This article was updated on June 18, 2018.
A global workforce comes with global challenges, especially if your business has to temporarily relocate workers to other offices around the world for specific projects. Because of the regulations and economies of different countries, the temporary relocation of employees could come with foreign currency fluctuation and tax considerations that finance leaders need to consider in their budgets.
Meeting Currency and Tax Challenges
Some countries have very stable currencies, while others do not. Even where currencies are relatively stable, the value of a currency can unexpectedly change. For example, the 2016 Brexit vote caused the Euro to drop to a 31-year low against the U.S. dollar, reports The Wall Street Journal. While a temporary change in currency matters little, a sharp, longer-term change can have bigger implications for an organization and its employees. Working with a payroll partner who has experience dealing with international firms can help you manage this currency exchange complexity.
Depending on the country, currencies can fluctuate a little or a lot, increasing or decreasing an employee's purchasing power. The employee with increased purchasing power is happiest, but it will be costlier to the organization than in the initial budget, and vice versa. You may be able to protect your organization and workers against currency fluctuation by paying a portion of the compensation in the currency of the host country or guaranteeing the exchange rate as part of the compensation package.
Any such guarantee poses its own budget and cost determination challenges for finance executives. As noted by Efile.com, some benefits that are taxable in the U.S. are not taxable in foreign countries, so withholding tax could be affected as well. Accounting for them in the wrong way can result in financial penalties in the U.S. and abroad.
3 Ways to Account for Relocated Employees
To monitor, budget for and reduce confusion with fluctuating currencies, consider these three methods to account for relocated employees.
1. A Hedge
A simple solution would be to agree to pay any workers temporarily relocated overseas in U.S. dollars if possible. While this method could result in a worker being less happy if currency rates go against them, if you have HR explain the implications of foreign currency fluctuations before sending the employee overseas they shouldn't hold it against the organization.
2. Split Pay
With this method, the business and the employee share risks of currency fluctuation. The business agrees to pay a certain portion of the employee's salary in U.S. dollars and a portion in the currency of the foreign country. To protect both sides from unexpected currency swings of more than 10 percent, you can work with HR to draw up an agreement to revisit the foreign currency portion of the payment once a quarter or if currency valuation changes more than a certain percentage. Drug firm Eli Lilly, based in Indianapolis, Ind., but with operations across the globe, uses split pay to help manage and budget for international compensation.
3. A Payroll Provider
Another avenue to explore would be to work with a global payroll partner that has experience dealing with the nuances of different national tax and employment rules and offers software robust enough to automatically adjust for currency fluctuations. The software should also be able to account for the differences in benefits taxation and any other adjustments, enabling you to seamlessly abide by the rules of foreign countries as well as U.S. laws for workers on temporary relocation.
As a finance leader, you can't control what happens in the world around you. You can use the tools you do have control of to take care of your largest strategic investment — your workforce.