Surveying multinational tax policies
ORC Worldwide’s 2008 global survey reveals significant differences between North American and European multinationals' tax reimbursement policies.
ORC Worldwide’s 2008 Global Tax Policy Survey Report was ranked fourth in the Expatica HR 2007/2008 Top 5 Industry Survey Awards. Two surveys by ORC Worldwide appeared in the top 5, both scoring well for methodology.
The Global Tax Policy Survey was expanded in 2008 to include questions for six nationalities. Twelve general tax policy questions were asked for American, British, Canadian, French, German and Swiss expatriates, with additional questions specific to each home country.
The number of participants varied by nationality; a total of 175 multinationals provided data for at least one home country. Participants were predominantly located in the Americas (78.3 percent), compared to 20 percent in Europe and the remaining 1.7 percent in Asia. The average number of expatriates among participants was 635, the median was 60. The Electronics sector was the highest represented, with 12 percent of participants.
Some of the survey's key findings are as follows.
Tax reimbursement policy
The tax reimbursement policy followed by the majority of companies for company-source income, regardless of nationality, is full tax equalization with the company paying actual taxes, including year-end reconciliation of hypothetical tax deductions. This is the predominant practice among North American multinationals (81.5%). Sixty-four percent of European companies also follow this approach with 28.6 percent applying a tax equalization policy without the year-end reconciliation.
Tax reimbursement policy for non-company-source income varies significantly between North American and European multinationals. Forty-four percent of North American companies tax equalize most non-company-source income, compared to 21.4 percent of European companies. Close to one-third of North American companies take a laissez-faire approach, versus close to two-thirds of Europeans.
Income used for final year-end tax reconciliation varies by nationality. However, the use of company-source income only and company-source income plus all outside employee income predominates. Income arising from stock option exercise is typically tax equalized on the full income amount, paid to the company upon exercise, with the balance paid upon year-end settlement. Companies with Canadian expatriates are the least likely to take a laissez-faire approach; companies with French expatriates are the most likely.
There is a fairly even split among companies that deduct and do not deduct a hypothetical social security contribution.
Close to one-third of companies are considering reviewing or changing their current tax policy.
Almost all participating companies deduct a hypothetical tax, with hypothetical tax data provided primarily by accounting firms. Only company-source income is used to establish the estimated hypothetical tax by the majority of companies for all nationalities, with the employee’s annualised or projected tax bracket predominantly used as the basis for calculation. Base salary and, in most cases, actual bonuses are included as income items in the hypothetical tax calculation. Close to half of participants will also include stock options in the calculation.
Items most frequently subject to hypothetical tax include bonuses, incentive compensation and employer-issued stock options. Items typically not subject to hypothetical tax include most expatriate-related allowances such as goods and services, housing, hardship, relocation, education and transportation.
Tax reimbursement method
For all nationalities, the majority of companies use the gross-up method of tax reimbursement. Participants are more likely to use the one-year rollover method for Swiss expatriates than for other nationalities.
For companies using the gross-up method, marginal tax rates are typically used for expatriate compensation elements paid to the expatriate after repatriation, with the exception of German, French and Swiss expatriates where the majority use statutory tax rates. Companies with American expatriates typically handle this on the expatriate’s tax returns.
Tax preparation and assistance
Most companies provide a pre-assignment tax briefing to familiarise expatriates with the company’s tax policy, most often conducted by outside tax preparers or consultants. Personal tax or financial counseling is not provided by most participants. When it is, the predominant area covered is general tax or financial planning, regardless of job level.
Tax preparation assistance is primarily provided as needed after repatriation. Deloitte & Touche is used most frequently for the preparation of expatriate tax returns followed by Ernst & Young, PricewaterhouseCoopers and KPMG.