- Many companies noted difficulties in using the balance sheet approach, living expenses, exchange rates, payment levels, and hardship allowances for determining salaries and allowances for overseas assignees and in explaining these factors to assignees.
- In terms of notable challenges related to employee benefits, many companies cited setting limits for medical expense coverage during the assignment and the coverage of educational expenses for any accompanying children. Astronomical international school tuition rates create benefit policy challenges whenever children accompany assignees to regions in which international schools are the sole educational option; the survey provides insight into company coverage of such educational expenses with questions addressing the payment of overseas kindergarten and daycare expenses. A surprising number of respondents also indicated that the text of their benefit policies is outdated and differs notably from actual practice.
- Findings indicate that in cases where an assignee who resigned while on assignment has received severance pay and selective taxes were levied on the severance pay, many companies’ policy is to either provide some measure of support for the necessary procedures or to provide no such support.
We are pleased to announce the release of EY Mobility Survey No. 3, a joint project of Ernst & Young Tax Co. and EY Immigration Corporation which explores international mobility practices. The final installment in our three-part series focuses on policies and tax practices pertaining to overseas assignees, including allowances, salaries, benefits, regulations, and double taxation arising from overseas business trips.
Responses to questions about the latest trends in benefits paid to overseas assignees—including allowances, home leave, tuition for accompanying children, and housing-related expenses—demonstrate that many companies are aware of the need to improve their benefit benchmarking practices. Moreover, a full 34% of respondents indicated that the most recent significant revisions to (or drafting process for) their assignee regulations took place at least six years prior to the survey, with some respondents replying “ten or more years ago.” Some respondents also expressed that their rules and regulations are outdated and that the treatments outlined therein are misaligned with realities on the ground, highlighting an urgent need for companies to review and revise their policies and benefit programs.
This final installment of the EY Mobility Survey was conducted over two months from February to March of 2022 with the purpose of gaining insight into corporate management of allowances, treatments, and taxation of overseas assignees. EY surveyed and analyzed responses provided by 238 respondents (215 companies) primarily from administrative departments, including HR, accounting, executive functions and corporate planning.
EY Mobility Survey No. 3: Findings
Criteria for provision of allowances for overseas assignees and relevant amounts
- Overseas work allowance
The most common response (34%) indicated payment of a fixed amount determined according to the assignee’s job title; another 31% of responses indicated payment of a fixed percentage of monthly or yearly income.
The survey examined amounts for the manager, section manager, and general employee levels. The monthly average amount paid was JPY141,861.
- Hardship allowance
50% of respondents indicated that their company makes decisions based on indices published by consulting and research firms. 14% indicated using company-defined criteria and in-house research.
The survey examined payment amounts for section manager positions in New Delhi, Hanoi, Bangkok, Jakarta, Manila, and Beijing.
Survey results indicate that New Delhi had the highest amounts paid with an average value of JPY123,633, followed by Manila at JPY81,410 and Jakarta at JPY78,099.
- Allowances for overseas assignees with no accompanying family
26% of respondents indicated that they provide all overseas assignees with no accompanying family an equal amount regardless of position or yearly income; another 26% indicated not providing this allowance.
The survey examined payment amounts for the manager, section manager, and general employee levels. The monthly average amount paid was JPY118,150.
Payment of overtime allowances for work performed overseas
The largest percentage (41%) of respondents indicated not paying overtime allowances when an assignee is working overseas even if said assignee would be eligible for overtime allowances in Japan (i.e., they are non-managerial employees), although this may be due to assignees working as managerial employees in assignment locations. Many companies will compensate for this lack of overtime allowance such as by promoting the individual or providing them manager-specific allowances.
Hypothetical (hypo) taxes on overseas salaries
While 40% of respondents indicated that they calculate hypo taxes using estimates, another 26% indicated performing tax equalization (TEQ, i.e., making exact calculations), indicating a divergence in trends among respondents regarding method and approach to hypo taxes. Since TEQ requires calculations to be conducted for each individual employee, companies also have room to consider utilizing tax specialists or outsourcing services for these tasks.
Challenges associated with configuring the balance sheet approach, living expenses, exchange rates, and explaining these factors to assignees
Our survey revealed that a major challenge associated with salaries and allowances for overseas assignees is the difficulty faced by the employees responsible for gaining the assignee’s understanding with regard to the framework and factors used to set the assignee’s salary and allowances—specifically the balance sheet approach, living expenses, exchange rates, and hardship allowances—which is particularly difficult when the assignee personally feels like their circumstances in the assignment location do not align with their compensation.
Reasons, objectives, and challenges for revising and creating new regulations for overseas assignees/plans for and timing of most recent revision of regulations
A majority of responses identified improving policies and procedures for assignees as the reason and objective for revising regulations for overseas assignees. With an increasing number of companies considering formulating policies that may be used globally as international mobility becomes ever more dynamic, a notable 17% of responses cited the acquisition of know-how for creating regulations that may be used globally as the greatest challenge their company faces, second only to the 43% of responses that cited understanding the standard practices of other companies as their greatest challenge. A common solution is to utilize external consulting firms or specialists to obtain information on global standards for allowances and payment levels since conducting such research in-house is often unfeasible.
Additionally, many respondents indicated that years have passed since their company last reviewed its regulations for overseas assignees and that those regulations are no longer in line with their actual practices, which suggests an urgent need for companies to regularly conduct reviews both to ensure appropriate treatment for assignees and to reduce company costs.
Trends and challenges regarding the implementation of overseas trainee programs
Tax risks top the list of concerns for many companies with the most common challenge identified by respondents being tax risks arising in Japan due to the allocation of trainee costs (14%), and an additional 9% identifying tax risks overseas as their greatest challenge. Another 27% of responses cited not having trainees or a program in place for them, although responses companies provided to open-ended questions reflect that, while their company is considering the implementation of a program for overseas trainees, they have not yet been able to do so due to lack of know-how for establishing such programs and setting policies therein.
Severance payments for assignees
Many companies have policies in place wherein the severance pay to be received by assignees are paid after the company repatriates the assignee to Japan and the assignee officially resigns, presumably to avoid complications in the handling of taxes in the assignment location and Japan. For instances in which companies are required to file income tax returns in assignment locations when an employee resigns during an assignment, many responses indicated that their company files returns correctly, but a significant number of the companies that have experienced resignations while on assignment (27%) indicated that they leave tasks related to filing tax returns to the host entity and consequently do not know the details of such tax returns. Confirming whether tax returns are being filed correctly in the assignment location is extremely important even in situations where the home entity does not pay income tax on behalf of the employee.
Taxation in assignment locations for short-term overseas assignees and long-term business travelers and double taxation between Japan and the assignment location
In response to questions about which entity bears the burden of tax payments when tax obligations arise in the assignment location, approximately 30% of responses indicated that Japanese headquarters bears the final burden. Moreover, in cases where double taxation occurs between Japan and an assignment location, over 30% of responses indicated that companies avoid double taxation by filing tax returns in Japan and applying the foreign tax credit. In light of the frequency of misstatements, such those arising from errors in how the number of tax-exempt days for short-term visitors is calculated or when the prescribed number of days for business travelers has unintentionally been exceeded, considerable caution is also warranted regarding the payment of taxes levied on business travelers, especially as overseas business trips are expected to resume in the near future.
Commentary from Megumi Fujii, Ernst & Young Tax Co. Partner:
“Our survey paints a clear picture of the precarious position of companies who want to improve their assignee benefits to increase interest in overseas assignments and assignee satisfaction, but who are simultaneously forced to identify ways to reduce costs. The data speaks for itself, as “cost reviews and reductions” was second only to “the desire to improve policies and procedures for assignees” as the most common reason and objective for the revision or drafting of regulations for overseas assignees.
Foreign-affiliated companies generally tailor assignee benefits to the objective of the overseas assignment and the employee’s job title, and moreover have a global headquarters that conducts centralized management of international assignments with a strong focus on cost management. In contrast, Japanese companies generally offer a generous set of benefits regardless of the objective of the assignment or the employee’s job title, and have a headquarters that is not actively involved in cost management. This approach usually results in an inability to ascertain total costs and more significant tax risks. Additionally, since the transfer of employees across national borders necessitates consideration of taxation in both Japan and the assignment country, and despite the intention of many companies to facilitate employee mobility as globalization continues apace, our survey has made it clear that tax risks are impeding those efforts.
The roots of these challenges lie both in the regulations that stipulate the allowances and benefits provided to overseas assignees as well as in the associated assignment contracts stipulating cost allocations between home and host offices. In regard to revising regulations and other policies, taking into account specialist knowledge pertaining to taxation, visas, labor issues, and other perspectives for both home and host locations is essential, as is considering all of these perspectives together when conducting reviews of regulations. EY is preparing a full analysis of the three surveys and will publish a summary of the key findings at a future date.”
Overview of survey findings: