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By Brian Yeomans - London

Globalisation brings new challenges to the hospitality and leisure industries, which are under increasing pressure to serve international business and tourism markets worldwide. Experienced hotel and leisure industry executives have often been transferred outside their home countries, whether to new build locations, new acquisitions or to enhance the provision of services of an existing operation. And in the past, companies often developed compensation packages to attract otherwise reluctant management and staff to accept foreign assignments, the emphasis being on persuading individuals to accept assignments at virtually any price.

With the evolution of a global marketplace, however, attitudes toward assignments out of the home country, as well as provision for compensation and benefits, have shifted significantly in the hospitality and leisure industries. For the truly mobile executive, the strongest development route may now be through a variety of international assignments with that individual bearing some of the "cost" of the assignment in return for stronger career development prospects.

To retain and motivate executives accepting assignments outside the home country, it is important to remunerate them accordingly. Nevertheless, payroll and related costs often account for as much as 45-60 percent of hotel expenses, and it is crucial that the costs of such transfers be controlled. In addition, new and more flexible approaches to compensating those executives accepting overseas assignments are evolving to match the needs of companies and employees in a global economy.

Traditional Approach

The traditional approach to compensating executives transferred from home countries in the past involved a central assumption - executives will be reluctant to take on an overseas assignment, and therefore the
process should be as painless as possible. The so-called Balance Sheet approach has broadly aimed to maintain the individual's home country spending power in the new host country.

Once an individual with the requisite expertise was identified and the family/personal issues were resolved, the company developed a package to ensure the individual was not adversely affected financially by the assignment. The individual's basic pay was augmented with additional entitlements or allowances to cover the following:

• Cost of living (COLA);
• Expatriate premium;
• Housing;
• Education (for individuals with families);
• Home leave;
• Professional tax advice; Tax protection/tax equalisation.

The Balance Sheet approach is relatively easy to understand, reduces suspicion that the executive is being disadvantaged, and by virtue of the fact that the executive is well remunerated, aids mobility. In addition, however, it can be:

• Expensive for the employer;
• Focused on the net benefit to the employee rather than driving down costs for the employer;
• Probably outdated as employers move to a global approach.

To ensure that the employee is not financially worse off, tax equalisation and protection schemes are often adopted. In a tax equalisation scheme, a hypothetical amount of home country tax is calculated on the usual elements of compensation (i.e. excluding extra amounts received as a result of the assignment). The employer withholds the hypothetical tax while paying the actual tax liabilities to the employee's home and host countries. There is often an extra cost associated with this payment of an employee's tax liability by the employer, as this generally creates further taxable income, and therefore there is a tax on tax or 'gross up' effect. At the end of
the year the final hypothetical tax liability is calculated and any under-, or over-payment of hypothetical tax is paid by, or reimbursed to, the employee. Consequently, the executive who has been transferred is no better or worse off than before the assignment. Any benefits arising from tax planning within these schemes are benefits to the company.

With a tax protection scheme the employee is responsible for actual tax and social security liabilities in both the home and overseas countries. These liabilities are then compared to the liability that would have risen had the assignment not taken place and any additional tax costs are reimbursed on a grossed-up basis. As a result, the employee cannot be worse off, but may receive a tax windfall if the actual costs are lower than they would have been in the employee's home country.

Net Pay Schemes

Net pay schemes are also a common feature of such assignments. Hypothetical tax and social security is calculated dependent upon an individual's salary, family size and other factors. The individual's pay, net of this amount, is guaranteed. The employer then assumes responsibility for all actual tax liabilities which are paid on a grossed-up basis. Usually net pay is also augmented by allowances for the individual. An advantage of this method is that no year-end reconciliation is needed as the net pay is guaranteed beforehand.

Pre-Assignment Planning

Tax protection or equalisation in a high tax environment can be very expensive for the employer. Planning an assignment, therefore, is crucial to reducing the associated costs as far as possible. Much can be done to limit the impact of taxes, including:

• Taking advantage of potential tax treaty exemptions. This may require consideration of the number of days spent in the foreign country, and who should be the employer or who should bear the employee's costs.
• Qualifying as a non-resident in years of arrival and departure, and consequently being taxed at a lower rate or not taxed at all. Timing here can be crucial.
• Maximising advantages of graduated tax rates.
• Delivering related allowances as cost effectively as possible. For example, home country social security costs may be saved if a portion of the allowance is paid by the employer as a direct payment to a third party for services such as housing. This is in contrast to providing a cash allowance to the employee, which would be subject to social security contributions.
• Using opportunities such as separate employment arrangements and special premiums for work outside the foreign country.

Pensions are another important area for consideration to ensure that pension contributions/coverage are not disrupted. For a short-term assignment an employee generally would continue contributing to his or her home country scheme. However, this may not necessarily be the most tax efficient planning for an individual on a longer term assignment, who possibly may not return to the home country. A solution adopted in the hotel sector involves establishing a worldwide unapproved plan to prevent employees accumulating limited pension entitlements in several locations. In this case, the benefits of maintaining one single fund outweigh the reduced tax efficiency.

Inheritance/Estate Tax Issues

Inheritance or estate taxes are frequently overlooked when planning an assignment. Generally employers will pay for professional advice in resolving complications with overseas and home country taxes as a result of an employee's death during his or her time away from the home country. This can prove costly to an employer and stressful to the family, so the following should be considered in advance:

• Does a tax treaty exempt the employee from taxes in the host country?
• Has the employee a valid will for both countries?

Globalisation puts considerable pressure on human resource personnel to re-evaluate the traditional methods of providing for executive assignments and to develop innovative new packages suitable for the globalised economy. This represents an increased challenge to human resource personnel during a time when head counts for support functions are under scrutiny.

In addition to the traditional expatriate moving to a specific assignment country and back, typically with a specific technical skill, there is a new breed of mobile executive who has no home country, but rather moves from location to location with career progression a primary motivator. For the latter, a single rigid policy covering different types of employees will be ineffective, and a more flexible, global policy is required.

Localisation

Expatriate assignments also are becoming longer-term because of changes in the business environment. Such expatriates may have adapted to the host country way of life, and as the employer has made the up-front investment in transferring the individual overseas, a solution needs to be identified to phase the individual onto local terms and conditions. The key to a successful transition will be the presentation of the reasons and methodology of the transition policy to the individual in a way which is easily understood and accepted.

Beginning of the End of the Balance Sheet Approach

It is likely that the Balance Sheet approach will soon be outdated as a general method for dealing with international transfers. Despite its popularity, fairness of treatment and logical approach, it is becoming too expensive for the employer to assume tax protection/ equalisation. Furthermore, using general assumptions to calculate the allowances for transferred individuals is often not the most appropriate way to determine benefits. It does not provide an incentive to drive down costs; perhaps most importantly, it lacks the flexibility required in today's global economy to enable the package to be tailored to meet individual circumstance and requirements.

Flexible Compensation Arrangements

The move to a global policy for international transfers requires a fundamental re-evaluation of the compensation and benefits approach. Pay and benefits will need to be re-engineered, with a system to differentiate high performance individuals and which reduces the importance placed on the pure money aspects of the pay and benefits package. This is not, however, going to be all bad news for the mobile executive; to date, this individual may not have extracted maximum value out of the assignment package.

The future will see the introduction of more flexible packages of benefits to meet the personal objectives of the individual. Rather than having fixed housing and schooling allowances, for example, an overall price might be put on the remuneration package so the individual can choose how that package is made up and used. In essence, the individual will be able to pick from a menu of benefits and design the package which is most appropriate to specific needs and aspirations. This menu, of course, must have tax considerations incorporated into the design so that the concept of gain sharing (sharing planning benefits between employer and executive) can be used to obtain the employee's buy-in and assistance in developing the benefits which will be offered. Such an approach would be weighted for different assignment locations to take account of local cost differentials.

Our recent experience, then, reveals an increasingly global attitude among both companies and executives with the trend toward sharing the benefits and costs of assignments overseas. The cost factor additionally dictates a more innovative approach to compensating executives abroad. The mobile executive gains, too, by being provided with more flexible compensation options in a tax efficient manner.

Brian Yeomans is an international corporate tax partner specialising in the hospitality and gaming industries. He is based in Arthur Andersen's London office.

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