One of our clients with staff assigned in Germany wanted more information about the different tax classes in that country, and how it affected their employees. Referred to as steuerklassen,Read More
The use of benefits in kind by companies to compensate or reward employees is a well-established practice in many countries. For many employers, benefits are viewed as a key component to maintain employee engagement and quality staff retention. But, there is often uncertainty on what exactly comprises a benefit, whether it is taxable and if it has value for the employee. This guide will cover all of these issues, as well as how several foreign markets treat benefits in kind for employees on assignment.
Sometimes referred to as ‘fringe benefits’, benefits in kind (BIK) are allowances or additional compensation that are not included in the paycheck as wages, but carry financial value. BIK may be in the form of providing life necessities, like housing or meals, or can be financial, such as pension contributions. In some cases, BIK can amount to 30-40% of the total compensation package due to the value of the items included.Subscribe to get more insights like this.
Benefits in kind are not as generous as in the past as many companies have cut this type of expense, but expat workers on assignment still have access to special BIK due to specific demands of working in a foreign location. However, ‘hardship’ compensation will be harder to obtain as overseas assignments are now viewed as an opportunity to advance, rather than a professional and personal challenge.
Both employees and employers should understand the specific tax rules that will apply in the host country of assignment, since not all BIK are tax-free and this will affect the final compensation amount.
For some employees, BIK packages are as important as the salary when they are negotiating an employment agreement, and so it is useful to review the current status of BIK when offered to employees who are working both domestically and overseas.
Benefits in kind are of particular relevance to workers on international assignments for four reasons:
Employees on overseas assignments may be offered more BIK than their domestic counterparts due to the expense and hardship associated with the position. Some of the advantages of BIK for employees abroad include:
The disadvantages associated with BIK may be:
There is a wide array of BIK used to compensate employees, and in some cases the BIK package can be as lucrative as the salary. Some examples of the most common BIK include:
A few of these such as health insurance are offered to many employees, while other BIK are reserved for executives or those working overseas who may have unusual living expenses and lifestyle challenges. For example, it is common for workers who are assigned to a hardship posting to receive a higher grade of health insurance with access to high quality medical care.
All BIK are negotiable just as the salary, and can have a significant financial impact for an employee. For example, a worker on an overseas assignment may receive a housing allowance that covers 100% of the expense, which results in the ability to save a larger portion of the paycheck.
Not all BIK will escape taxation, and it is necessary to know the tax laws regarding BIK prior to negotiating a contract. Some BIK are non-taxable, while others will be included in the tax return and taxed as wages. This is particularly important for international assignments where the policy of the host country towards benefits in kind may be very different to the home country.
Every country will have its own tax policy regarding BIK, but there are similarities when it comes to items that are taxable. For example, pension contributions by the employer are almost always tax-free, at least until withdrawal by the employee. Also, moving or relocation expenses are typically not taxed, nor are most childcare expenses. Some countries such as the UK, will not tax BIK if you earn less than the personal allowance on the income tax return.
In some cases, housing allowances or use of company cars will not be taxed if the use is necessary to carry out employment duties. Housing that is paid due to security risks or proximity to work sites would not be taxed, and vehicles used exclusively for company use are tax-free. Each country has specific rules regarding these items, and should be thoroughly researched before agreeing to a BIK package in order to evaluate the tax consequences.
In addition, benefits in kind can be delivered in a few different ways, for example through salary packaging or salary sacrifice. This can mitigate the tax burden by allowing the employee to exchange pre-tax wages for the benefit. In the UK this is known as flexible benefits or a ‘flex scheme’ and according to Towers Watson up to 20% of employers offered a flex scheme in 2014.
When an employee evaluates the compensation offered for an international assignment, the value of the benefits in kind (BIK) package can be significant. BIK are still seen as an essential part of expat compensation, more than their domestic counterparts, and should be expected to be a part of the salary negotiation. However, not all BIK have equal value to the employee, or some BIK may not be offered by the employer.
The BIK items with the most value are those that offset normal living expenses, such as housing and transportation, but qualify for tax-free treatment. This type of BIK is similar to receiving tax-free salary compensation, since wages will not have to be used to cover the expense. The offering of shares or options can also be a lucrative form of BIK (although not strictly a benefit and usually taxable) due to the potential for increases in market value.
If an employer offers an allowance or reimbursement of housing costs, this can have a large impact on the expat compensation package. The best situation for the employee is to have housing costs covered without a commensurate decrease in salary, essentially saving the expense of what is typically a large budget item. Even if there is a salary reduction to offset the cost, that may lower the employee’s tax bracket and rate, effectively increasing the net pay.
Tax considerations: Many countries do tax housing BIK as having a direct economic benefit to the employee and qualifying as taxable compensation.
Company provided meals on-site are a common tax-free BIK, especially if the worker is required to remain on-site for their duties. Other meal and expense allowances typically are related to business travel, rather than daily expenses at home. If there is an unusual cost of food in the location, or a necessity to dine out frequently, then there could be a meal allowance offered per diem to offset the expense.
Tax considerations: Meals and incidentals that are not related to travel or not offered on-site (such as a ‘food allowance’) will usually be considered a taxable BIK.
The children of expat workers will typically attend some type of private institution due to language and cultural restraints, and to ensure a quality education. This is a cost that most companies will expect to offer as a BIK, as part of the unique challenges associated with an overseas assignment.
Tax Considerations: In most countries, education expenses paid by the employer are tax-free. Childcare may also be offered as a tax-free benefit with some limitations.
One of the more controversial BIK is the use of a company provided vehicle. As a long-standing symbol of BIK status and position, having an employer vehicle and/or driver may be essential in some foreign locations. There may be restrictions placed on the vehicle for personal use, but in most cases the presumption is that any transportation could be labeled as business related.
Tax considerations: Most countries scrutinize vehicle use more closely than other BIK since it is most susceptible to abuse. There may be strict formulas on how much personal use is required, and in some locations a company vehicle will be taxed as employee compensation regardless of the type of use.
Medical insurance and even payment for cost of care is probably an essential part of an expat’s BIK package. The cost and difficulty of obtaining local insurance independently may be prohibitive, and companies will often have a group policy available where there they have some business history in the country.
Modest life insurance policies are common BIK, and may be attractive to expats considering working in hazardous occupations or locations.
Tax considerations: Health insurance and life insurance policies that are paid directly by the employer are typically tax-free to the employee.
An obvious BIK for expats is the cost of moving their family and household to the new location. Depending on the length of the assignment, this could entail a significant transfer of personal and household goods internationally, but companies do generally expect to pay for this expense.
A component of relocation is the eventual cost of moving back to the home country, an expense that some employees may overlook. Also, home visits of once or twice a year could be negotiated as a BIK.
Tax considerations: Moving or relocation costs that are either paid by the employer or reimbursed are almost universally tax-free. The key element is whether the move is required by the employer for business reasons. Some countries will even allow tax-free reimbursement of any capital losses on home disposal to facilitate the move.
The wide array of BIK types may not all be offered by a single employer for every overseas position, and some types may be less valuable depending on associated tax policy. Nonetheless, one of the advantages of a foreign assignment is the availability of BIK packages that can either offset or completely cover normal living expenses. Naturally, this allows the employee to save more of their wages, or at the very least have their salary reduced to where they are paying a lower tax rate.
Because BIK are an important part of compensation of assignees, there are a few ways to account for their value in the payroll alongside salary and bonuses. BIK are always a consideration when structuring payroll for assignments, as well as taxation, currency differences and preservation of pensions. So, the payroll method could impact the value of BIK, depending upon where it is paid and or taxed.
The home country model is ideal for shorter assignments, and basically maintains payroll in the home country along with the same benefit level as similar employees. There may be some addition of allowances if there are unusual expenses in the destination country. The disadvantage of this approach is that there may not be offsets for host country taxes or currency difference, if the payroll is split between home and host countries. This can affect the assignee’s overall compensation, and may need to be equalized.
The localized method is most useful for longer term assignments, and would include offering benefits that are the norm in the host country. Examples of BIK in other countries are housing, food allowances and pension contributions, which all must be considered as part of the value of the total compensation of the assignment. This makes sense since longer assignments would most likely have a host country payroll in place, and there would be statutory requirements to provide BIK locally. In this way, the payroll remains compliant and the BIK package can be consistent for assignees in the country.
Some employees are transferred from one country to another, which complicates both payroll and BIK. There are several ways to offer ‘global BIK’ to assignees that will not change if they move to a new location. Many of these may be centered in the home country such as ongoing pension contributions, while others may fluctuate according to the current country of assignment. This approach gives the mobile employee a sense of continuity and is least disruptive financially since they can plan their finances based on the global BIK types. Senior executives may also require a package based on their position and the region of assignment, in addition to home country BIK.
Depending upon the destination of an employee assignment, the BIK package can be a significant factor in offsetting hardships or expenses while abroad. Aside from tax equalization strategies, there are other ways to use allowances and benefits that make up for the unusual challenges that an employee may face in some countries.
Factors to consider when creating a BIK package include crime rates, security, political conflict, cultural differences, healthcare and climate. All of these issues can affect the daily personal and work life of an employee on assignment and may require special provisions to ensure their safety and well-being.
The payroll and tax laws of most countries require a company to report all BIK that are a part of the compensation package. Even if a specific benefit is not taxable, it should be reported to avoid any appearance of ‘stealth compensation’ to avoid taxation.
There may be separate forms required to report certain types of BIK, whether attributable to the employee or claimed by the company as a business expense. If a company is unfamiliar with host country reporting rules, accounting and legal experts may be needed to ensure compliance.
Are Benefits in Kind Tax Deductible?
Taxability of BIK will have an effect on the final value of a BIK package. For example, if a country taxes the employee on a housing allowance, then that could reduce their overall salary to pay the tax. If housing costs are tax-exempt as in China, then there is a double benefit since the exemption could lower both their expenses and the final tax rate as well, effectively increasing take-home pay.
One universal policy seems to apply to cash allowances for any type of expense, which are usually taxable to the employee. However, the same expense if reimbursed based on actual receipts could be tax-free, which should guide the employee in minimizing upfront cash allowances in favor or simple expense reimbursement.
Finally, the location where the employee is and payroll and taxed will have an impact. An expat could be paid in either their home country, the host country of assignment or some form of split payroll. This election of payroll type and locale could be made based on the tax policy in the countries in question.
The availability of exemptions from tax for some BIK will vary from country to country. The rules on exemptions and tax-free BIK should be factored into the overall compensation package prior to an assignment. If some BIK (such as a car or meal allowance) are taxable to the employee, then there may be a need to offset those amounts through salary adjustment so that take home pay is not reduced.
If an employee on assignment is terminated due to redundancy (meaning that their position is no longer needed), in some countries they are entitled to some type of redundancy payment from the company. This offsets the financial hardship of losing their job and giving them time to find new employment.
The natural question arises whether the value of BIK is included in the calculation of the redundancy payment amount (whether lump sum or incremental payments). Countries such as Ireland, leave it up to whatever the employer and employee agree, which means it should probably be a part of the employment agreement.
There are varying levels of policy toward applying BIK to redundancy payments, and if the BIK comprised a significant percentage of the package, it may likely be included. A good rule of thumb may be if the BIK is taxable to the employee, it should be included to arrive at a fair redundancy amount. Once again, this is a crucial area to research prior to an international assignment, since the host country laws will likely control calculation of the required payment.
The use of benefits in kind (BIK) to compensate employees is an established practice in most developed countries. Whether the employee is working domestically or on international assignment, there is always tax policy to consider when valuing a BIK package. Each country will have its own set of rules and tax regulations that pertain to non-wage compensation, and both employees and employers need to understand the specifics before negotiating a contract.
In China, the following BIK are considered tax-exempt if paid directly by the company or reimbursed based on actual documented expenses. These BIK would apply to an expat working in China on assignment.
Interestingly, cash allowances to cover travel or entertainment expenses are taxable to the employee, and better to be reimbursed based on actual receipts.
The housing BIK in particular can be an advantage when included as part of a compensation package even if it is simply deducted from salary. The reduction could result in being taxed at a much lower rate on the remaining wages.
In the United States, all BIK are considered taxable unless specifically excluded in the tax code. Even non-taxable BIK have limits and exceptions that must be considered prior to agreeing on compensation. http://www.irs.gov/publications/p15b/ar02.html
The most common non-taxable BIK in the US include:
There is no special provision for taxability of BIK for expat workers in the US, and any BIK such as housing, vehicles or other living expenses would be considered taxable to the employee.
In Canada, non-taxable BIK include:
The tax policy in the UK is similar to the United States, as the non-taxable BIK are limited and specifically defined. However, if an employee makes less than the personal allowance (10,600 Euros annually) then there is no tax on any BIK for the lower paid employee. This policy obviously opens the door to weight compensation more heavily with BIK if the salary can be kept below the personal allowance.
The standard tax-free BIK include:
For expat workers, there is a special regime that lists non–taxable BIK which include:
South Africa has a highly detailed BIK tax policy, which is strict for both domestic and expat workers and will tax BIK such as:
There is a detailed guide available on formulas used to compute the taxable amount of these BIK, and it appears that South Africa may have one of the more stringent tax policies. Even common BIK such as insurance policies are taxed to the employee in some cases.
This tax policy limits the ability of an employee to rely on BIK to offset expenses while on assignment in South Africa, or to add to the compensation package using BIK.
Non-taxable BIK in South Africa include subsistence and travel allowances for business purposes, such as expenses for meals, accommodation, incidentals and use of personal vehicle.
When employees evaluate a position transfer from one country to another, one of the important factors is how BIK will be treated in the new location. For example, an employee in the UK being assigned to the US would have to assess how the transfer would affect take home pay. This section explores the primary types of employee benefits and how they will impact both US and UK take home pay for an employee in each country.
There are three primary types of employee benefits that are offered most often as part of a compensation package, that provide coverage for illness, injury, retirement and loss of life.
Health Insurance, Sick Pay and Income Protection
Basic medical and dental coverage are typically offered to full time employees, regardless of their position or pay level. Other insurance benefits may include payment when an employee cant work due to illness, such as sick pay and income protection plans.
Pensions and Retirement Contributions
Large employers may have their own pension plan for employees that remain with the company for a certain number of years. There can also be portable retirement plans that employers may set up and contribute to for all employees. This is often referred to as a ‘defined contribution’ plan or pension, with either a fixed contribution amount or employer matching of employee contributions.
For some employees, life insurance is another attractive benefit that they may not go out and purchase on their own. Depending on the employee’s age, this can be a very economical benefit for the employer, and if the employee leaves they could have the option of picking up the premium payments. The amount is usually computed based on salary, and designed to assist the family in the event the employee passes away.
When offering a benefits package, an employer has to take into account after tax salary, and this includes the income tax rate and statutory withholding such as social security. As shown in this comparison, the different tax rates can be a big factor in the final amount of either US or UK take home pay for employees.
So, the only method (aside from sound tax planning) to increase after tax compensation is through benefits offered to the employee. The benefits included in an employment package are important to employees because they are often tax free or at least tax deferred.
For example, when an essential expense such as health insurance is provided by the employer, the employee is saved the expense of purchasing coverage with after tax compensation. Also, an employer may offer better coverage through participating in a group plan that an employee would not have access to on their own.
Most types of pension and retirement contributions are also tax deferred, meaning they are not taxed until withdrawn after retirement, presumably when the individual is in a lower tax bracket.
Employers in both the UK and US are interested in recruiting and retaining the best talent as employees, but there are different types of benefits offered in each country that can be used to attract a candidate.
US Employee Benefits
The US is not known for generous benefit packages for the average employee, and there are very few statutory benefits that are mandated for employers. This reflects the US pro-business culture and tax rates that are lower than many developed economies.
Employees can usually expect some type of health insurance and larger employers may offer a defined contribution retirement plan, with matching. Unemployment insurance is statutory, but is regulated at the state level. There are no other mandatory benefits, and items such as holiday leave, maternity leave and other allowances are negotiable as part of the employment contract.
Recently, health insurance coverage in the US was made a requirement for every individual, and if an employer does not provide it, the employee must purchase their own coverage. Health care policies are expensive and there is no national insurance plan as in the UK that can be used as back up. Some employers stopped offering coverage, and simply increased employee salaries to give them a way obtain their own coverage.
UK Employee Benefits
The effect of benefits on UK take home pay may seem more dramatic since there is a higher national tax rate than in the US for middle to high income earners. Therefore, tax free benefits carry more value for high earners who may be subject to as much as 50% tax on income.
Of course, there are more statutory benefits in the UK than the US, reflected in the higher tax rate. The mandatory benefits in the UK include paid leave, statutory sick pay, and there is a national insurance scheme as well. Private medical insurance is a taxable benefit when offered by an employer, a primary difference from the US.
There is an additional statutory requirement now in the UK for employers, who are required to enroll employees in some type of pension plan, and make minimum contributions. The UK is expanding its pension plan requirements for companies in an effort to make sure that workers have sufficient retirement funds in addition to government pensions. Until recently only large employers were subject to the new law, but that is changing soon, which will affect foreign companies that employ even one worker in the UK.
The criteria for enrolment are fairly straightforward, with certain exceptions. You must enrol and make an employer’s contribution for all staff who:
“Some employers make pension contribution payments by a salary sacrifice arrangement. This is a contractual agreement between the worker and the employer by which the worker agrees to forego salary in return for pension contributions by the employer.”
If an employer uses this type of arrangement, it does not replace the automatic enrolment requirements into a pension plan, but can be managed in tandem with minimum contributions above the salary sacrifice level. If you have a defined benefit plan, this also will affect how salary sacrifice can be used with the pension scheme.
Employee Self-Allocated Benefits
In addition, another approach being used in the UK, is where a benefits package is offered based on percentage of salary, and then the employee can choose how to allocate the benefits. Depending on circumstances, they may want to forego a benefit like life insurance, and contribute more to a pension plan for retirement.
There are other types of benefits that may be offered to employees, depending on the employer. Most of these are negotiable, but certain types of leave are statutory in the UK. In the US, only executives would have access to benefits like car allowances or paid leave of more than two weeks per year.
Other employee fringe benefits include:
Given the differences in tax rates and mandatory benefits between the US and UK, it is difficult to make a major distinction as which has a more generous approach to employee benefits. The effect on compensation may be nearly equal when you consider that the higher tax rates in the UK bring more statutory benefits, while the US relies on free market principles to allow employees to purchase items like health or life insurance using a greater share of after tax compensation.
For a business entering a new international market and assigning employees, there are an array of challenges to overcome in meeting host country payroll and tax laws. Smaller companies or those in an exploratory stage may elect to forego local incorporation, and instead use a GEO employer of record. The GEO solution makes international employment simple, cost effective and allows for rapid deployment of staff.
The Shield GEO service provides comprehensive employment support through local partners in the host country. This assures the client-company that they are in compliance with all employment, payroll and immigration rules. As a third party, Shield GEO becomes the local employer of record, assuming responsibility for all employment related matters.
A part of the GEO service is structuring the local compensation package to account for host country tax and withholding requirements. This is an obvious advantage when it comes to evaluating how BIK will be viewed, taxability and relative value to the employee. Shield GEO can also advise the client on which BIK will be needed depending on varying levels of resources inside the country. Items such as education, healthcare and security may require additional expense for expats if special provisions are necessary.Contact us to find out more about how we can help you manage your international employees
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