Going Local

A typical localization policy consists of a few paragraphs at the end of the expatriate policy. It might call for a lump-sum buy-out, a phase-out approach or the expatriate benefits are eliminated immediately and the employee is placed on a local package. Consider some of the more complicated issues that must also be address: • Americans have to file a United States tax return and may even have to pay some taxes in addition to taxes paid to the host country. • Will an expatriate who is converted to the local payroll be able to continue contributing to a qualified pension or retirement savings plan? • If the employee is still entitled to participate in such home country plans, is it appropriate that those contributions are now being calculated on the basis of a host country salary rather than a home country salary? • The employee may be prevented by plan rules from participating in those retirement arrangements in the home country and their funds must be withdrawn, which may create a tax liability. Is the employee responsibile for taxes? • If the employee retains funds in home country qualified plans, the income generated by those funds (though not normally taxable in the home country) might be considered taxable in the host country. • How will the employee's years of service in the home country be count toward retirement benefits in the host country? • What if the employee cannot secure permanent residence in the host country? • The employee will almost inevitably retire with split participation in the home country and host country social security systems, which may cause the employee to be subject to a reduction in benefits. Failure to address these questions can render typical localization policies of little value and very time consuming for all parties involved. The answers are tied to the employee's circumstances and assignment (including the home and host countries involved) and the employee's personal financial concerns, retirement plans and family situation. It is essential for human resources to think through these various factors in advance when developing a comprehensive localization policy. Advanced Planning Provides Protection! Companies should protect themselves from the added cost of ongoing expatriate assignments by setting a deadline on how long assignees can receive benefits before they have to repatriate or localize. A written policy allows the company to discuss the prospect of localization as soon as the employee begins an expatriate assignment. The transition from expatriate to localized employee is most effective when the expatriate candidate understands from the outset that, at a certain point in the future, expatriate benefits will cease. At that juncture, localization will take place if the assignee chooses to remain in the host country. This type of advance knowledge is helpful for all parties involved in the localization effort since it can reduce employee refusals down the road. Without a policy to fall back on, it's more difficult to initiate a discussion and there is little to enforce. Companies need to have a policy to have something firm to stand on - and it has to be properly grounded in the company’s guiding principles. Company Objectives are of Paramount Importance! An effective localization policy supports a timely transition. It assists with with cost-containment objectives and provides better assignment planning and return on investment (ROI). Unfortunately, the appeal of near-term reductions in assignment program costs can lead to shortsighted decisions that may come back to haunt the company, the employee, or both. The true objectives of the policy should be kept in sight at all times to avoid such pitfalls. Policy components and content are as diverse as the locations in which they are exercised! To ensure meaningful support, policy development requires identification of company intent and philosophy related to: Selection: Identify how individuals are chosen to relocate. How does mobility link to career progression, organizational growth, corporate culture, etc.? These connections drive the purpose of the company’s investment in an employee mobility program. Objective: What objective is the relocation fulfilling? Is it to recruit key talent or develop staff? Is it to ensure strategic management? Is the company seeking to provide a specialized skill? To support contract awards? Are there relocation requirements related to the performance of due diligence, entering joint ventures or participating in mergers/divestitures? Are relocations or assignments essential to career development? The answers to these queries establish not only why a policy is needed but also its core objectives. Philosophy: What is the company’s guiding philosophy or mission? In executing support, is the critical factor cost containment, competitive practice, employee enticement, or a combination? Knowing the company’s goals and thresholds in supporting mobility will help clarify the “purpose and intent” of policy statements. Business Planning: What specific growth initiatives and market expansion endeavors are occurring? Examine the existing and forecasted talent management plans - how are these plans to be fulfilled through employee mobility? Understanding the company’s future vision will further define the policy intent and its audience. By clarifying “why” and “when” a company needs to relocate talent, the purpose and objectives of the policy and its provisions can be established. The stated purpose then serves as a guiding principle for the allocation of support. Only then can an appropriate program be developed.