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Accommodating the needs of employees and families in hostile enviroments can increase expenses and alter tax liability.
Family members accompanying employees assigned to foreign work sites always have been a major focus of international HR (IHR) programs, and the Sept. 11 terrorist attacks and the conflict in Afghanistan have increased concerns for their safety. Anecdotal evidence indicates that assignees in at-risk areas are not requesting an early return home, but some workers are asking employers to send their family members home or move them to a more secure environment.
Many employers are trying to accommodate these requests, but such a change in the family’s residence raises a number of human resources and international assignment program (IAP) issues, some of which have a potential tax impact.
If the assignee’s family is relocated from the international work location to their home or another location, the organization must decide whether to allow increased home leave for the assignee. This may appear to be strictly an IHR issue, but the organization and the assignee also face tax implications of more frequent trips home, as well as the costs of maintaining dual households.
Home Is Where the Work Is
Under the Internal Revenue Code (IRC), the tax home of a taxpayer is the primary business location, although that may not be where the family lives. That means that if the assignee’s family returns to the United States, and the assignee is eligible for increased home leave trips, the costs of those visits are equivalent to taxable home leave. However, if the trips are coordinated with business meetings near the family location, they may not be considered taxable home leave, so HR should consider this cost-savings strategy.
Regardless of the tax implications, HR managers must determine the number and duration of reimbursable home leave trips they will provide. Prior to Sept. 11, most North American-based companies allowed one trip home per year, but that policy generally assumed that the family would be traveling together.
Paying for additional home trips may be significantly more costly to the company if the assignee is tax-equalized, i.e., the company would generally assume the assignee’s additional tax costs of the reimbursed extra trips in addition to the actual costs of the trip. If the assignee is not tax-equalized, the company could deduct these travel expenses as a normal compensation expense, but any travel reimbursements to the assignee would be considered taxable income to them. A third alternative would be for the assignee to absorb all expenses related to the additional home leave with the company simply providing the additional time away from the assignment. In this case, there are no taxable events to either party.
On another note, if an employee had been on a long-term assignment and the family moved back home prior to the end of the assignment, which had less than one year to run, the assignment is still considered long-term. But home leave trips do not qualify as deductible business trips if the assignment is for less than one year.
Alternatively, some families may not return to the United States but instead may relocate to a country that is considered safer than the work site. Normally, if the assignee maintains a second household, only the expenses related to the household nearest the work assignment can be used in computing the housing cost allowance. However, in certain situations (for example, when the second foreign home is necessary due to dangerous or adverse conditions) individuals may include these doubled housing expenses (i.e., the expenses of maintaining a second home for a spouse and dependents) in computing the housing cost exclusion, according to Section 911 of the IRC.
U.S.-based assignees sometimes feel threatened by events near the work site and choose to relocate their families to areas that are more pro-American. Such adverse conditions could include war or civil insurrection. For example, if the assignee was originally in Pakistan and the family has relocated to Hong Kong for safety, the IRS would allow the housing cost exclusion to include the costs of both households. However, that would not change the tax home for the assignee, and the company’s reimbursements for the assignee’s travel expenses for trips to the second household would be taxable as compensation.
HR also must consider the taxability of moving expenses when the family relocates but the employee remains. Are costs of relocating the family a deductible (i.e., non-taxable) moving expense? For moving expenses to be deductible, the primary business location must change. If only the family moves, the primary business location has not changed, so the expenses are not deductible. If the employer pays moving costs, that would be considered taxable income to the assignee.
If the assignee (and family) remains in a potentially unsafe work location, the company may be required to re-evaluate and upgrade security arrangements, which could increase expenses. For example, providing a car and driver to certain employees would normally be taxed as ordinary income, because employees cannot normally deduct commuting expenses. However, under the IRC section that governs working condition fringe provisions, an employer may provide specialized tax-free transportation for employees whose security is threatened. Because many businesses have legitimate safety concerns when employees commute in certain foreign locations (including traveling to and from business meetings and business sites), employers may provide a driver and a specially equipped vehicle (for example, bulletproof), with the value being excluded from the assignee’s gross income. However, the normal cost of commuting still remains nondeductible, and, if provided to an employee, it would be a taxable benefit.
A company must meet the following conditions to deduct the costs of improving employees’ security:
Similar rules apply to employer-provided aircraft if the assignee uses it in remote and/or large geographic areas.
Barbara Hanrehan is a tax partner with Deloitte & Touche’s International Assignment Services. Donald R. Bentivoglio is a senior manager with Deloitte & Touche’s International Assignment Services specializing in international human resources
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