What it means
Companies use expatriate assignments for three main reasons: to transfer skills into a new market, to control a critical operation from head office, and to develop senior talent by giving them international experience. Each reason implies a different length of assignment and a different measure of success.
Getting that clear before anyone moves is what separates a well-run assignment from an expensive one. The cost is driven by the extras rather than the salary.
A typical package adds a cost of living allowance where the host location is more expensive, employer-paid housing, international school fees, home leave flights, relocation and shipping, and the cost of making the employee no worse off on tax. Together these commonly take the total to two or three times base salary.
Tax equalisation is the most misunderstood element. The employer agrees that the employee will pay roughly the tax they would have paid at home, deducts that hypothetical amount from their pay, and then meets the actual host country liability itself.
If the host country taxes more heavily, the employer absorbs the difference, which is a genuine cost that must be budgeted rather than discovered. There are risks beyond cost.
Sending staff abroad can create a taxable presence for the company in the host country, trigger social security obligations in two places at once, and raise immigration issues if the assignment is structured badly. These are avoidable with planning but expensive to fix afterwards, so payroll, tax and legal advice belongs at the start of the process.
Many organisations now use alternatives where the business case is thin. Local hires, short-term commuter arrangements, rotational assignments and remote working can achieve much of the benefit at a fraction of the cost, and long-running assignments are often localised after two or three years so the package steps down to local terms.
The expatriate package still has a place; it is simply no longer the default answer.
In practice
Real-world examples.
Example
An engineering group posts a plant manager overseas for two years to commission a new production line and train a local successor. The package costs about 2.5 times his salary, but the assignment ends on schedule because a named successor was identified before he left.
Example
A bank sends a compliance specialist abroad on a twelve month assignment with tax equalisation. The host country's income tax is far higher than at home, and the employer absorbs $41,000 of additional tax that never appears in the salary line of the budget.
Example
A consumer goods company reviews six long-running assignments and finds that four employees have been abroad for more than five years. It localises three of them onto host country terms over a phased two year period, cutting annual assignment cost by roughly $600,000.
Formula
Calculation
Total assignment cost = Base salary + Cost of living allowance + Housing + Schooling + Tax equalisation + Relocation and travel
A company sends an operations manager on a three year assignment. Base salary is $120,000, and a cost of living allowance is set at 25% of base, so $120,000 x 25% = $30,000. Employer-paid housing costs $48,000 a year, international schooling for two children is $30,000, the tax equalisation cost is estimated at $35,000, and relocation, shipping and home leave average $22,000 a year.
Total annual cost = $120,000 + $30,000 + $48,000 + $30,000 + $35,000 + $22,000 = $285,000
The assignment multiplier is $285,000 / $120,000 = 2.375, or roughly 2.4 times base salary. Over three years the commitment is 3 x $285,000 = $855,000, against a local hire at, say, $140,000 a year, or $420,000 over the same period. The $855,000 - $420,000 = $435,000 premium has to be justified by something the local hire genuinely cannot deliver.Case study
Seen in the real world.
Wexford Industrial Group is a fictional manufacturer created to illustrate expatriate economics. It planned to send an operations manager overseas for three years to establish a new plant, and the initial approval paper showed only the $120,000 base salary.
The finance team rebuilt the number properly, adding a $30,000 cost of living allowance, $48,000 of housing, $30,000 of schooling, $35,000 of tax equalisation and $22,000 of relocation and travel, for a total of $285,000 a year and $855,000 over three years. A local hire with similar experience would have cost around $140,000 a year, or $420,000 in total, so the assignment carried a $435,000 premium.
In this illustrative case the board approved the assignment anyway, because no local candidate had experience of the group's production system and the plant represented a much larger investment. It attached two conditions: a named local successor had to be appointed within eighteen months, and the assignment would convert to local terms at the end of year three. The premium was accepted as the price of a specific transfer of knowledge rather than as an open-ended arrangement.
Watch out
Common mistakes.
- Budgeting an assignment on base salary alone, when allowances, housing, schooling and tax typically more than double the true cost.
- Overlooking the risk that an assignment creates a taxable presence for the company in the host country, which can be far more expensive than the package itself.
- Letting assignments run indefinitely without a review, so a three year posting quietly becomes a ten year one on a package nobody would approve today.
Questions
People also ask.
What is the difference between an expatriate and a local hire?
An expatriate is transferred by the employer on home country terms plus allowances, while a local hire is engaged directly on host country pay and conditions.
What does tax equalisation actually mean?
The employee pays a hypothetical amount roughly equal to their home country tax, and the employer meets the real host country liability, so the employee is neither better nor worse off because of where they work.
When should an assignment be localised?
Usually once the original purpose is complete or after two to three years, at which point the employee moves onto host country terms and the allowances are phased out.
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