May 1, 2011:
Our last issue looked at short-term global mobility options including business travel, cross border commuters, and short term assignments. As we turn our focus to longer-term options we have, once again, sought the advice of our panel of experts, who are:
Compensation Steve White, President and Founder, Thought 2 Finish Consulting Ltd.([email protected])
Immigration – Naumaan Hameed, Senior Associate at Greenberg | Turner ([email protected])
Tax Arun (Ernie) Nagratha, CA, CPA, Trowbridge Professional Corporation, Chartered Accountants |Tax Advisors ([email protected])
These experts contributions provide information essential to remaining compliant. It bears repeating that the impact of non-compliance can be enormous with significant repercussions for your globally mobile employees and for your company.
IMPORTANT NOTE: Please keep in mind that compliance and regulatory requirements will differ with each country to country combination and will change from time to time. Consulting with the appropriate expert in advance is the only way to be absolutely sure you are in legal and regulatory compliance.
Long Term Assignments
These have historically been the most traditional global mobility option with work terms in a host location that generally last from one to five years.
Compensation (Steve White)
In longer term assignments most organizations will provide adjustments to compensation to reflect differences in cost-of-living, housing, tax, etc. Further, organizations often consider moving assignees from home country pension and benefit arrangements to those of the host country. While these assignment types have typically gained the most attention within organization, some common areas to watch are to:
- Ensure the assignee remains in CPP/QPP and EI wherever possible. Canada and Quebec have bilateral agreements with many countries which require employees to be maintained in the Canadian plans if the assignment meets the terms of the agreement. Where an agreement exists between 2 countries, the Canadian employer is required to keep the employee in CPP/QPP. This is a legal requirement; it is not a choice of selecting one country’s plan over the other.
- Ensure a Certificate of Coverage is obtained to register the assignee as being out-of-country but continuing to participate in CPP/QPP and EI. This will ensure you do not have to contribute to the social security scheme in the foreign location.
- When keeping assignees on the home country life and disability coverages, make certain your insurer is aware of their location and understand what conditions may apply in the event of a claim.
- Understand what adjustments are being made to compensation and why. When the assignee returns or if the assignee is localized, what elements of the assignment compensation should be removed ?
- Recognize that payroll location is not a determinant for what legally mandated benefits are provided, for example, despite being on a foreign payroll you may still need to contribute to CPP, EI and/or provincial healthcare.
- If the employee has severed employment ties with the Canadian company, do not continue to cover this individual in the Canadian pension plan.
Immigration (Naumaan Hameed)
Canadian immigration requirements will be used to illustrate the scope of immigration issues to look at when considering the longer term global mobility options. Changes to Canadian immigration law will soon restrict assignees on Labour Market Opinion (LMO)-based work permits to four years in Canada, after which they must cease working in the country for a subsequent four year period. If not addressed effectively, organizations will have to engage in replacing critical skill sets every four years, resulting in significant cost and business disruption.
HRs must work with specific business units to determine the ongoing need for the LMO-based worker and his/her skill-set. As these assignees will be limited to a strict term of four years, organizations must commence recruitment efforts for a replacement worker well in advance so that the worker can train his/her successor effectively. This process can become costly, especially if the same skill set has to be replaced every four years. A company may, therefore, also wish to implement talent management programs for LMO-based positions so that skilled resources can be organically trained and developed from within the organization.
LMO-based assignments can become costly and onerous due to the recurring need to recruit, usually for specialized skill sets not readily available in the Canadian labour market. Recruiters should assess their global pool of internally qualified candidates to determine whether they might be interested in permanently relocating to Canada or whether they may be qualified for LMO-exemptions as intra-company transferees or NAFTA Professionals.
Tax (Ernie Nagratha)
It is important to determine from the outset whether the employee will severe residency with Canada or not. Residency can have a large impact on the compensation and benefits package in that the individual may continue to be seen as taxable in Canada.
You should also not assume that contributions to a Canadian pension or benefit plan maintains the same tax free status as may occur in Canada. Most such contributions will be considered taxable income to the employee in the host location. Likewise, contributions to host country plans may be taxable to the employee is Canada.
You should also recognize that different countries treat equity compensation differently; some tax at time of grant, some at time of exercise, and some on alternate basis.
As the name indicates a permanent relocation is a one-way transfer to a foreign location that is considered a permanent transfer. The employee is no longer eligible for benefits offered to employees in the home country.
Localization refers to when an employee is moved from an assignment to a permanent position in the host location and as such is moved from the assignment compensation package to a local package. The considerations are similar to permanently transferring an employee internationally with one added consideration. The employee’s compensation is changing to meet local or host country standards whereas, while on assignment, they are compensated in keeping with their home country standards. A period of adjustment may be required as part of the transition process.
Compensation (Steve White)
As general rule, there are few situations where assignees transferred permanently should remain on any of the home country, or sending location compensation or benefit arrangements. However, certain transitional measures may be necessary. In those cases we would recommend these be limited in nature and limited in duration. Employers should also be cautious about:
- Ensuring the employee is moved to the receiving location social security (for example CPP/QPP). Note that many countries require a minimum number of years contribution before any benefits are payable from their scheme. If the employee does not have the required minimum (or is not expected to attain that during his/her time in the new location) but the combination of time in the host location with that in Canada meets the minimum participation requirement, the bilateral Social Security Agreements referred above may be effective.
- Recognizing that compensation structures vary from country to country. Moving an individual from one structure to another may result in compensation differentials between the two locales. Short term adjustments may be necessary but should be managed carefully and removed as quickly as feasible.
- Pre-existing medical conditions may make it difficult (and sometimes even impossible) to get certain coverages ion the host location.
Immigration (Naumaan Hameed)
As foreign workers become increasingly limited in how long they can remain in Canada on temporary status, organizations may seek to encourage their permanent relocation. The transition of LMO-based foreign nationals from temporary to permanent status can avoid significant costs and business disruption that otherwise result from having to replace the critical resource. Hence, it is imperative that employers implement clear, mutually agreeable relocation policies.
Becoming a permanent resident is an important personal decision and can have significant consequences for an assignee. For instance, the individual will immediately be required to meet residency obligations and pay Canadian taxes if (s)he was not already doing so. Where the decision to permanently extend an assignee’s stay is dictated by business needs, it will become commonplace for an employer to contribute to the costs associated with permanent residence applications. Moreover, corporate policy should require that the permanent residence process is initiated in the early stages of a temporary assignment given processing times associated with the application process.
Changes to an organizations relocation process can have an impact on existing policies of an organization. For instance, companies often commence the localization process for an assignee five years after (s)he has been in the host country. Where the assignee agrees to obtain permanent residence, it may be prudent (and consistent) to initiate the localization process at the same time which can, in turn, result in significant savings for an employer.
Tax (Ernie Nagratha)
Companies should always be conscious of the benefits provided to employees in similar situations to remain competitive in the local market. For example, in the Middle East, it is common for the employer to provide an allowance for housing and transportation as part of an employment agreement. Ensure the total compensation is competitive and confirm the tax consequences of these benefits.
It is difficult for the employee to know what it will cost to live and work as a local employee so providing them with estimated cost of living data is important for them to get comfortable with their local package.
In conclusion, the immigration, compensation and benefits and taxation issues present with an international assignment are significant and often represent issues with which an employer may not have had prior experience. In most cases, the issues can be easily resolved if addressed well in advanced and before specific commitments are made to the assignees. Be sure to consult with the appropriate specialists as early as possible, and the pitfalls can be avoided.
Our global mobility series continues in our next issue with a more detailed look at global mobility compensation options.