The Repatriation Blind Spot
As a Global Mobility professional, do you feel 100% confident that you are aware of every financial transaction on every file in your program? Further, are you confident that every financial transaction that you’re not aware of is being handled properly from a global tax perspective? Not entirely? Well… don’t feel bad, chances are you’re not the only Mobility professional playing ‘traffic control’ with concerns about blind spots. When I spoke to industry peers about this topic, I learned that this is a concern shared by many in the community, which prompted me to write this article. We’re all learning together and are in good company so to speak — no pun intended.
A lot of work has been done in recent years to advance Global Mobility functions from mere ‘logistics providers’ towards more broadly connected strategic partners within their HR environments through silo reduction and closer collaboration. Aligning Mobility with the Talent function is a great example for this ongoing effort. However, Global Mobility touches other areas of HR as well, such as the Compensation function, with some areas of collaboration being more prevalent than others. The intention of this article is to focus to an area of the Comp-Mobility alliance that can be easily overlooked – managing executive repatriation provisions — and shine a light on its risks and opportunities to help close blind spots and inspire process improvement where appropriate.
Mobility and Compensation: Tied At The Hip Or Room For Improvement?
Expat Comp is typically either handled directly directly within the Mobility function, or by the Compensation function. Some organizations take the approach to have Mobility handle all non-executive comp and then Comp handles all executive pay. In general, most mobility programs these days do a great job with proper pre-assignment pay planning, either by keeping employees on their home country compensation schemes or by adopting alternative approaches such as local plus methodologies; depending on talent strategy, assignee demographics and key locations around the globe. With pre-assignment comp being safely wrapped up for the most part, it’s smooth sailing from there on out until repatriation time comes around, right? Right??
The answer is: Hopefully. Those who have had the opportunity to observe the inner workings of the general HR landscape at a deeper level are aware that repatriations aren’t always what they seem and come in many different forms. For starters, there is the ‘true’ repatriation where the employee returns to their home location at the scheduled end date of their assignment. In other scenarios, repatriations are legitimate retirement situations if the assignment was the last step in an employee’s career. However, things aren’t always what they seem, especially when employee situations get a little tougher.
In the overall HR and business space, it is fairly common to offer employees that weren’t a good fit or didn’t meet performance expectations, etc. the option to save face via ‘Reductions in Force’ or offering ‘retirement’ packages that incentivize employees to exit the organization quietly rather than than going through a formal and potentially lengthy termination process. Typically, severance situations disguised as ‘retirements’ are handled with the highest levels of confidentiality, especially in the very sensitive executive space where the goal is to avoid business disruptions or employee morale issues. The challenge with high-confidentiality situations is that if the ‘in-group’ doesn’t involve the right people, the room for error and exposure increases exponentially, especially in the area of tax compliance.
Expat Severances And Retirements – The Tax ‘Nightmare’
In the executive space, it is not uncommon that retirement/severance situations include substantial financial provisions that can easily reach six figure Dollar amounts due to the accumulative effects of triggered payments that become due when entering retirement. Payment types that are routinely included in retirement packages are payouts from pension plans, stock options and short term and long term bonus incentives. In cases where the retirement option is really a disguised severance situation, often times additional provisions are being made to incentivize a quiet departure, such as assignment-end bonuses, knowledge transfer bonuses or severance payments.
While all of these options are perfectly legitimate payment types, there is often uncertainty or lack of knowledge around the taxability piece associated with these payments. As such, significant breaches in the tax compliance space can occur when home and host compensation partners team up and treat an expat package like ‘business as usual’; unsuspecting of the issues this can create if they don’t consult with Mobility.
While all payments related to the assignment should remain subject to hypo taxation if the company has a Tax Equalization approach, this detail can get lost or forgotten for severance or retirement scenarios, even though the TEQ concept remains applicable. This oversight can occur if payments are made directly by the business in the assignment location on behalf Comp if the payment authorizors are not educated in the added complexity around expat tax and miss the red flag. Especially if the tax rate in the host location is much lower than in the home location, not instructing the proper hypotax withholding can lead to significant overpayments to the employee. In multi-million Dollar payout scenarios, lack of hypotax withholdings can easily reach substancial six figures sticker prices. While this tax windfall would give the assignee a pleasant retirement present, it may raise some uncomfortable questions with Finance if discovered.
While instructing proper hypo tax withholdings is an internal policy compliance topic, overall tax compliance goes beyond internal policy parameters. Another question mark is the question where such payments are actually taxable from both an assignee and employer perspective. The answer to this question varies based on the payment type, because many countries treat pension payouts differently than bonus payments for example. And then, for further complication, additional research needs to be conducted for those employees who don’t return to their home location but elect to retire in a different country, as commonly seen with career expats who have been on the road for years and no longer have a true home location. For extra complexity, taxability is also largely driven by the factor of who actually pays for the provisions which could be the home or the host company business entity. Often times the different payment types are split between home and host organizations, requiring analysis around tax laws for every payment type and full clarity on any internal finance-driven charge back arrangements between the business entities. Unless you are a tax professional licensed in the countries that need evaluation, it is almost impossible to navigate and instruct these payments compliantly from a tax perspective without professional tax support. Compliance however is critical because once payments are released and processed improperly, it will become very expensive to fix. In the event of error, additional support from the tax providers in the affected locations will be needed to correct the issue in partnership with the local payroll teams.
Mobility and Comp Alliance: Claim Your Seat At The Table
So — how navigate this? What does success look like? For companies who perform well in this space without errors and the needs for costly retroactive corrections, ‘success’ means proactive case management of the taxability evaluation related to repatriation, retirement and severance payment scenarios in partnership with outside tax counsel. In many cases, Mobility owns the taxability research, the research about which business entity covers the cost for the different payment types and also coordinates the payout once the package is completed and taxability is cleared.
Since an executive severance/retirement scenario is a multi-stakeholder situation between high-level business leaders, HRBPs, Comp and Mobility, it makes sense for Mobility to take lead on this traffic control situation due to the function’s close proximity to outside tax counsel. It is the nature of our jobs as Mobility practitioners that we don’t always have all the answers, but we know where to find them, which makes Mobility a natural leader in these situations. As such, routinely educating your local and host HRBPs and comp partners about the risks of solo-efforts and the critical need to bring Mobility into the conversation early will move the needle from playing in the dark and hoping for the best to playing transparently, informed, compliantly and in true partnership across global teams.
Doing it Right – The Value Proposition
Research shows us that establishing ROI for mobility departments isn’t easy and few companies have mastered the art of creating a formalized approach. Meanwhile, Mobility practitioners already provide value to their organizations on a daily basis that remains often unseen and largely undervalued.
Even though Global Mobility departments may never be a profit center, their contribution to organizations routinely exceed their ‘behind the scenes cost center reputation’: Mobility functions deliver world-class logistical services, are a major facilitator for employee career growth, safeguard organizations from tax compliance breaches and if an entrepreneurial spirit is encouraged, they can support that too. At the end of the day, every business appreciates money, either by making it or by saving it. Because many global mobility professionals don’t (typically) live a life in the spotlight, executive comp related mobility projects are a great way to show value to the enterprise. Being able to show the business that your expertise and well-orchestrated severance execution saved them from a, for example, half a million Dollar overpayment due to enforcing proper hypo withholding versus ‘just paying it out’ is a big win.
Don’t be afraid to engage yourself in the conversation, get a seat at the table with comp in those ‘strictly confidential’ cases and take ownership of the taxability analysis with your tax provider. Once you’re in the weeds, you will be amazed at the value you are creating. Then it will your time to shine with highly specialized knowledge, protecting compliance and possibly tangible cost savings results for the organization. Throughout this journey, you will gain valuable insights into the modus operandi of general HR, Compensation and Corporate Finance; all valuable skills to add to your Mobility toolbox for deeper subject matter expertise and future success in this space.
Elisabeth Hauss, GMS, M.A., M.Ed. is an experienced Global Mobility and Immigration leader who has served relocating expats around the globe and across industries in both supplier and HR Global Mobility roles. Her experience includes global project management, rebuilding mobility functions strategically and transactionally, full-cycle supplier implementation, and leading operational cost leadership initiatives. Elisabeth, a native of Germany, has lived and worked in Europe and the United States and currently resides in Nashville, Tennessee with her family where she manages the global mobility program at Bridgestone Americas.