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Disclaimer
► EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.
► This presentation is © 2014 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party.
► Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP.
► This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts and circumstances.
► These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.
Page 3 How soft is your landing? Best practices for localization
Content
► What is localization?► When is localization the right option?► What are the challenges with implementation?
Page 4 How soft is your landing? Best practices for localization
What is localization?Definition
► Localization is a term used when an employee who was “assigned” to a host location is formally moved onto host country terms and conditions, and all ties to the home country are severed.
► Localization is often triggered when an employee’s assignment becomes a permanent arrangement, generally when the assignment length exceeds four to five years and there’s no plan to return to the home country.
Page 5 How soft is your landing? Best practices for localization
What we’ll cover
► Who here has a localization policy?► Do you enforce it?► What sort of push back do you get from the business? ► From your assignees?
► Why consider localization?► What are your triggers?► Is there a “sense check”?
► Is localization the only option? If it isn’t, is it the bestoption?
Page 6 How soft is your landing? Best practices for localization
When to start the conversation
► What triggers the localization discussion?► Specific period of time at host location (four to five years)► Assignee’s desire to make the host location his or her permanent
home► Family ties► Lifestyle
► Career path, especially if the host location is corporate HQ► Upcoming opportunities for promotion or lateral move
► At higher levels in an organization, it’s more difficult to source opportunities.
► Cost-cutting initiatives► Expats are expensive!
Page 7 How soft is your landing? Best practices for localization
What are the options?
► First determine the WHY:► Personal circumstances, lack of opportunity at home location, etc.
generally support localization► Host country regulations may be a barrier
► Can the employee obtain permanent resident status or local equivalent?
► Time at location and/or cost-cutting measures may not support localization► Buy out of home country benefits can be expensive► US citizens are taxable on worldwide income► Employee may not be able to afford the change to host country salary
and benefit plan► Family requirements► Home country obligations
Page 8 How soft is your landing? Best practices for localization
If the WHY supports localization, what next?
► How will you determine the host country salary and benefits?► Current host local peer comparison► External market data or third-party data supplier► Internal net-to-net calculation► Foreign exchange (FX) rate used► Medical insurance — possible pre-existing conditions
Page 9 How soft is your landing? Best practices for localization
Net to net calculation
► Base salary► Other home country allowances, e.g.,
car► (Retirement plan contribution)► (Hypo income tax)► (Hypo social security and/or national
insurance)► (Housing and utility deduction)► (Other benefits deduction)► Other assignment allowances, including
COLA, hardship, etc.
Net cash on expat terms
► Base salary► Other host country allowances► (Retirement plan contribution)► (Actual income tax)► (Actual social security and/or national
insurance)► (Actual current housing costs)► (Medical, dental and other host country
benefits deduction► (Residual taxes*)
Net cash on local terms
Expatriate Local
*Trailing stock plans, retirement plans, etc., which may be calculated as part of a transitional arrangement
Page 10 How soft is your landing? Best practices for localization
Retirement benefits
Retirement benefits are probably the single biggest barrier to successful localizations globally. Why is that?► Different tax treatment of private retirement plans — will the host country seek
to tax growth in a home country plan?► Is the home country retirement plan more valuable than the host country
retirement plan?► Does the home country plan charge a higher annual fee to members who no
longer actively participate?► How will exchange rate fluctuations impact the host country value of benefits?► Gap in state retirement plans — What are the qualification periods and benefit
levels?
Question for participants: how do you handle this in your company?
Page 11 How soft is your landing? Best practices for localization
Social security and national insurance
Retirement benefits and minimum participation requirements vary from country to country:► China requires a minimum 15 years’ participation to receive a pension.► In Vietnam, it’s a minimum of 20 years.► The UK only requires 1 year of participation to receive a partial pension, but a
full 30 years are needed to get the maximum amount.► Spain requires a minimum of 15 years’ contributions to receive any pension,
and 35 years to receive the maximum amount.► For the US, a participant must make contributions for at least 40 quarters (10
years), with the pension benefit based on the average of the participant’s 35 highest earning years.
Page 12 How soft is your landing? Best practices for localization
Other alternatives
► Maintain home country contract and benefits participation, but phase out or cash out expat allowances:► Apply three-year reduction (100%, 66%, 33% actual benefits) or
two-year reduction (100%, 50% actual benefits)► Calculate value of “lost benefits” then cash out► Protect or equalize on trailing equity, deferred bonus plans and
other deferred compensation► Specify currency used for calculation and who bears the FX risk if
things change during transition period► Allow employee to maintain home or expat level of medical and
other benefits and participate in home country pension arrangements where allowable
Page 13 How soft is your landing? Best practices for localization
What if my employee says no?
► The employee can accept, reject or counter the offer► In case of rejection:
► What happens next?► Does the employee have skills and knowledge that can be
deployed in the home location? If so, do HR and the business have a support plan to help the employee find a new role?
► If not, is there another location where the skills and knowledge are required?
► Should there not be another position available, will the employee be terminated? In the host country or the home country? This requires careful consideration and consultation with home and host country legal teams.
Page 14 How soft is your landing? Best practices for localization
If the localization moves forward
► Immigration support –ensure that your employee and dependents have the legal right to remain
► Agree in writing the tax support provided for trailing liabilities, including retirement funds
► Agree home country “wind down” arrangements, e.g. home sale, final home leave trip, tax counseling meeting, required de-registrations, etc.
► Prepare new host country contracts► Thoroughly explain all host country benefit entitlements,
including holidays, vacation pay, insurances and allowances
Page 15 How soft is your landing? Best practices for localization
Localization checklist
► Immigration► Trailing liabilities
► Who will cover potential tax
► Retirement plans► Participation rules in host location► Who will cover potential tax in home or host
► Medical coverage► Benefits coverage► Currency issues