The US government's plans to remove a tax break benefiting Americans who work abroad has been dropped for now. As Rebecca Buckman and Dan Bilefsky report for CareerJournalEurope.com, the fight isn't necessarily over yet.

US lawmakers still angling to kill the USD 80,000 exclusion on income earned by American taxpayers working abroad — a controversial provision in the current US Senate tax bill — call it a tax loophole that benefits big American companies and their rich, fat-cat executives living overseas.

Tara Holeman begs to differ.

Holeman, 33 years old, has spent the past two years toiling in Hong Kong for a nonprofit group — Business for Social Responsibility — and is one of many expatriate Americans who currently count on the tax exclusion to make ends meet. She shares an apartment in high-rent Hong Kong with roommates and earns less than USD 80,000 a year.

If the full US Congress votes to repeal the income-tax break, "the personal liability for me would be too large to keep working in Hong Kong," says Holeman, who is originally from Nebraska. Now, she helps companies in Asia improve working conditions for their employees and learn about corporate responsibility.

For now, an unexpectedly strong onslaught of lobbying by business groups in Washington seems to have persuaded lawmakers to retain the income-tax perk for Americans working abroad, though the final outcome won't be known until at least the end of May. The consensus following a meeting Monday night between President Bush and Republican congressional leaders was that the repeal provision "will not survive," and US expatriates will continue to receive the tax break, according to a senior Senate Republican aide.

But American business groups in cities such as Hong Kong and Singapore remain on guard, noting that repealing the tax exclusion has long been supported by some congressional Democrats. The surprising thing this time, tax experts and businesspeople say, is that Republicans led the charge.

"We're still shocked," says Frank Martin, president of the American Chamber of Commerce in Hong Kong. He says he never expected this year's repeal provision to make it out of committee, and certainly not the full Senate. Chambers in Hong Kong, Singapore and other Asian countries have been urging members to send faxes to members of the US Congress to protest the move.

Martin doesn't deny that US businesses benefit from the tax exclusion, because it gives them a break when they move employees overseas on full-fledged, expatriate pay packages. Such packages typically involve "tax equalisation" for employees, through which an American company adjusts an overseas employee's compensation — with tax rates in mind — to make sure his or her take-home pay is roughly what it would have been in the US. That allows the company to handle a complicated tax situation for the worker, but also to benefit if the tax rate in the foreign country is lower than that in the US. The exclusion also helps businesses afford other perks often essential to luring Americans abroad, such as help with private-school tuition and yearly trips home.

Hurting the less fortunate

But repealing the exclusion would also pinch many less-fortunate Americans in low-tax overseas locations such as Hong Kong, Saudi Arabia and Singapore. These workers include US taxpayers hired on increasingly common "local" pay packages — which contain fewer perks and are cheaper for companies to provide — and people like teachers and not-for-profit workers, who enjoy no corporate largess.

American Stephen Elting and his wife, Cheryl, both of whom teach English in Hong Kong, are good examples: Their combined salaries last year were just under USD 80,000. Doing away with the tax exclusion "doesn't really sound like a good deal to us," says Elting, aged 33.

He says he and his wife didn't move abroad to save on their taxes. For them, "it was just a chance ... to explore a different part of the world that most people from America wouldn't see," Elting says. "I wonder, if this [tax bill] passes, if it will actually deter people from doing something like what we've done."

If the USD 80,000 exclusion were repealed, American expatriates like the Eltings could get a tax credit for paying foreign taxes; they don't get that credit now if they take the US tax exclusion. But the new credit still wouldn't make up for the higher US taxes they would have to pay. The top tax rate in Hong Kong is 15.5 percent, compared with 38.6 percent in the US.

Jill Elsner, a managing director for tax consultancy US Asia Tax & Business Services Ltd in Hong Kong, estimates that a US taxpayer earning exactly USD 80,000 in Hong Kong, and paying about USD 12,000 a year for housing, would pay an extra USD 7,300 in total taxes if the exclusion were repealed. Elsner says she has been deluged with calls and other inquiries in the past week about the possibility the tax break could end.

Doing away with the exclusion would make hiring American workers more expensive, and could encourage US companies overseas to start hiring employees from places such as Britain and Australia, says Richard Weisman, a tax lawyer and partner with Baker & McKenzie in Hong Kong. Britons and Australians working abroad don't pay taxes to their home countries, but if Americans abroad were no longer excluded from paying taxes on the first USD 80,000 of their foreign earned income, many would demand higher salaries to compensate.

"The US is the only developed country in the world that continues to impose world-wide income tax on its citizens that are working overseas," Weisman says. The tax exclusion is not so much a perk, he argues, as an effort "to place Americans [working abroad] on an even footing with citizens from other countries."

Across Europe, American chambers of commerce also have been lobbying US senators, warning of the added burden the repeal of the tax break will bring to American businesses abroad. The American Chamber of Commerce in the Czech Republic, which hosts US companies such as Philip Morris, Johnson & Johnson and Coca-Cola, said it fears that scrapping the tax break will result in the retreat of American expatriates from executive positions in Asia, Europe and Africa as well as a winding back of American influence in the areas of teaching, theatre production, environmental advocacy and journalism.

Fostering misunderstanding

"Without the cultural and intellectual exchange, the misunderstanding of America and its policy will likely increase, removing a balancing influence on the growth of violent anti-Americanism," wrote Weston Stacey, executive director of the Czech Chamber, in a recent letter sent to Charles Grassley, chairman of the Senate Finance Committee.

Terrence Valeski, chief executive of Prague-based Eurotel, a telecommunications company with USD 1 billion in annual revenue and 2,500 employees, said he feared the scrapping of the tax will mean the end of Prague's reign as a magnet for foreign investment by US companies. He said the repeal of the tax would make it very difficult to recruit senior managers from the US, who were already reluctant to leave American-style income taxes behind.

Roger Adams, a Lisbon-based American accountant who advises American expatriates on their income taxes, warned that the repeal of the tax would be a double blow to workers as well as companies. For example, he noted that, under the current exemption, a single person living in Portugal, who makes USD 100,000, would pay USD 2,704 in income taxes to US tax authorities. If the tax break is repealed, that same person would pay USD 24,308 in income taxes.

"Why would that person want to stay in Europe?" asked Adams. "If we lose the exemption it will be a nightmare for Americans living in Europe. It will make all the benefits of European living — the food, the culture — much less attractive."

22 May 2003

Rebecca Buckman and Dan Bilefsky are staff reporters for the Wall Street Journal.