- with readers working within the Basic Industries industries
At first glance, direct costs seem relatively clear and easy to determine. They can be directly attributed to a person and are generally easy to quantify. With sufficient experience and accuracy, assignment budgets and cost estimates can be prepared in advance to accurately reflect the total costs of an assignment. However, this requires that a cost estimate be prepared at an early stage and that payroll, taxes, and social security be set up correctly from the beginning.
The third part of this series focuses primarily on direct costs and shows how HR generalists and global mobility specialists systematically capture the most common direct cost blocks, how to identify typical stumbling blocks early on, and how to prevent a supposedly simple assignment package from ultimately becoming more expensive than expected.
Direct costs for assignments
Direct costs are costs that can be clearly attributed to an individual and are typically part of the assignment package. In addition to remuneration and social security contributions, these primarily include benefits such as school fees, home flights, housing costs, and any tax equalization.
These costs are generally easy to budget for. However, tax and social security aspects must also be taken into account here, as any necessary gross-up (tax and social security adjustments) of the benefits often makes them significantly more expensive than the actual amount of housing or school costs.
Benefits with a clear monetary value
In practice, it is often not the basic additional benefits included in expatriate packages that pose a challenge, but rather their interpretation by the expatriate and loopholes in the policy. Questions such as whether the transport of an extensive wine collection to Argentina or an IT specialist's concert grand piano to Japan should really be paid for by the company are unlikely to be clearly regulated in many expatriate policies.
For HR generalists, the following three points are crucial:
- A clear definition for each benefit of what is paid for and what is not.
- A binding upper limit for benefits depending on category and assignment destination.
- A defined exception process with clearly defined responsibilities and documentation.
Without these three elements, additional costs will gradually arise, as benefits are quickly perceived as being standard in practice. If adjustments are to be made later, this will lead to discussions, especially if previous individual decisions are used as a reference.
Once something has been granted, it is often requested again in comparable cases, even if the initial situation is not identical.
Tax equalization as a cost driver
Although different tax burdens tend to be taken into account in advance, experience shows that this is not always thought through consistently. For example, when granting benefits, it is not uncommon for only their direct monetary value to be considered initially, without taking into account the fact that the tax burden significantly increases the total costs.
A common mistake in business is to view benefits as net payments and assume that the invoice amounts are also the final costs. For each benefit, it should be clarifed whether it is taxable in the country of assignment and who bears the taxes on it. In practice, the tax is usually paid by the company so that the employee receives the full benefit. This must, therefore, be taken into account in budget planning.
Social security contributions in the context of tax equalization
Social security contributions are often underestimated in budget planning. However, they can have a significant impact on overall costs (especially for employees assigned from Switzerland). There is no upper limit on contributions to the Swiss AHV, and contributions are generally levied on the entire remuneration (including benefits). In practice, social security contributions are, therefore, usually taken into account as part of a gross-up. Depending on the structure of the assignment package, this can significantly increase the employer's burden.
It is also crucial to clarify in advance which social security system applies, what contribution obligations arise from this, and whether these have been fully budgeted for.
Further detailed considerations, such as coverage under tax equalization or the handling of voluntary insurance, are certainly relevant in individual cases, but do not have to complicate every budget in detail.
Questions relating to budget preparation and cost estimation
No complex systems are required for budgeting expatriation costs. The workload for human resources and global mobility should also be kept as low as possible so that details do not become overwhelming.
Instead, the right questions must be asked at the right time so that the cost implications of the assignment are known in good time. To this end, the following questions, among others, must be clarified in consultation with the business, payroll, and, if necessary, the tax department:
- What benefits are included in the package? Which ones are explicitly excluded?
- Is there a clear definition and binding upper limits for each benefit?
- Which benefits are taxable in the country of assignment?
- Is a gross-up applied to taxable benefits?
- Is tax equalization confirmed? Which components are included and which are not?
- Which social security regulations apply? What are the resulting contribution effects?
- Which providers are involved? Who controls them? How are additional services approved?
Conclusion
Originally published by Linkedin
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
