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Expatriate, Inpatriate, and TCN Total Rewards
Traditionally, total rewards packages for an expatriate, inpatriate, and a TCN on an international assignment are designed to keep their compensation level similar to their home country compensation program.
The package is designed to ensure fair and competitive compensation based on home country practices and helps to repatriate the employee to the home country upon the completion of the foreign assignment - typically within two to three years. When needed, supplemental allowances may be delivered to the international assignee when the cost of living is higher in the host country than in the home country.
If an employee will not return to the home location, a localized package based on host country practices should be considered.
Obtaining up-to-date, reliable global compensation market data is important, as well as cost of living data, to effectively manage international assignments (as will be discussed in a later section on Local Nationals’ base salary).
What to consider when designing Expatriate, Inpatriate, and TCN total rewards packages
Total rewards consists of more than just an employee's base salary. In the following, we'll discuss several items to consider when designing Expatriate, Inpatriate, and TCN packages:
- Variable pay
- 13th month pay
- Allowances
- Taxes
- Benefits
Variable pay
Globalization is shifting attitudes towards variable pay throughout the world. In the United States, variable pay in the form of performance-based incentives or discretionary bonuses is widely accepted, and multi-national businesses have successfully managed global performance-based bonus plans - even for international assignees. Yet, consideration of cultures in other countries which may be risk averse should be carefully assessed when designing and implementing a variable pay plan. For some time now, multi-national employers have been moving away from fixed, guaranteed annual bonuses in favor of discretionary, performance-based bonuses, especially for senior, professional and managerial employees.
13th month pay
13th month salaries have become common practice in many countries around the world. In some of these countries it is required by law and in others it is customary. In a few countries, an additional 14th month of pay may be required or is customary. The extra pay is delivered coincident with the end of the year or a major holiday such as Christmas or the Lunar New Year. In Central and South American countries, 13th month pay may be given out in two or three equal installments during the year.
Allowances
Determining the cost of living for expatriates, inpatriates, and TCNs can be done using ERI's Relocation Assessor®. This is a robust database that allows you to compare cost of living (COL) differentials between 10,600 areas worldwide. Please see DLC Course 92, Expatriate Compensation to find out how to use this software.
When reviewing the potential cost of living financial impact of an international assignment several variables need to be evaluated:
Consumables
Consumables reflect a market basket of goods and services that a typical expatriate, inpatriate, or TCN household would purchase and can include items similar to those in the consumer price index such as: meats, dairy products, produce, bakery products, miscellaneous grocery products, miscellaneous goods and services (e.g. fast food, average casual restaurant, haircut and other personal services), clothing items, entertainment, major appliance repair, etc. All state and local sales tax estimates, value added tax estimates as well as any other country specific consumption taxes are included in the consumables estimates.
Transportation
Transportation includes the yearly total cost of operating an automobile or equivalent commuter expense. The costs covered are mileage, maintenance, taxes and licensing fees, insurance, and gasoline and gas taxes, etc. Additional factors that affect this allowance are public transportation, airline travel and parking when it is a substantial cost.
Health Care Services
Health care service costs in the U.S. include the amount an employee pays for coverage and out-of-pocket costs such as co-pays and deductibles. In non U.S. locations, a national health plan can be assumed for developed countries and supplemented with costs based on organization and location–specific company policies. Typically, a foreign national relocating into the United States will need to be managed under a U.S. health plan during the assignment as most foreign health plans are not portable outside of their home country.
Housing
Most employees on international assignment will be renters and an allowance is directly linked to earnings level and a commensurate square footage. Rental of an unfurnished apartment, condominium, or house for management level transferees is standard as most employees ship their personal effects. Amenities vary by region and the estimates should reflect these variations for the region. Utilities and renter's insurance costs should be estimated based on local rates. Home ownership in a host location is typically not encouraged due to the limited duration of an assignment and significant financial risks of ownership.
Miscellaneous
There are some after-tax miscellaneous expenses which can be included in allowances like tuition for dependents, childcare, and spousal career support. These additional allowances will typically reflect company policies and competitive market practices.
Income and Payroll Taxes
Typically, employee tax estimates include employee income taxes, which may be national, state/provincial, and local (if they exist), along with national and local payroll taxes, flat taxes, surtaxes, employee-paid disability, and employee-paid unemployment rates (if applicable).
Taxes can be one of the most complicated and costly components of expatriate, inpatriate, and TCN management. Typically, one of the two following methods is applied in managing taxation:
Tax Equalization: Ensures an international assignee does not experience a significant gain or loss due to the tax laws applicable to individuals on assignment outside of their home country and to keep an employee’s tax obligation approximately the same as if they remained in the home country.
Tax Protection: If the actual worldwide taxes exceed the stay-at-home tax amount (as determined under the company’s policy), the company reimburses the excess to the employee. If the actual worldwide taxes are less than the stay-at-home tax, the employee retains the tax benefit. This might be used in low tax countries such as Saudi Arabia, Singapore, or Hong Kong.
The tax situation is typically simpler between two countries other than the United States, since the U.S. taxes its citizens (whether resident or non-resident) on worldwide income. Fortunately, the United States has a foreign earned income exclusion on the first $126,500 (2024) earned abroad.
| United States Citizens | Non-United States Citizens |
|---|---|
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Can be taxed TWICE on earnings made outside of the United States 1) Taxed by the government of the country where they work AND 2) Taxed by the United States government on income over the applicable foreign earned income exclusion |
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See ERI Distance Learning Center Course 92, Expatriate Compensation, for more information about how to handle the United States double taxation situation.
Benefits
For broader benefits programs, expenses can be considerably different throughout the world. Like most expatriates, TCNs will typically retain their home country benefits. However, if one country has a critical benefit such as private health coverage and the other does not, the company may need to add this benefit to the TCN's compensation package. The most obvious example is an expatriate, inpatriate, or TCN who is transferred to the United States from a country with a national health system, which does not provide portable coverage when the employee is abroad. In this instance, the company would then need to provide this international assignee with private health coverage.
Memory Jogger
Under tax equalization, an expatriate or TCN's tax liability would be based on: