As a decision maker in a multinational organization responsible for deploying employees around the world, you may have been wondering how the proposed tax reform under the Trump administration and current GOP Congress will affect your bottom line. The prospect of lower individual tax rates on the surface may seem to be favorable when implementing tax reimbursement policy for a sizable global mobility program. However, you may be in for a few surprises.
With a new President and a new Congress, the likelihood of tax policy change is very high. Indeed, there are many proposals to reduce income tax rates on both individuals and their employers. The plan to decrease individual income tax brackets to three and setting the highest marginal rate at either 25% or 33% seems imminent. Even though the reduced rates are also expected to be coupled with limitations on itemized deductions and the like, we are all anxious for news to plan mobility policy impacts.
How might the reduction in tax rates affect global mobility policy and assignees?
1. Outbound U.S. Assignees Tax Equalized:
The reduction of individual income tax rates in the U.S. is likely to increase the employer’s costs, especially at the middle management level. This is because tax equalized assignees would be required to pay less hypothetical tax which is used to offset the company’s tax costs. The potential increase in cost will also be dependent on host country tax rates.
High tax host location – An assignee in a host country, like the UK for example, with a highest marginal tax rate greater than 25 or 33% is going to cost more. The company commits to paying the host country tax under equalization but will only be able to collect a fraction of that from the assignee as U.S. hypothetical tax… and that fraction is decreasing. This, in turn, leaves more foreign tax credits on the table to carryover and the number of foreign tax credits that are potentially unusable in the U.S. will increase under the proposed tax reform. Unused foreign tax credits are to be carried forward for ten years but may never be used.
Low/no tax host location – An assignee in a low or no tax host country, one where the highest marginal rate is not greater than the proposed 25 or 33%, may also cost more in some cases. Foreign tax credit will be used, but there will likely be residual U.S. tax cost. Given the additional assignment benefits such as housing, school fees, and other benefits, the reduced hypo tax collection will almost certainly leave a balance for the employer to pay on behalf of the employee in the U.S. where before there may have been none. However, as we see in the higher income situations, the Trump proposed tax savings become greater than under the current tax regulations.
|Effects of Trump Proposed Tax Administration||High Tax Country||Low/No Tax Country|
|Company Cost Increase||$1,400||$4,950||$1,000||($5,650)|
|Individual Tax Savings||$1,400||$4,950||$1,400||$4,950|
Tax estimates based on Married Filing Joint rates, two exemptions and standard deduction for both current tax and Trump tax. The Trump tax rate schedule assumed: 12% tax on Taxable Income (TI) up to $75,900; 25% on TI up to $233,350; and 33% on TI over $233,350.
2. Outbound U.S. Assignees Tax Protected:
A tax protected assignee in a high tax country will again create greater tax reimbursement and gross-up costs for an employer. The low tax country protection may seem like a windfall for the employer because the employee pockets the lower tax cost. However, employees tend to miss the connection between the lower tax costs in the foreign country and the higher figures in the U.S. When it comes time to file taxes in the U.S., protected assignees may not have the funds to pay the additional tax cost that could be due in the U.S.
3. U.S. Inbound Assignees Tax Protected:
This is best of both worlds. Whether from a high tax or low tax country, under the proposed tax reform, a foreign national working and paying U.S. and state income tax should have a reduced tax burden. The employer, in turn, gets reduced tax reimbursement costs on protected assignment related benefits and allowances.
4. Unexpected Mobility Side Effects:
Corporate Tax Deduction Value – The proposed tax reform reduces corporate tax rates from 35% to either 15% or 20%. The reduced corporate tax rate means that deductions have lower tax value so while assignee tax reimbursement costs for the employer may increase, the corporate tax deduction value for the employer decreases.
U.S. Becomes a Tax Haven – What has made corporate tax structures outside the U.S. so successful for global multinational organizations is the opportunity to reorganize where companies can take advantage of lower corporate tax rates in countries like Ireland or Luxemburg. If the U.S. reduces the corporate tax to the proposed 15% rate, the incentive to organize and structure U.S. corporations outside the U.S. is significantly reduced making the U.S. a tax haven country. With an equal playing field, foreign businesses may consider setting up U.S. corporate structures to take advantage of the opportunity to access U.S. markets. This development would likely result in an increase of international transferees to the U.S.
Tax reform does seem to be a high priority for the new administration and Congress. Even though there has been very few details provided and no hard timeline for implementation, we all seem to be anxiously waiting for news. Corporations, unlike individuals, don’t need visas to relocate around the world to take advantage of tax opportunities. With an open-for-business climate, the U.S. should become a very tax competitive place to invest and work. Coupled with other attributes such as an unwavering commitment to property protection and rights, the U.S. will likely become the destination of choice for global assignees in the future.