The passage of the Tax Cuts and Jobs Act of 2017 has had far-reaching effects within the domestic sector of the global mobility industry, however, international employee relocations have been impacted as well. All of the benefits that are affected from a domestic perspective will have the same implications on international moves if those benefits are included in an international relocation package. For example, household goods shipments and final move benefits are typically included in both international and domestic employee mobility packages. As of 1 January 2018, both of these benefits have been deemed as taxable, with no distinction between the benefits being administered domestically or internationally. It will be up to companies on an individual basis to determine if they are going to consider grossing up the taxes for both of these benefits going forward.
Tax equalization and the utilization of the hypothetical tax deduction programs could see a rise in costs due to the inverse relationship between the hypothetical tax rate and the assignment expenditures. When assignees with the U.S. as their home country move to a host country with a higher marginal tax rate than the U.S., the employer typically opts to ensure that the employee pays no more or no less taxes than he or she would have paid had the employee never gone on assignment. The employer equalizes its employees, agreeing to pay the higher host country tax on behalf of the employee. Because of the lower tax rates in the U.S., the company can collect hypothetical taxes that are only a fraction of the amount due in the host country, thus having to absorb the remaining tax burden. Conversely, the lower U.S. tax rates could result in U.S. inbound assignments becoming less expensive due to the likelihood of the U.S. tax cost for the company being lower than the tax rate in the assignees home country.
Due to these changes and the swiftness with which they were implemented, TRC recommends that companies revisit their original cost estimates for employees who are currently on assignment and adjust their accruals accordingly so that there are no surprises when it is time for the employee to repatriate. Additionally, TRC also recommends that companies should revise their international relocation policies and cost estimation methodology to reflect these new tax changes.
To start your efforts towards compliance with the new relocation benefits tax changes, download this white paper to understand the:
- Changes to Federal Tax Treatment of Moving Expenses;
- New Challenges For High-Cost Locations;
- Reason Behind the Anticipated Popularity of Lump Sums;
- Impact on International Assignments; and
- 3 Immediate Steps You Can Immediately Take.