The new US tax rules mean that businesses need to review the cost and policies of their workforce mobility programs.
While many businesses have unveiled perks for employees including one-time bonuses or raises in light of US tax reform, there may also be hidden costs for some workers, including those moving across borders, as well as for the employers who transfer them.
The US Tax Cuts and Jobs Act (TCJA) is boosting the bottom line of many businesses by reducing the corporate income tax rate to 21%. However, it also includes reforms with direct and wide-ranging implications for companies with inbound or outbound US workers, as well as those with employees moving across US state borders.
The new US tax rules mean that businesses need to review the cost and policies of their workforce mobility programs. It is also an opportune time for companies to take a more holistic, global approach to these programs.
“US tax reform presents a compelling opportunity to focus on global mobility’s ever more important role in organizations,” says Michael Bertolino, Global Leader, EY People Advisory Services. “It gives companies another reason to think carefully about strategic sourcing of employees to confirm that they have the right people in the right locations based on the markets that drive the most value and require the related talent to drive that value.”
Many of the changes under the new tax law restrict business deductions for payroll and fringe benefits, which means they also impact the cost of company mobility packages. For example, the new US tax law limits the tax deductions for compensation paid to certain corporate executives of public companies, including equity grants, salary or post-employment payments. The TCJA also introduces changes to business deductions for a long list of fringe benefits, from employee stock benefits to transportation and entertainment expenses.
But the widespread changes to individual taxation under the new law may have the most significant impact on the corporate cost of mobile employees.
“As background, when a business moves an employee across borders, individual taxes can be higher in the new location,” says Mohamed Jabir, Dallas-based member of the Ernst & Young LLP People Advisory Services practice. “The employee may also have significant relocation expenses, which may or may not be tax-deductible. To relieve the employee of additional taxes linked to the move, the vast majority of companies provide additional compensation, known as tax equalization, tax assistance or ‘gross-up.’ This type of tax assistance adds to the employer’s cost of transferring an employee to a new work location.”
The TCJA may make employer tax equalization/assistance payments to employees costlier, he says, since it eliminates many personal tax deductions, credits and exemptions. For example, the elimination of individual tax benefits relating to moving expenses will likely impact mobility programs. Because companies typically pay or reimburse some or all moving costs, elimination of the tax benefits means potentially higher taxes for relocating employees and thus higher tax assistance/tax equalization costs.
“By far, the suspension of the moving expense benefits has attracted the most attention, especially for companies in sectors deploying consultants on extended projects,” says Jabir. “Based on simulations to measure the potential impact, we’ve found that the change in the taxability of moving expenses accounts for more than 40% of employer cost increases in years with relocation expenses.”
Rising mobility costs
The loss of the individual moving expense benefit is not the only personal tax change that may impact corporate tax assistance costs. For example, the tax deduction for real estate taxes on foreign property has also been repealed, which could also lead to higher tax equalization costs for businesses.
Another change is a new TCJA limitation on an individual’s deduction for state and local incomes paid, which may affect employees moving across state borders within the US. In most US states, individuals pay state as well as federal taxes, and state rates can vary significantly.
“Employers with inbound assignees to high-tax states may see increased program costs, as could employers with domestic mobility programs that gross up nonresident state income tax,” says Bertolino.
The new tax law includes other major changes for individuals, including lower tax rates, a higher standard deduction amount, changes to rules governing the mortgage interest deduction and others. These changes may increase or decrease US tax liability for mobile employees, depending on individual situations.
A TCJA change that may trigger higher tax costs for workers inbound to the US — and thus the employers who take these workers on — is the potential loss of the enhanced child care credit due to rules requiring a US Social Security number for dependents. The suspension of personal tax exemptions may also create a filing requirement and possibly incremental tax costs for certain nonresident alien assignees to the US who previously fell under the filing requirement threshold, or for business visitors who do not qualify for relief under a double tax treaty.
A broader look
All these changes mean that companies need to review the costs and policies of their mobility programs, says Bertolino.
But the impacts of TCJA also raise broader issues, he says. “It is not just about design of benefit programs,” says Bertolino. “It’s also about workforce strategies, sourcing, retention and location of talent.”
“As the economic dynamic shifts, a company’s talent footprint should also shift so that there is an optimum alignment of talent location to corporate and economic value,” says Bertolino. “It always gets back to having the right people with the right capabilities in the right place, doing the right thing, at the right cost.”
Key action points
- Incorporate the US tax changes into mobility cost calculations
- Conduct modeling analysis to assess the TCJA cost impact and adjust budget forecasts and tax cost accruals accordingly
- Evaluate the impact of TCJA changes on prospective project bid
- Consider alternative approaches to employee relocation costs
This article was originally published in Tax Insights on 24 May 2018