The Dilemma of Corporate Expats

December 2, 2009 Updated: October 1, 2015

Sending business executives overseas creates its own set of problems. (Erik Araujo/www.sxc.hu)
Sending business executives overseas creates its own set of problems. (Erik Araujo/www.sxc.hu)
WASHINGTON—International companies are facing increasingly greater risks when moving employees to long-term assignments overseas, recent studies indicate.

“The whole approach to moving talent in a globalized workplace is in a constant state of flux. At the source is the variety of rules, regulations, policies and procedures,” said Ernst & Young (EY), one of the “Big Four” accounting and advisory firms, in a recent report titled “2008 Global Human Resources Risk: From the Danger Zone to the Value Zone.”

Employees often expect promotions upon returning from overseas assignments, but studies have shown that it’s not a guarantee. In addition, the global economic recession—a period often associated with cost cutting at companies and family unity for individuals—has lessened the draw of moving abroad.

At the heart of the matter is governments’ search for additional tax revenues from expatriate employees—tax agencies are scrutinizing corporations carefully, including the whereabouts of their expatriate workers.

Such focus could result in bigger taxes for companies and individuals.

The Journal of Accountancy of the Harvard Business School suggests that employers and employees buy into the tax equalization program, as it is straightforward and unbiased and creates less confusion than the bureaucratic tax guidance by the different tax authorities.

Under the tax equalization program, the firm or the employee may have to reimburse funds, depending on whether the taxes are lower or higher in the home country. If the taxes are higher in the home country, the firm reimburses the difference to the employee, while if they are lower, the employee has to pay back to the employer the difference the company paid out.

“In terms of expatriation and tax, the United States is one of the only countries in the world that taxes on worldwide income based on citizenship,” said Clarissa Cole, director at PricewaterhouseCoopers, in a recent report. “U.S. citizens working abroad continue to be subject to U.S. income tax, whereas other expatriates have no or limited continuing home-country tax obligations.”

Additional concerns for multinational corporations are expatriate employees running afoul of regulatory compliance, tax requirements, ethical, societal, and cultural norms.

EY put forward suggestions for lowering risk to companies, including greater transparency, monitoring the regulatory environment with immediate compliance, and keeping an eye on the activities of the employee at work and away from work.

“Needless to say, as the world becomes increasingly more connected and flatter, the list of regulations and living risks will also elongate beside this extended corporate community,” EY said.

Expatriates Learning the Hard Way

“Among the ranks of ambitious executives around the world, it’s long been believed that the way to get ahead at a company is clinch an overseas assignment,” a Knowledge @ Wharton (KW) report said.

But the above no longer holds true. Having access to world travel and a coveted position in a multinational company, with many financial and other perks not available to employees on the home turf, is rapidly losing its appeal.

The latest economic upheaval put a dent in the additional benefits of working abroad—including losing touch with family and coworkers, missing out on networking at the home base, and a drastic reduction of financial perks.

What was once the way to move up the corporate ladder has become a nightmare to companies and their employees during the financial crisis.

“Part of the reason has to do with general corporate belt-tightening during the global economic downturn,” Marta Alvarez-Novoa, a partner at EY’s Madrid office, explained in the KW article.

An even more important reason is that expectations of “climbing the corporate ladder” are a myth. Companies more often than not don’t see foreign assignments as a sure bet to future top brass development.

“Expatriates have extremely high expectations, largely due to the considerable demands required of them. However, companies cannot guarantee that there will be a vacancy to match these expectations upon their return, say in three to five years’ time,” according to a recent report on expatriates by the IESE Business School at the University of Navarra in Spain.

The opportunity to move up the corporate ladder is even less in a smaller company. A recent IESE study of 30 multinational companies—with fourteen based in Spain and the remainder in other foreign countries—that sent employees on long-term foreign assignments showed that the larger the company, the greater the opportunity to be promoted on the return to one’s home base.

Companies view foreign experience as part of an individual’s professional growth, which does not guarantee upward mobility, while the expatriate often views such assignments as a sure bet to promotional opportunities. Therein lies the discrepancy in expectation.

According to the IESE study, fewer than 33 percent of those returning from a foreign assignment were promoted.

“Employees must realize that enlisting as expatriates does not mean they will step into the general manager position upon their return,” said the general manager of a company as quoted in the IESE report.