What Is A Cost Of Living Allowance (COLA) / Goods And Services Differential (GSD) And How Is It Determined?

Calculator and pen to determine Cost Of Living AllowanceYou have just accepted the role you have always dreamed about: a long term, international assignment in London! There are so many things to think about before leaving the US. Will you succeed in your new role? Will you fit in with your colleagues? Where will you live?

The one thing that you don’t want to have to worry about when taking an international assignment is whether or not you can afford it financially. You’ve always heard that London is a very expensive city, so how will you make ends meet on your current salary? Will your cost of living allowance cover your needs?

Financial considerations are top of mind for most potential international assignees–especially when the assignment is in an area known to be expensive or one where the home currency is weak against the host currency.

Most companies with international relocation programs that send employees abroad on assignments understand that even though the work and life experiences they are about to gain are priceless, the employees are unlikely to accept assignments that leave them worse off financially. These companies utilize a Cost of Living Allowance or a Goods and Services Differential to ensure their international assignees have the same amount of spendable income in their pockets.

Spendable Income

First, let’s talk about spendable income. Spendable income is the amount of money or portion of the home salary the employee uses to maintain his standard of living. To determine what is spendable, one must consider the benefits the employer is providing or the fixed costs they are covering while the employee is on assignment. Typical international relocation benefits include housing, health care, allowances (transportation, utilities, etc.), hypothetical taxes, dependent’s education and more. The employer might provide these benefits in kind or they might be fixed costs in the home country. Subtract the monthly cost of all of these items from your monthly net salary (salary after taxes) and what is left is the Net Spendable Salary or Disposable Salary. The Net Spendable Salary is money that is utilized for items such as:

  • Food / Groceries (at home or at a restaurant)
  • Clothing
  • Personal care
  • Tobacco, alcohol
  • Furnishings and household operation (including private residential telephone)
  • Medical expenses not covered by insurance
  • Recreation
  • Automobile/vehicle maintenance, insurance and public transportation
  • Domestic service

Cost of Living Index

After determining the Net Spendable Salary, the employer uses data from an independent data provider to determine the Cost of Living Index (COLI) for the home and host cities. The COLI measures the cost of hundreds of products and services (also called a ‘market basket’ of goods and services) in cities around the world. The market basket includes the goods and services mentioned in the Net Spendable Salary discussion above.

The Cost of Living Index utilizes a cost of index of 100 for your home city as a baseline. If the market basket of goods and services for the host city has an index greater than 100 that indicates the host city has a higher cost of living than the home location. If the market basket of goods and services for the host city has an index less than 100 that means the host city has a lower cost of living than the home location.

Here is a simple example:

Home City, USA
Home City, USA’s Cost of Living Index = 100

Host City – London, UK
London’s Cost of Living Index as it is compared to Home City, USA = 120 or + 20%

Therefore, London is 20% more expensive than Home City, USA

If an assignee’s annual net spendable salary is $75,000, the assignee would need 120 percent of that amount—an extra $15,000 per year—to maintain the same standard of living in London. Most employers spread the Cost of Living Allowance across the year’s pay periods. So for employers with a biweekly payroll, the employer would divide the $15,000 in this example by the year’s 26 pay periods.

In instances where the COLI is less than 100 and the host city is less expensive than the home city, most companies will allow their assignees to maintain the higher purchasing power and not require a reduction in salary.

Best practice for employers is to review the Cost of Living Index and current exchange rates annually and make any necessary adjustments. It is important that the assignee understand that the COLA is subject to review and will likely fluctuate while he is on assignment.

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Current Key Trends in Global Mobility

Earth globeIn an increasingly volatile world, companies are trying to ensure their global mobility strategy remains competitive while increasing their return on investment from costly global assignments. Interestingly, more employees are interested in a global stint now than in the past, even those at relatively junior levels. In many organizations, realizing one’s career potential all but requires a global assignment.

Because of this, employers usually do not need to offer windfall-level benefit packages to coerce employees into taking these assignments, and there is much more variation in the assistance offered to global assignees than in the past. Senior executives might still receive rich packages but more inexperienced Millennials who are embarking on developmental assignments might require surprisingly modest assistance. As a generalization, they do not see these assignments as the hardship more senior employees often do.

These changed demographics free employers to pay more attention to cost containment when they are developing policies. The goal is to deliver the support needed for a successful assignment without spending money on unnecessary frills that may not be necessary to remain competitive.

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Corporate Relocation: Creating Choice in Policy Structure

Man holding cubes The economy has recovered and job-hunters have more leverage than they’ve had in years. They are much more willing to relocate for the right opportunity if the employer is willing to offer relocation assistance that meets their unique needs. Gone are the days of strict, one-size-fits-all policies. Instead, the modern corporate relocation policy structure includes several tiers and offers flexibility to the employee to make the relocation as comfortable and simple as possible.

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Domestic Relocation: Easing the Transition

Easing the transition of domestic reassignmentsWhether it is a domestic transfer or a global assignment, even the best-managed relocation will upset the employee’s sense of equilibrium. We expect this with international assignments and are much more likely to provide the support needed to make the assignment (and substantial) investment successful. But it is equally important to consider fit and adaptability for domestic moves. Ignoring these concerns will only make things more difficult for the employee and create needless risk of attrition.   (more…)

Relocation Tax Best Practices

Relocation tax best practicesBecause the tax aspect of any relocation is so important, clear and continual communication with the transferring employee is essential. A transferee should never be surprised at tax time with a large and unexpected payment due to the IRS. It is the responsibility of the transferring employee to understand the tax implications of each relocation benefit, but it is incumbent upon the employer and the Relocation Management Company (if one is involved in the process) to ensure that the tax implications of benefit usage are fully explained to the transferee verbally and in writing. (more…)

The Amended Value Option and Tax Favorability

Amended Value tax blogTo facilitate a relocation, many employers offer home selling assistance to homeowner transferees. Home sale assistance can come in various forms; however, the IRS specifically calls out the Amended Value (AV) program as the favored method in terms of compliance.

An AV program allows the transferee to market the property and attempt to find a buyer before the employer acquires the property and takes it into inventory. If the transferee finds a buyer, he sells the home to a third party Relocation Management Company (RMC) for the agreed-upon price, and the RMC, in a second and separate transaction, sells the property to the buyer for the same price.

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Employee Relocation Tax Law: What is tax gross-up?

What is tax gross upTax gross-up is a topic that relocation professionals routinely speak about among themselves but sometimes do not discuss adequately with relocating employees. Gross-up is a complicated subject and we sometimes wrongly assumed that tax discussions should be saved for the tax professionals—particularly if the employer is providing that service.

What is gross-up or tax assistance? In simple terms, an employer agrees to defray the taxes owed on a relocation benefit(s) on behalf of the transferee / assignee.

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TRC Global Mobility Announces Management Promotions

MILWAUKEE, Wis. (March 14, 2017)– TRC Global Mobility, an employee talent mobility company providing services for U.S., international and government clients, announced several changes to its executive leadership team, including four management promotions today.

Sean Lickver, CRP, GMS, was named TRC’s new President. He previously served as Executive Vice President. In announcing this promotion, Paul Haislmaier, TRC’s CEO and Chairman said, “Over the past two years Sean Lickver has played an integral role in TRC’s progress. His collaborative manner with employees and management, his ability to evaluate talent, his vision for the future and his knowledge of the global talent mobility industry are impressive. He has been a driving force in bringing TRC to where it is today and preparing us for where we want to be tomorrow. I look forward to continuing to work with Sean.”

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Taxability of US Domestic Relocation Benefits – Are You Prepared?

Arguably, the most complicated discussions surrounding domestic relocations involve the tax piece. For any domestic relocation expenses to be qualified as tax deductible, there are a few requirements that must be met, including:

  • The move must correlate with the start date at a new job location
  • The employee must be employed full time for 39 weeks during the 12-month period following the first day of work in the new location
  • The new place of work must be 50 miles farther than the commute from the old residence to the old place of work
  • The expenses must have been incurred due to the move
  • Only reasonable expenses are deductible
  • There is no limit on the dollar amount of deductible expenses

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How Immigration Reform will Impact Global Mobility

immigration reformFor years, comprehensive immigration reform has moved through the U.S. House and Senate in stops and starts. The new administration has signaled a more aggressive stance on immigration right out of the gate, and Congress is expected to take up comprehensive immigration reform once again. In the meantime, a great deal of uncertainty will cloud the process for companies and candidates alike.

Attracting Talent

Talent knows no borders.

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