How soft is your landing? - EY - United States · Page 3 How soft is your landing? Best practices for localization ... is it the best option? ... things change during transition period

How soft is your landing?Best practices in localization

26–29 October 2014

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Disclaimer

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► 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?


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.


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?


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!


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


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


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


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?


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.


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


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.


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


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


Questions?

How soft is your landing? - EY - United States · Page 3 How soft is your landing? Best practices for localization ... is it the best option? ... things change during transition period

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