the neighorhoods where highly skilled professionals live and work have similar costs among the most common OECD home-host country pairs. Adjustments for currency fluctuations may be a sufficient alternative to COLA.
This concludes an initial roundup of concepts in practical global mobility. Be sure to check out our companion concept series on International Taxation and Global Talent Management.
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