For the American expats, or planning to be an expat. Pete
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Your Money
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 coming up: taxes.
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."