Accounting issues for expatriate employees

The US dollar has fallen more than 5% in the past year against the Euro and the British pound. Source: Bloomberg

The cost of living for U.S. expatriates, U.S. employees based overseas, continues to rise, as a new survey from the Economist Intelligence Unit (EIU) demonstrates. Rising cost of living in foreign markets is driven by inflation in those markets, and weakness of the U.S. dollar, which continues to decline against leading foreign currencies (see chart). This makes it more important than ever for U.S. companies to plan their treatment of relocated employees carefully.

The EIU recently released its list of the most expensive cities in the world for expatriates. Singapore tops the list, unseating Tokyo (now tied for 6th) for the honor. Paris is the second most expensive city, followed by Oslo, Zurich and Sydney. New York, the most expensive U.S. city on the list, is relatively cheap, coming in at 26.

The EIU’s Worldwide Cost of Living is a twice-yearly survey that compares more than 400 individual prices across 160 products and services. These include basic necessities like food, drink, clothing, household supplies and personal care items home rents, and transportation; as well as extended costs including utility services, private schools, domestic help, and travel vacations and home visits. The purpose of the survey is to help human resources and finance managers calculate cost-of-living allowances and build equitable compensation packages for expatriates and business travellers.

Costs for everything for a cup of coffee ($8.00 in Moscow, $1.50 in Nicaragua) to housing to education for children can vary widely from country to country, and present significant compensation challenges. But cost of living is just one factor in determining compensation. Relocation allowances, particularly amid the U.S. housing slump, can vary widely. In a 2013 survey by Ernst and Young, just 29 percent of executives said their companies “effectively” relocate employees without major disruption. Other common costs include education allowances for children, spouse employment allowances for spouses that give up their jobs to move, travel allowances for visits home, and car and utility allowances to account for the much higher cost of these expenses in most countries.

There is also the “expat premium,” an increase in salary or a bonus plan for more “difficult” placements. This cost varies depending on the host location and is calculated based on a factors such as danger in the host location, political stability, weather, language, culture, distance from home country, hygiene and health, and the quality of education and healthcare.

Tax and social security, retirement benefits and healthcare coverage need to be considered in an overall compensation package. Surveys like the EIU’s are one tool to help companies accurately calculate all these costs involved to develop an equitable compensation plan when sending employees abroad. In addition to the compensation issues are immigration and security regulations. Understanding all of the legal and financial requirements, including reporting requirements by local and U.S. finance and tax agencies and immigration officials, can make the relocation less disruptive for the employees, their families and for the employer.