CaptJax
3rd Sep 2006, 18:19
Your Money from the New York Times
For Workers Sent Abroad, a Tax Jolt
By KEITH BRADSHER
Published: September 2, 2006
HONG KONG, Sept. 1 — At picnics and dinner parties in the United States, conversations may flit from Iraq to housing prices to hurricanes and perhaps even to Tom Cruise. But for Americans overseas, another subject keeps
Congress sharply raised the percentage tax rates this year on Americans working overseas who have salaries plus taxable benefits totaling $93,000 a year or more. The bill, signed by President Bush in May, also imposes taxes on more of the rent assistance that many companies provide their employees to help them cope with high rents overseas.
The businesses are taking notice. The United States is the only developed country that taxes its citizens while they are overseas, so people from Canada, Britain, Australia and New Zealand, among others, can often afford to work abroad for less and do not need to ask employers for costly tax assistance.
“The concern is universal between the companies, where they feel they’re losing their competitive advantage if they hire Americans,” said Harley Seyedin, chief executive of the First Washington Group, a power company in southeastern China, and president of the American Chamber of Commerce in Guangzhou. “Most companies are looking outside the U.S. if they need to hire.”
Americans living overseas, particularly those facing high taxes on employer-provided benefits like housing assistance and tuition for school-age children, are reviewing whether it makes better financial sense to move back to the United States — and whether their employers will try to transfer them home in any case. “You really have to be able to differentiate yourself to justify someone hiring you over a Brit or an Australian or a Canadian,” said Robert B. Keys, a partner in the Hong Kong office of PriceWaterhouseCoopers. Mr. Keys and other tax experts said that in poring over the two main changes enacted in May — higher marginal tax rates and higher taxes on housing assistance — they had found several features that were not immediately obvious at first.
Initial discussions of the tax increase in Washington focused on its cost to corporations, notably oil companies, which often help pay the tax bills of their overseas employees. But many companies demand that Americans become employees of their overseas subsidiary and give up their expatriate benefits, including tax assistance, if they settle in and stop moving to another city every few years.
In Hong Kong, a base for many of the highest-paid investment bankers in Asia, four-fifths of the Americans working for five of the largest American financial services companies are now classed as local employees and will have to foot the cost of the tax increase themselves, said David K. Sutherland, the former associate international tax counsel at the Treasury Department in Washington and now the chairman of the tax committee of the American Chamber of Commerce in Hong Kong.
Another surprise is that the tax increase will not hit just those Americans in low-tax jurisdictions in East Asia or many developing countries. Even Americans living in fairly high-tax countries in Western Europe, for example, may find that they are no longer paying enough taxes overseas to avoid owing taxes at home as well.
The reason is that many foreign tax codes may have higher marginal tax rates than the United States, but may also allow more deductions and exemptions than in the United States. An American investment banker who has lived in London for fewer than three years and who spends two-thirds of her days traveling on business in other European countries may owe British taxes on only the one-third of her income earned in Britain, but would owe American taxes on her entire income.
The increase also applies to non-Americans who carry green cards allowing them to work in the United States. Green card holders must pay American taxes when living and working outside the United States; tax experts urge them to review whether it makes sense to retain the cards.
The interaction of the two tax increases — higher effective rates and more taxes on housing assistance — will have the sharpest effect on the tax bills of overseas Americans earning less than $500,000 a year, especially those with corporate benefits worth nearly as much as their salaries.
Overseas families receiving free home-leave flights, generous medical benefits and subsidies for American-sized apartments and houses, all of which were either taxed at fairly low rates or were partly exempt from taxation, are finding themselves facing federal tax rates of up to 35 percent on these benefits.
In some cases, notably those of former residents of New York and California, overseas taxpayers may face considerable state and local taxes on their benefits as well. Executive search and corporate relocation companies say they are already encouraging businesses to consider carefully before choosing Americans and green card holders for overseas assignments, especially if they have families.
“This is essentially a tax on families,” Mr. Sutherland said. “There are a lot of people this is going to slam really hard.”
Senator Charles E. Grassley, the Iowa Republican who is chairman of the Finance Committee, is a longtime critic of tax breaks for expatriates, whom he has depicted as living in mansions paid for with tax-deductible dollars.
A committee aide said that overseas Americans were often able to hire inexpensive domestic workers and that the tax law still allowed Americans to deduct the taxes they pay overseas. The aide also said that overseas Americans who send their children to English-language international schools and now face higher taxes on corporate reimbursements for their children’s tuitions, might if they lived in the United States send their children to costly private schools and would not receive any tax assistance for that.
The aide answered questions on the condition of not being identified, following the common practice in Congress that only members may speak on the record.
Until this year, the first $80,000 earned overseas was excluded from taxation in the United States, with the next dollar earned overseas treated as though it were the first dollar of income and scarcely taxed. Taxes paid to foreign countries can then be used to reduce tax liability in the United States as well, although this also reduces the value of the $80,000 exemption.
The new law raises the exclusion to $82,400. But under a provision known as “stacking” in the new law, the next dollar of income is now being taxed at a much higher marginal tax rate as though it were the 82,401st dollar of income.
Until this year as well, only the first $11,894 in housing assistance was taxed — even if a company was providing over $100,000 in rent assistance, as has been common in financial centers like Hong Kong, Tokyo and London where rents may be higher than in the United States.
Under the new law, the first $13,184 of housing assistance is taxed, the next $11,536 is not, and any further assistance is taxed. It is common for housing assistance to be provided in costly cities not only to bankers and top executives but also to teachers at international schools, sales managers and, for that matter, foreign correspondents for The New York Times.
One pivotal question now is how the Treasury will interpret the flexibility that Congress gave it to determine how much housing assistance is exempt from taxes in high-cost cities. Congress gave the department the authority to “issue regulations or other guidance” to adjust the untaxed $11,536 of housing assistance based on differences between housing costs overseas and these costs in the United States.
Sean Kevelighan, a Treasury spokesman, wrote in an e-mail message that the instructions from Congress were a priority for the agency, which includes the Internal Revenue Service, and added that, “It is likely that the guidance will be released in the fall.”
Senator Jim DeMint, Republican of South Carolina, has introduced broad legislation to repeal income taxes on overseas Americans, expressing concern that they will hurt the competitiveness of American exports. But Congress does not have time to act this year and would probably need to find offsetting spending cuts or tax increases to act on it in 2007 or 2008. Even then, Senator Grassley could use his chairmanship to block it.
“We have some work ahead of us next Congress,” Senator DeMint said, “before we can realistically complete this goal.”
For Workers Sent Abroad, a Tax Jolt
By KEITH BRADSHER
Published: September 2, 2006
HONG KONG, Sept. 1 — At picnics and dinner parties in the United States, conversations may flit from Iraq to housing prices to hurricanes and perhaps even to Tom Cruise. But for Americans overseas, another subject keeps
Congress sharply raised the percentage tax rates this year on Americans working overseas who have salaries plus taxable benefits totaling $93,000 a year or more. The bill, signed by President Bush in May, also imposes taxes on more of the rent assistance that many companies provide their employees to help them cope with high rents overseas.
The businesses are taking notice. The United States is the only developed country that taxes its citizens while they are overseas, so people from Canada, Britain, Australia and New Zealand, among others, can often afford to work abroad for less and do not need to ask employers for costly tax assistance.
“The concern is universal between the companies, where they feel they’re losing their competitive advantage if they hire Americans,” said Harley Seyedin, chief executive of the First Washington Group, a power company in southeastern China, and president of the American Chamber of Commerce in Guangzhou. “Most companies are looking outside the U.S. if they need to hire.”
Americans living overseas, particularly those facing high taxes on employer-provided benefits like housing assistance and tuition for school-age children, are reviewing whether it makes better financial sense to move back to the United States — and whether their employers will try to transfer them home in any case. “You really have to be able to differentiate yourself to justify someone hiring you over a Brit or an Australian or a Canadian,” said Robert B. Keys, a partner in the Hong Kong office of PriceWaterhouseCoopers. Mr. Keys and other tax experts said that in poring over the two main changes enacted in May — higher marginal tax rates and higher taxes on housing assistance — they had found several features that were not immediately obvious at first.
Initial discussions of the tax increase in Washington focused on its cost to corporations, notably oil companies, which often help pay the tax bills of their overseas employees. But many companies demand that Americans become employees of their overseas subsidiary and give up their expatriate benefits, including tax assistance, if they settle in and stop moving to another city every few years.
In Hong Kong, a base for many of the highest-paid investment bankers in Asia, four-fifths of the Americans working for five of the largest American financial services companies are now classed as local employees and will have to foot the cost of the tax increase themselves, said David K. Sutherland, the former associate international tax counsel at the Treasury Department in Washington and now the chairman of the tax committee of the American Chamber of Commerce in Hong Kong.
Another surprise is that the tax increase will not hit just those Americans in low-tax jurisdictions in East Asia or many developing countries. Even Americans living in fairly high-tax countries in Western Europe, for example, may find that they are no longer paying enough taxes overseas to avoid owing taxes at home as well.
The reason is that many foreign tax codes may have higher marginal tax rates than the United States, but may also allow more deductions and exemptions than in the United States. An American investment banker who has lived in London for fewer than three years and who spends two-thirds of her days traveling on business in other European countries may owe British taxes on only the one-third of her income earned in Britain, but would owe American taxes on her entire income.
The increase also applies to non-Americans who carry green cards allowing them to work in the United States. Green card holders must pay American taxes when living and working outside the United States; tax experts urge them to review whether it makes sense to retain the cards.
The interaction of the two tax increases — higher effective rates and more taxes on housing assistance — will have the sharpest effect on the tax bills of overseas Americans earning less than $500,000 a year, especially those with corporate benefits worth nearly as much as their salaries.
Overseas families receiving free home-leave flights, generous medical benefits and subsidies for American-sized apartments and houses, all of which were either taxed at fairly low rates or were partly exempt from taxation, are finding themselves facing federal tax rates of up to 35 percent on these benefits.
In some cases, notably those of former residents of New York and California, overseas taxpayers may face considerable state and local taxes on their benefits as well. Executive search and corporate relocation companies say they are already encouraging businesses to consider carefully before choosing Americans and green card holders for overseas assignments, especially if they have families.
“This is essentially a tax on families,” Mr. Sutherland said. “There are a lot of people this is going to slam really hard.”
Senator Charles E. Grassley, the Iowa Republican who is chairman of the Finance Committee, is a longtime critic of tax breaks for expatriates, whom he has depicted as living in mansions paid for with tax-deductible dollars.
A committee aide said that overseas Americans were often able to hire inexpensive domestic workers and that the tax law still allowed Americans to deduct the taxes they pay overseas. The aide also said that overseas Americans who send their children to English-language international schools and now face higher taxes on corporate reimbursements for their children’s tuitions, might if they lived in the United States send their children to costly private schools and would not receive any tax assistance for that.
The aide answered questions on the condition of not being identified, following the common practice in Congress that only members may speak on the record.
Until this year, the first $80,000 earned overseas was excluded from taxation in the United States, with the next dollar earned overseas treated as though it were the first dollar of income and scarcely taxed. Taxes paid to foreign countries can then be used to reduce tax liability in the United States as well, although this also reduces the value of the $80,000 exemption.
The new law raises the exclusion to $82,400. But under a provision known as “stacking” in the new law, the next dollar of income is now being taxed at a much higher marginal tax rate as though it were the 82,401st dollar of income.
Until this year as well, only the first $11,894 in housing assistance was taxed — even if a company was providing over $100,000 in rent assistance, as has been common in financial centers like Hong Kong, Tokyo and London where rents may be higher than in the United States.
Under the new law, the first $13,184 of housing assistance is taxed, the next $11,536 is not, and any further assistance is taxed. It is common for housing assistance to be provided in costly cities not only to bankers and top executives but also to teachers at international schools, sales managers and, for that matter, foreign correspondents for The New York Times.
One pivotal question now is how the Treasury will interpret the flexibility that Congress gave it to determine how much housing assistance is exempt from taxes in high-cost cities. Congress gave the department the authority to “issue regulations or other guidance” to adjust the untaxed $11,536 of housing assistance based on differences between housing costs overseas and these costs in the United States.
Sean Kevelighan, a Treasury spokesman, wrote in an e-mail message that the instructions from Congress were a priority for the agency, which includes the Internal Revenue Service, and added that, “It is likely that the guidance will be released in the fall.”
Senator Jim DeMint, Republican of South Carolina, has introduced broad legislation to repeal income taxes on overseas Americans, expressing concern that they will hurt the competitiveness of American exports. But Congress does not have time to act this year and would probably need to find offsetting spending cuts or tax increases to act on it in 2007 or 2008. Even then, Senator Grassley could use his chairmanship to block it.
“We have some work ahead of us next Congress,” Senator DeMint said, “before we can realistically complete this goal.”