Expatriate Compensation

Taxation

Most countries have an income tax, and this tax varies in amount and structure from country to country. Countries may levy this tax on expatriates when working in a host country. Therefore, the company needs to assess the cost of income taxes in the home and host country prior to extending a job offer. The organization should provide the employee with access to a qualified tax consulting firm. The major accounting firms have worldwide offices with global mobility tax specialists and are very capable of establishing and managing worldwide taxation for international assignees. A pre-departure tax interview from the home country tax accountant and a post-arrival tax interview with the host country tax accountant should be a regular component of all long-term international assignments. (It is also good practice for all international assignments - excluding business travel.)

U.S. expatriates

If taxation issues for a U.S. expatriate merely involved knowing about the taxes that need to be paid in the host country compared to what the employee would pay in the U.S., this would be a relatively simple problem. However, the U.S. tax code makes this more difficult by taxing the worldwide income of a U.S. expatriate!

This remaining section on taxation deals specifically with problems faced by U.S. expatriates.

Double taxation

U.S. expatriates may be subject to double taxation on income.

IRS help

There are two areas within the Internal Revenue Service code that can help mitigate the effects of double taxation:

• Foreign Tax Credit
• Section 911

Foreign Tax Credit

A Foreign Tax Credit can minimize double taxation by allowing an itemized tax deduction on the expatriate's U.S. tax return for foreign taxes paid when foreign-sourced taxable income is taxed in both the host country and the United States. Generally, only income tax paid or accrued in a foreign country or U.S. possession qualifies as a foreign tax credit. The foreign tax credit will be the lesser of the amount of the foreign tax paid or accrued or the amount of U.S. tax attributable to foreign income.

Section 911

The individual foreign earned income exclusion is $132,900 for 2026 and is adjusted annually for inflation. There is also a foreign earned housing exclusion, which is total foreign housing expenses minus the base housing amount. The base amount is 16% of the foreign earned income exclusion that is calculated from whatever portion of 365 days is applicable.

Which option should you use?

Which of these alternatives is better depends on the particular circumstances of the expatriate and the assignment. Generally, the difference between the U.S. tax rate and that of the host country is a determinative factor:

• Foreign Tax Credit – When the U.S. tax is lower than the host country tax, a foreign tax credit is preferable.
• Section 911 - If U.S. tax is greater than the host country's tax, section 911 will usually lead to a lower total tax liability.

Further information can be obtained from IRS publication, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

The large tax consulting firms also publish complimentary worldwide personal tax guides such as the Ernst & Young Worldwide Personal Tax and Immigration Guide.

Company compensation

Regardless of IRS allowances provided to ease the effects of double taxation, U.S. expatriates face paying more taxes during assignments in other countries.

Companies compensate for this difference through:

• tax protection
• tax equalization

Both of these approaches begin with creating a hypothetical U.S. tax liability for the U.S. expatriate.

Tax protection. When using tax protection, the company reimburses the expatriate for the difference if the actual U.S. tax plus the host country tax is greater than the hypothetical tax calculation. If the two are less than the hypothetical tax calculation, the expatriate benefits by getting to keep the difference. This might occur during foreign assignments in low-tax countries such as Singapore.

Tax equalization. Tax equalization is the most common approach. In this approach, the company pays both the U.S. and host country taxes for the expatriate. The tax consultant calculates a hypothetical tax under the assumption the employee never left the United States and the company deducts the hypothetical tax from the expatriate’s paycheck. At the end of the tax year the tax returns are filed, and a tax equalization is prepared. If the stay-at-home tax is less, the company reimburses the expatriate for the over-deduction of the hypothetical tax. If the stay-at-home tax is more than has been deducted, the expatriate reimburses the company for the difference.

Tax equalization has 2 advantages:

• Expatriates do not benefit from differences between actual stay-at-home taxes and hypothetical taxes.
• Location does not influence how much an expatriate can retain, making transfers between locations easier.