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United States Tax Reform
May Not Result in Decreased
Costs for Mobility Programs
By Peter Clarke, Global Mobility practice leader at PwC
This article first appeared in International HR Journal
Winter 2015
@2015 Thomson Reuters
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Executive summary
Tax reform is a primary focus for US tax policy
makers and many in the business community.
Reforms, if enacted, would undoubtedly affect
multinational companies with globally-mobile
workforces. But what changes will likely occur? The
short answer is that lawmakers may have some
common vision as to what attributes a reformed
individual tax system should embody, but the specific
changes are uncertain at this time. A possible
roadmap is a lengthy and detailed discussion draft
released by Dave Camp (R-MI), the Chairman of the
House Ways and Means Committee (hereinafter
Chairman Camp) earlier this year, which is aimed at
both individual and corporate levels of tax. While
Chairman Camp is retiring at the end of this year, his
draft bill may serve as a benchmark for future reform
legislation.
An important issue is how reform could impact
mobility program costs. If Chairman Camp's
proposals are used as a guide, a surprising result is
that their impact will vary greatly depending upon
the attributes of a company's US outbound and
inbound employee population and any other
potential workforce shifts across borders. Reforms
could lead to lower individual federal income tax
rates while not necessarily equating to less US tax for
mobile employees. This is because current deductions
could also be limited or repealed. The bottom line is
that Chairman Camp's proposal could result in
increased tax costs, tax savings, or even have a
neutral impact.
Although it is presently unclear when any reforms
will be enacted, there is a general belief that reforms
may be possible in 2015. Reform also could be
delayed until after the 2016 presidential election.
Regardless of the timeline, achieving reform will
likely be a formidable task given the many
stakeholders and challenges. Among many questions
is whether individuals or entities should bear the
greatest burden for tax revenue and whether reform
should be comprehensive with respect to both entity
and individual level taxes (as opposed to a piecemeal
approach).
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Reform to be shaped by competing
factors
Tax reform is being driven by many factors such as lawmakers' desire to increase economic growth and achieve
greater simplicity with respect to compliance—longstanding goals that have enjoyed bipartisan support. The US tax
code is broadly seen as complex and difficult to understand. Members of Congress and the public have expressed a
desire for a simple tax code under the belief that reforming and simplifying the rules will spur economic growth.
But simplicity could mean getting rid of some popular provisions, mandating the need for tough political choices.
A significant factor shaping the debate is determining who should bear the ultimate cost of tax reform. About 85%
or so of all US federal tax revenue comes from individual taxpayers. Roughly 50% of this number is from the
individual income tax and about 35% is from payroll taxes other than income tax; the latter percentage is split
between employer and employee obligations.When tax reform occurs, should individuals or entities bear the
greatest burden and how should pass-through entities like partnerships be treated? Some lawmakers believe that
the burden should be shifted to corporate entities. Chairman Camp's discussion draft would eventually shift some
of the burden from the individual tax base to corporate taxpayers.
With respect to individual taxation, some lawmakers believe that the US should have lower rates of taxation while
broadening the tax base. They may have the perception that broadening the base and eliminating many preferences
available to high income earners enables a greater ‘sharing’ of the overall tax burden and is thus overall, better tax
policy. The rationale is that a narrow tax base or a tax burden borne disproportionately by high income earners
could lead to large swings in government revenue depending on the economy. Some lawmakers may also believe
that a fairer tax system is one that has more people paying into the system and thus a greater perceived ‘stake’ in
the government.
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Rates, deductions, and special
provisions could change
The top US individual federal income tax rate of
39.6% would be lowered under Chairman Camp's
discussion draft. The current marginal tax brackets
would be reduced and the top rate would fall to 35%.
However, under this proposal, a more broadly
defined modified adjusted gross income is subject to
the top rate whereby certain excluded or exempt
income is added back. For example, amounts
excluded under Section 911 (a popular incentive for
mobile employees relating to foreign earned income
and housing exclusions in certain locations) would be
added back.
Also under Chairman Camp's proposals, the
alternative minimum tax (AMT) regime is eliminated
as well as the consolidation and significant increase
of the standard deductions. The latter should enable
roughly 90% of taxpayers to claim the standard
deduction without losing higher tax benefits that
would otherwise result from having to itemize
deductions. An aim of this proposal is to reduce
complexity for filers.
While the AMT and standard deduction proposals
would be welcome changes to mobile employees,
other proposed changes are not as favorable. These
include, for example, the elimination of state and
local taxes as an itemized deduction (not related to a
trade or business) and the elimination of deductions
for moving expenses, medical expenses, and
unreimbursed employee business expenses. Repeal of
the exclusion for employee fringe benefits and
changes to the mortgage and charitable deductions
are also proposed. And current-law exclusions for
housing and meals provided to an employee for the
convenience of the employer may also be subject to
an overall limit.
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Mixed impacts for mobile
employees and their employers
If reforms similar to Chairman Camp's discussion draft are enacted in 2015, the unexpected fact is that mobility
programs can expect to see a varied impact on program costs depending on their particular situation. The
employer's specific industry, mobile employee mix, and non-US host locations at issue will be important factors, as
well as the tax reimbursement policies that are utilized by the employer (described in more detail below.)
An important takeaway is that although Chairman Camp's discussion draft proposes to lower individual income tax
rates, many other reforms are proposed and the changes as a whole could result in reductions, increases, or no
impact on costs.
As an example, a mobile executive with a higher income could enjoy a lower US federal tax liability if Chairman
Camp's proposals are enacted. This employee could reap savings if they did not claim significant deductions under
current law and thus benefit from the rate reductions. On the contrary, an executive who presently claims a larger
itemized deduction for non-business related state and local taxes could cause an individual's US federal tax liability
to increase due to the proposed elimination of this deduction.
It is important to note that mobile individuals may be more likely to pay US tax at a higher rate generally than those
who are not on assignment. The gross income of most assignees include not only salaries, but also a large amount of
income attributable to employer provided benefits—often resulting in taxable income larger than their regular
salary. Socalled ‘gross-ups’ of benefits are aimed at making the individual whole from a cost perspective, however,
they could also cause the individual to move into a higher rate of tax.
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Detailed analysis of policies will
likely be required
The cost impact to mobility programs if reforms to
the US individual tax system are enacted will likely
depend upon the company's mobility policies. For
example, consider a multinational company that has
a large population of employees on assignment to a
jurisdiction with a much lower (or no) foreign tax
burden (e.g., Hong Kong or United Arab Emirates).
Assignees who are US citizens or residents
temporarily working in lower tax jurisdictions may be
more likely to claim Section 911 exclusions. If tax
reform occurs that embody Chairman Camp's
proposals, the Section 911 exclusion may be
eliminated depending upon the employee's income,
resulting in increased US tax costs. Under mobility
policies, would the employer or employee bear this
cost? Should the organization consider changing this
policy?
In the situation above, assume that US tax reform
results in an increase in the mobile employee's
individual US federal tax liability. The company's tax
reimbursement policy may state that the employee is
responsible for his/her US federal tax liability (under
a so-called US ‘hypothetical tax’ calculation), but the
policy has a carve-out for a change in US tax laws that
occurs during an assignment. The policy could
thereby potentially increase mobility program costs
for the company. Even further analysis may be
required, for example, does the policy take into
account whether the employee has any foreign tax
credits to shelter such additional liability?
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Adapting to change
While US tax reform will not be enacted this year, companies should be aware that change may be on the horizon.
When the promise of individual tax reform becomes more close at hand, multinational companies may consider
analyzing the specifics of how proposed changes could affect mobility costs. This would include quantifying
additional tax costs for both existing employee populations as well as proposed overseas assignments for new
business. Various other actions would be needed such as a review of mobility reimbursement and equalization
policies, the creation of a communications policy to business teams who may be asking questions, and assessing
resource needs.
In the meantime, companies with mobile workforces may consider broad statistical samplings to pinpoint proposed
changes that may have a significant adverse impact for the company. These companies may also want to shape the
tax reform dialogue either through submitting written comments or liaising directly with lawmakers. These
proactive actions may serve to decrease or achieve net neutral costs down the road for those companies that expect
their workforces to become increasingly mobile in the future.
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