T Magazine speaks to Martin Schulz, the new President of the European Parliament, about what is being done to create a more flexible labor market.

What is being done from a political perspective, at both a national and European level, to eliminate the barriers to cross-border tax and social insurance legislation and facilitate more flexibility on the international labor market?

Martin Schulz: I must point out, unfortunately, that there are practically no borders for capital any longer, whereas in terms of labor mobility, the freedom of movement for workers, there are still considerable obstacles. However, many fiscal issues and, above all, decisions relating to the labor and social sector are still the national responsibility. I regret this since, in Europe, it means we are faced with fiscal and social competition between one another, usually with a downward tendency, which is damaging to the economy in many of our countries.

This complicates the desired convergence of our economies and ultimately does not lead to sustainable growth for the Member States. I see our social model as a key to the economic success of the European Union and it will play an essential role in overcoming the current crisis. All the same, the European Parliament will continue to press for decisions in important fiscal matters – whether toward the harmonization of corporate tax assessment bases or toward a financial transaction tax.

What are Germany and/or the EU doing to standardize the various pension regulations?

Our disadvantage as an economic zone – compared, say, with the USA – is the coexistence of 27 different national systems. Of course, variety and difference can also be a bonus: I am against total standardization. But what we do need is a common framework and common rules, so that workers can move inside the EU without barriers.

Yes, superannuation and pension schemes are a matter for Member States. But the European Parliament will support any steps aimed at helping enable workers to retain their retirement pension claims if they move from one Member State to another. However, in that process, there should be no need to weaken national social standards. One of the key areas of harmonization lies within the financial services sector.

What else needs to be done here?

As noted, capital nowadays can be transferred between countries almost instantaneously. But many financial centers are only inadequately regulated, a situation that can cause substantial damage to our economy. I firmly believe that politicians have to help to set clear guidelines here, which is why I wholeheartedly support measures taken within the G20 framework – it is in this area that we must take joint action.

The European Parliament has already made an important contribution by limiting certain kinds of short selling in particular and by generally creating more transparency on the derivatives trading market.

Martin Schulz is a Member of the European Parliament for the Social Democratic Party of Germany, since 2004 leader of the Socialists in the European Parliament. In January 2012, the 56-year old politician was elected President of the Parliament.

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By Gerri Chanel

Tax administrators around the world are facing the same challenges as corporations: how to adjust to the reality of the new economy and the complexities of an increasingly global business environment. Tax authorities are becoming more efficient and are trying to raise revenues like never before.

They are doing so through a wide range of initiatives, from more aggressive tax enforcement, to collaboration with their counterparts across borders, to new requirements for transparency and disclosure by taxpayers.

These increased pressures by tax authorities around the globe are taking place at the same time that companies – in their own quest for efficiency and cost savings – are undertaking large finance transformation projects, including within the tax function, which are reducing the number of in-house tax resources available in-country. The result? Increased global compliance and reporting (GCR) reliance and risks for multinational companies. This article describes some of the major initiatives by tax authorities as to how they are addressing these changes and discusses how effective GCR models can mitigate the resulting risks.

Sharing ideas and information

These days, tax administrations are joining forces with their cohorts around the world – sharing best practices and information in an effort to address common cross-border challenges and internal issues. “For example,” says Monique van Herksen, leader of Ernst & Young’s EMEIA Tax Controversy Practice, “one cooperative effort is the OECD’s Forum on Tax Administration (FTA), which engages in a highly interactive exchange of best practices where tax authorities of the OECD member countries, plus several observer countries, compare notes on what they’re doing in their jurisdictions, and others can then decide whether to follow suit.”

The FTA is just one of many such groups. There is also the Leeds Castle Group, the Commonwealth Association of Tax Administrators (CATA), the Study Group on Asian Tax Administration and Research (SGATAR), the Inter-American Center of Tax Administrations (CIAT), the Caribbean Organization of Tax Administrators (COTA) and the UN Committee of Experts on International Cooperation in Tax Matters, all of whom have provided regular forums for collaboration among tax authorities.

Countries are increasingly relying on information exchange agreements and double tax treaties to gain information on cross-border transactions. Improvements in information collection processes, especially through the use of electronic media, have made it easier for countries to collect and share information. And routine data sharing is on the rise. Exchange of information takes place “spontaneously,” upon request and automatically. Tax authorities in Australia, France, Italy, Mexico, South Africa, the United Kingdom and the United States are all embracing this practice. And even historically “privacy sensitive” regimes, such as Switzerland, are beginning to participate with the exchange of information.

Getting tough on high-risk areas

Tax authorities are increasingly focusing their efforts on perceived areas of risk and abuse and on other high-value opportunities. One way they can assess such areas of potential risk and abuse is by obtaining greater taxpayer disclosure and transparency before the tax return is even filed. “When a taxpayer discloses uncertain or contentious tax positions early and before filing their tax returns, the tax authorities can decline it or approve it up front, which saves audit resources down the line and it ostensibly also makes sure they get their revenue earlier rather than later, which is after a lengthy audit,” says van Herksen.

Some of these initiatives are mandatory; others are (so far) voluntary. These increased reporting and transparency requirements are not only giving countries more and better information; they, in turn, are sharing the information with other countries. “A very important indication of where things are going,” says van Herksen, “is the recent publication by the Forum on Tax Administration, called Tackling Aggressive Tax Planning Through Transparency and Disclosure. It lists all kinds of disclosure initiatives that are currently already operative in the world.” In turn, these disclosure initiatives determine that taxpayers meeting certain criteria will be forced or obliged to engage in certain additional reporting.

Simultaneous and joint audits

Tax administrations are also using simultaneous or joint audits, and sometimes both. This means that an issue arising and audited in one country can, and increasingly will, quickly surface in others.

In a simultaneous audit, several countries all review a company’s books and records in their own respective countries. “A new breed of enforcement,” says van Herksen, “is the joint audit program. In such a program, several countries will put together a single audit team composed of representatives from each country. They will compare notes; they will regularly have conference calls; they will send out the same set of questions to all the subsidiaries of the company.”

As tax administrations around the world develop more sophisticated risk assessment and enforcement tools, companies need global visibility over where their risks lie. And, as tax authorities develop ways to share information and coordinate in other ways, companies also need to know where positions may be inconsistent. Responding to this new tax environment is one of the key drivers behind improving GCR processes.

How firms are responding

“Companies that have put a governance and risk oversight solution in place helps them, for example, to identify and address situations where tax authorities may be talking with each other on a particular issue,” says Chris Kealy, EMEIA Leader for Global Compliance & Reporting for Ernst & Young. “The oversight will allow them to harmonize their own processes to be prepared to deal with controversy issues when they come up and to harmonize their answers to the tax authorities on a cross-country, consistent basis. Sometimes it’s a very simple solution, like centralizing documents for companies to enable them to respond immediately and quickly to questions from the tax authorities.”

Van Herksen adds: “This is highly advisable to do because a lot of controversy preparation, defense, controversy planning and avoidance can be done at the compliance phase, particularly if you have identified the countries where the tax authorities have a very litigious nature, what issues are likely to trigger audits, where alternative dispute resolution is something to consider, where settlement procedures are easy or difficult, what the transfer pricing issues are and so on.”

Part of what makes effective GCR challenging for multinationals is that, even though centralization offers significant GCR benefits, tax enforcement will always be, to some extent, inherently local. So, even as tax authorities coordinate their efforts, they often continue to diverge in terms of approach and outcome. As a result, companies with shared service centers need a hybrid and bespoke approach to tax in achieving effective GCR.

One example where the hybrid approach is needed is in the area of transfer pricing. A company using a shared service center that has centralized its transfer pricing compliance will have implemented benchmarking studies and economic analyses on a global basis, or against another large comparable set.

“But, we know for a fact that certain countries’ tax authorities will want local comparables,” says van Herksen. “So even though, for cost-efficiency reasons, you’re trying to streamline to get everything centralized and harmonized, local idiosyncrasies can a put a lot of pressure on the management of the company’s tax system, its transfer pricing system and its tax policy, and can actually serve as a threat to your cost savings and your centralization efforts if they are not managed properly.”

Effective GCR in the new international tax landscape

As multinationals expand around the world, dealing with a growing number of authorities and tax administrations, they face more complex, and sometimes conflicting, reporting obligations. These challenges are exacerbated by the many initiatives and the more aggressive stance of tax authorities around the world, plus the simultaneous economic reality that companies are reducing the number of experienced tax resources available in-country.

In addition to the many other ways in which effective GCR can support corporate goals, effective GCR practices can also allow companies to be prepared for this new tax landscape.

“What we’re finding,” says van Herksen, “is that a holistic view on how a company handles its taxes is really recommended, if not mandatory at this point in time, in order to comply and to be audit ready or to position itself from a controversy defense perspective. And that means having as much information as possible on what is happening with each issue in each jurisdiction, ready and available at the time of filing. I would say that, with 75% to 80% of the issues that can come up, they could – in hindsight – have been handled, avoided or addressed efficiently at the global compliance level. So we’re seeing there’s a lot of gain to be made by considering this early. And at the end of the day, it can lead to significant reputational exposure if it is not considered.”

“Governments are starting to behave like multinationals. That’s their bottom line,” says van Herksen. In response, the new bottom line for multinationals must be more effective and intelligent GCR.

• Read all web articles from T Magazine issue 06
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Recruiting and retaining talent is a perennial challenge for any multinational business.

In rapidgrowthmarkets, there is already intense competition for relatively small numbers of highly skilled and experienced workers, especially within middle and upper management, despite huge numbers of new graduates emerging each year.

In developed markets, multinational businesses are grappling with other challenges: an aging workforce as a result of demographic change, and all too often a disconnect between the skills of the labour force and those that businesses need to succeed.

Addressing these talent mismatches requires companies to think carefully about how they manage their human capital on a global basis. For many, the greater use of overseas postings is an important tool for filling talent gaps and transferring best practice around the world.

Gaining experience in other markets is also a crucial part of management development, helping high-potential employees to develop the international experience and cultural understanding that will enable them to lead tomorrow’s global business. Can tomorrow’s CEO be someone without deep, first-hand knowledge of today’s rapid-growth markets?

In recent years, the pattern of international postings has evolved. Traditional expatriate models, whereby companies relied on the experience of managers from developed markets to establish operations in rapid-growth economies are now just one part of the mix. Today, there is a much more fluid, dynamic approach to the migration of talent, with executives also moving from rapid-growth to developed markets, and also from one rapid-growth market to another.

The emergence of a new generation of “global executives”, while beneficial for the business overall, presents companies with many challenges from a tax perspective. Different rates of income tax around the world can make it difficult for companies to create remuneration structures that equalize liabilities between jurisdictions.

A related challenge here lies in crafting incentive structures that motivate global executives, without creating a mismatch between them and local workers. Beyond this, social security obligations and pension entitlements, complex enough in many jurisdictions, become even more challenging to manage for mobile employees.

In addition, meeting the challenges of housing, schooling for children and potentially work assistance for spouses present complications. Obtaining appropriate residential and working permits are also critical steps in managing risks for both the firm and employees. Even employees who are not based overseas can present problems because they may trigger local tax liabilities if they travel frequently enough.

In issue 07 of T Magazine, we look at the emergence of a new generation of “global executives”, either traveling frequently, or else shifting from one international posting to the next. We consider how companies are developing global talent management processes to build talent pipelines for the future, and explore the tax implications of this increasingly mobile workforce.

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Read all web articles from T Magazine issue 07

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By Gerri Chanel

People have been moving in search of better opportunities since the dawn of humanity. Back then, hunters migrated to stalk bigger herds. Today, it is intellectual capital on the move. Just a few years ago, talented engineers or scientists from such countries as India or China would make their way to countries such as the UK or the US. Now those individuals are increasingly returning to their country of origin after obtaining education and experience – a phenomenon sometimes called “reverse brain drain.” Of course, one country’s brain drain is another’s gain, presenting challenges and opportunities for the countries – and companies – on both shores.

China, India – and beyond

Hai gui is the Mandarin term for sea turtle, a creature that is born on land, but grows up in the ocean before returning. It is also the informal term for the ever-growing number of Chinese graduates and professionals abroad who are increasingly returning home. China is not alone in this phenomenon: according to a 2011 study by recruitment consulting firm Kelly Services, an estimated 300,000 Indian professionals now working overseas are expected to return to India by 2015. Elsewhere, skilled expat workers from African countries such as Nigeria, Kenya, Ghana and Angola are also returning in notable numbers to their countries of origin, not least due to a slowdown in many richer economies.

Joseph Pagop Noupoue, Ernst & Young’s Managing Partner for Cameroon, is one example. He recently relocated back to Africa after being educated and working in France for 23 years, and is far from alone. “We are receiving applications from so many young and talented Africans who are ready to make the trip back and bring their contribution to the development of the continent,” he says.

Another notable trend is the movement of skilled workers within Europe due to varying economic conditions, says Michael Liley of Ernst & Young’s Human Capital practice in London and former Global HR Director of Ernst & Young. Spain, Italy and Greece now host a generation of highly-educated people in their mid-20s to mid-30s who cannot find good work. “So EU countries that are doing better economically, like Germany, have had quite a significant intake of qualified talent from those other countries,” he says.

In addition, various talent consultancies arguing that within several decades, many vacancies for senior roles in countries such as India will be filled not only by returning Indians, but also by Americans and Europeans seeking better prospects.

Push and pull

“The labor market is a major driver of talent migration,” says David Rooney, Executive Director of Global Mobility in Ernst & Young’s Human Capital practice, but he notes that it is only one of many factors, often categorized as either “push” or “pull.” Push factors might include lack of career or salary growth, or immigration policies that discourage permanent residence after training. “Pull factors,” he says, “may include higher wages or opportunity for career advancement, but there are others.

According to a 2011 study sponsored by the Kaufmann Foundation in the US, which interviewed Indian and Chinese professionals who had been educated in America about their reasons for returning home, the top three factors were economic opportunities, access to local markets and family ties.

For highly skilled scientists and technology workers, there are other factors. According to a 2008 OECD publication, The Global Competition for Talent: Mobility of the Highly Skilled, these workers also seek better research funding and research infrastructure, the opportunity to work with “star” scientists and more freedom to debate.

Government programs and policies

Governments across the world continue to create a wide repertoire of programs to help draw highly skilled expats home. China’s list alone is huge. To encourage students to return, the Government there has set up educational bureaux in its embassies and consulates as well as several thousand student associations. Universities and government-funded research organizations actively recruit returnees. One initiative, The Thousand Talents Program, offers incentives to top researchers to come home, including a one-time, tax-free cash allowance of ¥1 million (US$159,000), and a residency permit in whichever city they choose, among other benefits. Some cities have created “enterprise incubators” for returnees.

The United Arab Emirates has made its expat workers aware of employment opportunities back home by creating an online platform called Return2Home. The initiative targets Emirati jobseekers in the US, UK, Canada, India and South East Asia, as well as employers seeking non-resident Emiratis with international experience and expertise.

With many skilled expats being increasingly “pulled” home, the countries currently hosting these expats have an equally large stake in encouraging them to stay. According to Liley, “How well a country integrates its talent will have a high impact on whether that talent comes to consider the host society home. For example,” he says, “countries such as Sweden and other Nordic countries have provided language training for numerous years, which is the key to connecting with the local population and integrating into the society.

In some cases, immigration policies create barriers to workers who might otherwise wish to stay in a host country. For example, the US is experiencing an exodus of skilled foreign workers, particularly in crucial fields of science, technology, engineering and mathematics. “Many of these people are leaving simply because they cannot get permanent visas to stay in the US after their student or training visas expire,” says Rooney.

Another approach is to ease immigration policies that prevent needed talent from entering. Like the US, the UK faces shortages of skilled workers, particularly in certain sectors. The British Business Secretary Vince Cable stated in 2011 that the UK’s aerospace industry faces a serious, chronic shortage of engineers; he believes certain immigration caps are partly to blame.

Governments can also change immigration rules to make it easier for expats to return. In Canada, a pilot program was launched in 2011 to encourage Canadian expats in certain sectors facing significant shortages, such as health care and academic research, to return home by easing immigration restrictions on non-Canadian spouses.

Talent at stake

“Companies need to focus on the opportunities they create for employees,” says Michael Dickmann, Professor of International HRM at the UK’s Cranfield School of Management. “This goes far beyond monetary issues. I believe it is about the very clear development of employees and the way companies manage their talent. We consistently see that, in the range of drivers for people who work globally, these are the strongest.”

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By Bill Millar

International experience is becoming increasingly valuable in a world where globalization continues to deepen. To succeed at a senior level, executives need an understanding and awareness of different cultures. Perhaps the best way of developing this experience is through a series of temporary foreign assignments or secondments.

Moving executives around the globe can be a valuable way of developing the managerial skills and knowledge that are necessary for an international business, but it can be challenging to get right. One of the biggest problems is the regular departure of executives after the completion of a foreign assignment, especially in the immediate 12–24 months after repatriation. Over the years, countless surveys have shown that expatriates who have recently returned from a secondment are much more likely to leave the company than those who have not been away.

One of the main reasons for this is that, on return, expatriates find that the dynamics and management teams in their home country have changed, leaving them without their original sponsors or mentors. “They can return to a sort of vacuum, with no job and no one looking out for them,” says Marion Festing, Professor at the Berlin campus of the ESCP Europe Business School.

A weak economy exacerbates this problem. In the current environment, many executives are returning to a company where there are fewer senior positions to fill. “Companies send managers on expatriate assignments with the expectation that they will fill another more senior position upon their return,” says Festing. “But with many companies either downsizing or cutting back on expansion plans, there’s often no position available.”

Another common problem is that returning executives experience a sense of loss or diminishment. As David Rooney, an Executive Director in Human Resources at Ernst & Young in Frankfurt explains: “Expatriates on assignment away from the headquarters are treated almost regally. The company will often attend to – and pay for – many of their needs, from housing and transportation to their children’s education. Their total reward will typically be higher than in their home country.”

There are other potential problems. Sometimes an expatriate, away for a long assignment, no longer feels at home upon return. They have established strong connections with the country they have just left. In addition, they may realize that their skills or abilities, no matter how well developed during an offshore assignment, no longer align with the organization’s needs. In these situations, it is unsurprising that these executives will actively seek a way to return to their former standing or location.

Stemming the loss

Addressing the problem starts with the selection process. Companies need to set expectations carefully and ensure that expatriates are aware that there is no guarantee of promotion on return. There should be a similar discussion about compensation. Although an executive may be well paid while on assignment, they need to understand that the same level of pay is not likely to continue when they return.

Companies should ensure that there is a strong channel of communication between their home country office and expatriate. Often, a formal mentoring relationship can be a good way of ensuring that managers do not feel cut off from corporate headquarters. This relationship should be tracked formally and included as an element of performance evaluation for both the mentor and the expatriate.

Finally, there should be a formal process that prepares for the expatriate’s return. Preparations should be made well in advance to ensure the transition is smooth. “You don’t want to wait until they are back before you make plans for their next job or their next assignment,” says Rooney.

Many executives returning from secondment complain their new skills and experience are not sufficiently valued. Companies can avoid this problem by ensuring that the executive’s new role makes use of these new capabilities and experience.

The embodiment

International experience is crucial for the drinks manufacturer Diageo, which owns a range of globally recognized brands, including Guinness, Smirnoff and Johnnie Walker. At any one time, it has around 400 managers in its “expatriate pool,” who are all gaining overseas experience in order to develop their skills and build long-term careers with the company.

This pool includes executives from a wide range of positions. Some are short-term pragmatic assignments, such as bringing specific brewing experience to get a new operation up and running. But most are long-term assignments, lasting two or three years, which tend to be occupied by managers and senior executives who have been selected especially for the role.

These assignments have two primary. “One is that we want these executives to get the job done,” says Gareth Williams, Director of Human Resources at Diageo. “But the second is to provide these executives with valuable experience that can benefit the company.”

Executives on secondment at Diageo remain closely connected with head office via a series of formal processes. This involves ongoing discussions about performance in the position, personal growth, challenges and training requirements.

“Wherever they are, they are still tracked within our global talent processes,” says Williams. The company also thinks ahead to ensure that the expatriate’s next steps are carefully considered. “Even though the current assignment might not be over for another 12–18 months, we’re already making plans for the next one,” says Williams.

But of all the mechanisms that optimize talent development and minimize attrition rates, perhaps the most valuable, according to Williams, is the initial selection process. This requires detailed up-front conversations about every aspect of the candidate’s personality, including their family situation and aspirations. “You need to get an idea of how they might get on in a more developing, as opposed to more developed, country,” says Williams.

More taxing matters

Given current economic conditions, it is not surprising that host nations are becoming more aggressive in their pursuit of expatriate tax revenues. This highlights the importance of being clear with expatriates about responsibilities for different aspects of tax compliance. “Administrations are paying closer attention to due dates – and they’re tougher when deadlines are missed,” says Williams.

An investment in talent

Executives returning from an international assignment are typically much more valuable than when they left. Yet despite this, there is a high risk of them leaving the company. By being more proactive and, in particular, by applying formal processes, companies can reduce the rate of attrition and thereby improve returns on their investments in human capital.

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By Nigel Holloway

Globalization is both a product of and a contributing factor of economic integration.

As national markets become increasingly connected, the demand among international employers for globally-minded executives has grown. For the jet-setting business traveler, many markets can seem fairly homogeneous, as they travel from hotel to hotel, their feet barely touching the ground.

Yet, despite the trend toward globalization, the cost of living varies almost as widely from city to city today as it did 20 years ago. This is a problem not only for expatriate business executives trying to maintain their living standard. It is also a headache for their employers that seek to keep their top talent happy, while deploying them around the world wherever the need is greatest.

City price data comparisons

With the expatriate in mind, the Economist Intelligence Unit (EIU) has collected price data from cities around the world for more than two decades, comparing costs such as home rental, private school tuition and the costs of domestic help. It then ranks the cities on an index, using New York as a constant baseline at 100.

Today, the most expensive city in the world, Zurich, is at 170, meaning that costs there are 70% higher than New York’s. Twenty years ago, the most expensive, Tokyo, was at 171. The cheapest city today is Karachi at 46. In 1992, the cheapest was Mumbai at 32, which this year ranked just above Karachi.

Generally, cities in the developed markets of Europe and Japan are among the most expensive. Their individual rankings bounce up and down according to exchange rate movements, but they remain in the same richer group. By the same token, cities in the fast-growth regions of Asia and the Middle East are among the cheapest. But there are some notable exceptions. Singapore, for example, is now in the top 10 and 42% pricier than New York, thanks to soaring rents and a strong exchange rate. It is now far more expensive than rival Hong Kong (115 on the index) and neighboring Kuala Lumpur (83). Nor are all cities in other rapidly growing countries cheap.

Luanda, the oil-rich capital of Angola, was one of the most expensive cities in the world for expatriates in 2011. Two other African cities were also prominent on the list, Ndjamena, Chad and Libreville, Gabon. Energy and mining companies have been lured there by the promise of natural resources. But the lack of infrastructure means that these firms must build their own housing and amenities, resulting in high costs for expatriates’ employers.

Professionals seek out growth markets

Cheapness, in and of itself, does not necessarily make a city attractive. But as the global economy tilts towards fast-growth markets, an increasing number of professionals are seeing cities in those markets both as a source of jobs and as places that offer a boost to their careers. Inevitably, as demand for fine housing grows, prices go up. Shanghai, on a par with Moscow, is now slightly more pricey than New York. São Paulo in Brazil is 12% more expensive than New York, and pricier than Rome and Berlin. And the variations within countries are often as great as from one nation to another.

Thanks to the weak US dollar, American cities are in the middle of the global rankings. But the gap between the top (Los Angeles at 102) and the cheapest (Cleveland at 73) is greater than between Shanghai (102) and Tianjin (79). In the US, high unemployment and falling rents have made the traditional manufacturing heartland a cheap region in which to do business.

Overall, though, the cities with the lowest expatriate costs tend to be in non-western countries. Mumbai, New Delhi, even Panama City (42% less expensive than New York) would seem to present enticing bargains to the expatriate. The question arises, though, as to how much longer such disparities will last. The foreign executive living in the lap of luxury on a foreign assignment, with domestic help covering the daily chores, may become a thing of the past, not least as cheap labor finds better-paying jobs in manufacturing or IT.

Indeed, a popular complaint for wealthy households in São Paolo today is the soaring cost of domestic labor, as the pool of available nannies, cooks and cleaners dries up. Such changes will continue as the balance of power in the global economy shifts towards key growth markets.

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Interview by Fergal Byrne

T Magazine: In today’s increasingly global business environment, how important is it for managers to have international experience?

Françoise Gri: What has changed more recently is the way in which we think about different markets. In the past, we assumed that the world was flat and we wanted managers who dealt with different markets in a similar way. Today, we no longer believe the world is flat. We want business leaders who have an international perspective and who can respond to local differences.

Although we still need managers with international experience, we view this experience in a slightly different way than we did in the past. It’s no longer desirable to have a manager who has lived in five different countries for two years each because, although they have some experience of different cultures, they do not have a deep enough knowledge of any. Today, we need managers who are totally connected with the local culture but who can also build a bridge with the culture of the company. This will be a critical dimension of tomorrow’s leadership style.

ManpowerGroup has recently published research on the Human Age. Can you tell us what this is?

We believe we are entering what we call a Human Age. This is a complex new era in which companies will have to embrace new work models, people practices and talent sources to ensure future success. In order to unleash their potential, companies will need to engage with their people on a deeper, human level. Individual needs will determine recruitment and development strategies. Companies will need to provide an environment suitable for collaboration and to anticipate more precisely the skills they’ll need.

When we first discussed these ideas at the 2011 World Economic Forum in Davos, many felt they were interesting. Since then, there has been continued social, political and economic turbulence. This year in Davos, we noticed that more and more companies are seeing the impact of these changes.

What does the future hold for expatriate managers?

We see fewer and fewer companies today looking for expatriate managers. They are not sufficiently or deeply connected to the markets in which they operate. The old idea where managers from developed countries go in and show the locals what to do is finished. Increasingly, we see what we call the “reverse expat” phenomenon. This approach rotates a local manager, based in the emerging market, through functions outside the home market. The manager can then adapt the experiences gained from this to the local market upon their return.

The reverse expat approach is also a particularly powerful way to enhance retention of local talent because it allows employees in emerging markets to see that the company is truly global. If you are sitting in a business in Asia, for example, and you can see some Asian counterparts who have been promoted and are now running pieces of the business, it makes a big difference to the overall level of employee retention. Seeing that the top echelons of management are not just dominated by the parent country management team provides reassurance for ambitious local managers.

How can companies balance local responsiveness with global economies of scale?

Companies need to have global collaboration but they also need to be anchored in the local market. Some company programs will be applied systematically in all markets; others can be adapted to the needs of the local environment. There is a lot of complexity here, and managers have a new level of responsibility to implement this quickly, efficiently and in the right way.

At ManpowerGroup, we have developed frameworks to help the company find a balance between local and global. The framework has two major components to it: one fixed and one flexible. The fixed part consists of processes that are non-negotiable, whether you are in Istanbul or Buenos Aires. In those instances, the local company needs to operate according to this fixed template, no matter what. Then there’s a flexible component, where managers can localize the program to the needs of the local market.

Is technology changing the nature of work?

It is difficult to understate the likely impact of technology on the workforce. Technological developments allow new ways of getting work done, which increase the importance of co-ordination and collaboration. Rapid communication via online networks, for example, is changing organizations’ choice of where, when and how work is performed. Social networks are pervasive, but research suggests only 30
of executives understand the implications of this new, data-intensive, social network-intensive world. This is a big challenge. We have had waves of technology before, but I think the impact today is much more subtle, while no less important. It has therefore become crucial to understand the human dimension, to adapt and respond to this changing technology.

How important is diversity?

It isn’t just about hiring on the basis of gender, religious persuasion or culture. Without genuine diversity of thought and representation, you’re not going to come up with the right answers. It’s just too complex to have a purely British team, for example, running a global company.

As part of that drive for diversity, we need to have more women involved in business, particularly given the talent supply challenges and talent mismatch problems we see. The female talent pool is still largely untapped. I think involving women more in the labor market and, in particular, at senior leadership level, will help companies to access the right talent to succeed. In addition, female executives can bring new and valuable perspectives to the leadership team.

This kind of change does not come about on its own, however. You have to fight for it. I think companies are slowly making progress on this front, but not enough. Much more still needs to be done. Looking to the future, I think the companies that will do best in the new and evolving workplace of tomorrow are those that have dealt with diversity for a long time and that have embedded it into their values and culture.

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By Andrea Chipman

An era of rapid globalization has produced a new generation of “stateless employees.” These executives may be born in one country, live in another and spend a significant proportion of their working lives traveling from one continent to another, either as an expatriate on assignment or else simply as an executive constantly on the move. This nomadic workforce is increasingly valuable to companies, but can also pose tax and benefits headaches.

Expatriate employees that move intermittently from one geographic assignment to another can face considerable difficulties in managing their personal finances too. Those who spend a lot of time overseas can have more complex personal tax affairs, may need multiple bank accounts, and can have difficulties with moving pension arrangements when they relocate. In a survey for HSBC International, 71% of expatriate employees said their finances had become more complex since relocating.

Salary arrangements may need to be split between home and host country, causing significant reconciliation work when tax returns are filed, to determine how much time the executive spent in each location. Certain compensation structures can make tax affairs even more complex. For example, if an executive receives deferred compensation in the form of equity, rather than cash, this can have tax consequences if equity awards are granted for a particular business year but vested over a longer period during which the employee changes location several times.

Such issues can also crop up for so-called “accidental expatriates”, which relates to the phenomenon of executives who are ostensibly based in their home country, but who travel overseas frequently. Employees who are paid in their home country but do a lot of work overseas can trigger local tax liabilities, presenting a challenge to companies to find ways of tracking these individuals in order to be compliant. “We see more and more individuals who are on a domestic contract but overseeing a regional area with a lot of cross-border commuting that can expose them to local taxes,” says Nick Bacon, a Partner in EMEIA Financial Services-Human Capital at Ernst & Young.

It may also be unclear how to account for the mobile employee’s time and costs, particularly if they move frequently. “If you have someone sitting in a legal entity in India, going to work for an entity in the same group in London, what happens to the individuals’ costs – are they borne by London or Mumbai?” asks Bacon. “If there is a supply of staff, it can give rise to a VAT reverse charge, where the host country would have to charge itself VAT on the deemed import of services from the home country.”

There are also corporate tax risks for employers. “If you think about financial institutions sending project teams abroad to work on a large deal, they may be based abroad for weeks or months at a time. This could certainly attract the attention of local tax authorities during transfer pricing reviews or tax audits,” says Chris Price, the Head of Tax for Ernst & Young’s EMEIA Financial Services practice in London.

Creating mobile retirement plans

Pension arrangements also pose a major challenge. Employees who live in several countries throughout their career are likely to have multiple pension plans, each in a different currency. When the executive finally retires, reconciling these plans and moving money to where it can be accessed from one location can be a time-consuming process that holds currency and taxation risks.

Sarah Dyce, Senior Manager for Global Mobility at Ernst & Young, says: “Portability is increasing slowly, but we’re a long way from people being able to move their pensions wherever they are in the world.”

Tax policy on international pensions has been slow to develop. There are currently no tax relief regimes for international employee pensions, and no way to claim deductions on foreign assignments when plans vest. This means employees can be exposed to tax liabilities, while employers may be taxed in multiple locations on the contributions.

Domicile debates

Remaining domiciled in one’s home country for pension purposes has been a particularly emotive issue for citizens of European countries, which have traditionally had strong welfare states and extremely generous health care and social security benefits. Increasingly, however, employers are less willing to keep global employees in their home country benefit plans.

Changes in the social contract between government and the population in these countries have also started to weaken this link: “Social security systems are no longer as secure as they were 20 years ago so people are more willing to work elsewhere because they have no idea where and when they are going to retire,” says Bernd Kirchner, Global Head of HR International at Deutsche Bank. “In the old days, it was a big selling point if you could tell someone you were sending them on an assignment but keeping them in the German social security system. Now that’s not seen as much of a benefit.”

More generally, employees who work overseas as expatriates are now less likely to receive the generous benefits that once went with the role. In part, this is because there is a view that international postings should now be seen as an attractive part of the career path, rather than a hardship. This reduction in the financial incentives for expatriate postings can create a dilemma for some employees. While recognizing that the move is good for their own career, it may mean that their spouse – if they are also working – will not be able to work because of visa issues. This can mean that, in real terms, the employee’s total household income will fall.

Kirchner thinks that, in future, companies will need to do more to encourage mobility among their employees, particularly those below the C-suite who rely on incomes from both partners. “Companies need to find a smart way to make it an attractive package to both partners, even though you can only employ one,” he says. “For example, they can offer support for the spouse to apply for a job, visa sponsorship or an explanation of the labor market in the host country.”

Tracking compliance: tax track and trace for global executives

Keeping track of globally mobile employees is a major challenge for corporate compliance teams. Senior executives that live in one country, work largely in another, and regularly fly into several others can present a particular challenge from a tax tracking perspective, as can international expatriates. Some countries are even handing executives and their employers an income or social security tax bill when they stay too long in one place, or pass a time threshold after one-too-many short-term visits to a location.

But a new app called “Tracer” promises to help globetrotting executives avoid tax traps. Created by Ernst & Young, the app provides a mobile calendar service which, when activated, records the location of an employee and tracks their movements using the phone’s GPS. This generates a report that allows employers to analyze the travel data—which automatically excludes holidays and other exceptions, as well as any personal information—and provides alerts when an individual is close to triggering a tax alert in a location.

According to Tim Stansel, an Executive Director in the Human Capital practice at Ernst & Young in New York, the app targets two kinds of executives. One is the frequent traveller who works outside of his or her home tax jurisdiction and is at risk for triggering a taxable event; the other is an expatriate on assignment and who needs to track their travel for income tax purposes. “It helps mitigate the potential risks associated with cross border tax and immigration,” he says. “At the same time, it allows employees to focus on their job responsibilities by eliminating the need for users to log into a web-based calendar to keep track of their travel.”

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By Nigel Gibson

Despite worries about the strength of the world economy the number of employees working in a foreign country on a long-term contract has remained buoyant. That suggests companies realize the benefits of deploying people with the skills and experience required in promising, new markets.

It also means firms are having to efficiently managing a number of considerations best coordinated centrally – from unequal rates of tax to domestic pensions and complicated systems of social security – which can deter executives from accepting an assignment, long or short, in another country.

Michael Dickmann, Professor of International Human Resource Management at the UK’s Cranfield University, explains that global careers are becoming increasingly important. “Even small organizations nowadays have global issues to master.”

Assignment challenges

Although more companies now employ more people on assignments in more places around the world, there are no easy solutions to the problems it creates. “What it means for organizations is that they have to start thinking about different patterns of international work and to understand their individuals better, as well as the tensions in the whole process,” says Dickmann.

Chief among which obstacles is tax. Moving from a country with a high rate to one where they pay little or no tax may seem straightforward to an employee. But expecting executives to move between destinations with markedly different rates of tax, not to mention social security and other changes, can lead to strife, disillusion and, sometimes, even defections.

To overcome these problems, 85% of multinational companies adopt what is known as tax equalization. Chris Debner, Senior Manager for Human Capital at Ernst & Young in Zurich, explains:

“If you go abroad with a company, the amount of tax you pay is equalized in such a way that you do not lose out. There is often something called a net promise which means that, as an employee, you do not suffer from a higher rate of tax and neither benefit from a lower one. Especially in financial services the amount of tax that needs to be paid is a factor in how mobile some executives are prepared to be.”

Taxing alternatives

There are two other main ways to manage an employee’s liability when on a foreign assignment, which are hardly used anymore. One is tax protection, under which the employee is subsidized if they pay more tax than at home, yet enjoys a windfall if the posting is to a destination with a lower rate. The second is laissez-faire, in which the employee is left to fend for themself.

As Peter Ferrigno, Leader of Ernst & Young’s Human Capital practice for EMEIA, points out, the aim of equalizing liabilities between destinations is to remove tax from the question of whether or nor to accept the assignment. “Large companies don’t want people to determine whether they move or not based on the rate of tax.”

A global approach

A growing number of firms, particularly larger multinationals international, have chosen to set up what are known as “global employment organizations”. These seek to lift executives clear of disagreements over the rate of tax, as well as problems over entitlements to pensions, by creating an international entity that hovers over all destinations.

Instead of providing a fresh contract each time an employee moves from one country to another, all those within the global employment organization are employed on similar terms.

Such an approach may have its advantages but it does not suit all, not least because of the cost of managing offshoots. Take Deutsche Bank, a global financial services organization headquartered in Germany that has no fewer than 180 “country combinations” – sets of nations, in other words, between which employees migrate on a mixture of short- and longer-term contracts.

With developing markets making much of the running within the world economy, many of the destinations are big cities in Asia. “Five years ago,” says Matthew Ozburn, Deutsche Bank’s Director of Human Resources International, “the number of executives moving from job to job around the world was probably 1% of the workforce. Today it may be double that number.

“We use an approach which we call host-based”, says Ozburn. “We start from the premise that the executive has a pay package which looks like those of his or her peers. Then, considerations as to whether or not the employee has a family, children and so a need for schooling, etc. are introduced on top.”

“Within each market, we must remain competitive. So an assignment in, say, Singapore will be different from one in Frankfurt. We do a calculation at the outset, which addresses whether there is an advantage or disadvantage for the employee. We look at the difference between what an executive would have received in their home country and what they stand to get in the new one. The result is a system of equalization that allows for the combinations of pay found in the financial services industry: a mixture of salary, bonus and deferred equity.”

Deutsche Bank also uses a system called “local to local”. Under this, an employee would complete an assignment on local terms in one place and then move to another on similar terms.

Pensions pose a problem

Within the European Union, of course, individuals assigned from one country to another can remain under their home state’s system of social security, subject to certain conditions. This can be done for up to five years.

By comparison, says Ferrigno, pensions remain an issue. In part, he says, this is because each country’s legislation is different, but also because of a philosophical difference between private vs. state, and employer vs. private provision, in different places. Even so, the appetite for mobility among international executives will still pose difficulties for companies, not least because of the risk of getting it wrong.

Firms are in danger not just of leaving employees disgruntled and so losing them altogether, but also of making mistakes that can undermine their reputation at home as well as abroad. As Debner points out, out that there is a risk of an employee choosing to do it themselves, making a mistake and thereby failing to comply, and so causing trouble for their employer. The secret, it seems, is to be aware of such risks from the outset and to manage them as they arise.

Alternative solutions to managing a global workforce: going GEOpolitical

Does your company have more and more employees working in different parts of the world? Is the administration of masses of contracts, currencies and assignments causing a headache?

Then the answer may be to set up what is known as a global employment organization (or GEO). Besides the above reasons, many companies find other valid business cases for changing the employment structure of their mobile employees. Such entities have long been popular among multinational companies in the oil and gas and mining industry.

The idea is that a peripatetic executive is employed not by the company in their home country, nor by a subsidiary elsewhere, but centrally by a GEO. Not only does this reduce the number of country combinations and therefore complexity; it may also enable all expatriates, wherever they happen to be, to be treated equitably and compliant with local legislation.

The parent company may also find it easier to standardize the salaries, pensions and other benefits of those employed by the GEO. Indeed, many international firms look upon a GEO as a center of excellence that hosts and manages much of the company’s talent.

There are drawbacks, of course. One is the effort that goes into the setup of such a structure. Another is that the employees have to change their existing terms of employment. Employees of the GEO could also find they are ineligible for social security at home unless their employer has a subsidiary registered there. For many international employers, however, the advantages are sufficiently convincing.

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By Kim Thomas

The days when a team consisted of a group of people who arrived at the same office at 9:00 a.m. each day are long gone. Knowledge workers now often work from home, and may live in different parts of the country or even across several countries and time zones.

In her recent book, The Shift, London Business School Professor Lynda Gratton argues that virtual working will largely become the norm for most office workers in the coming decade. The shift brings obvious challenges for managers: in a team of people who rarely see each other, individual members can feel isolated, and may lack the opportunity to share ideas or engage in casual conversation that can spark a fruitful idea.

While research shows that people who work from home tend to be more productive than those working in an office, the opposite is the case for virtual teams, according to a recent study from The Society for Human Resource Management. As Richard Edwards, Principal Analyst at Ovum, points out, even in co-located teams, managers need to accommodate the fact that people have different styles of working. “It can exacerbate and challenge team-working more if you are separated,” he says.

Rethinking virtual management

INSEAD Professor José Santos has found that teams where each member has a clearly defined role and focus work better than ones where roles are loosely defined. The measurement of performance also needs to adapt – toward a system where team members are measured on outputs. “You have to focus on performance rather than on how people are behaving with you,” says Bill Shedden, Director of the Centre for Customized Executive Development at Cranfield School of Management.

Other things can help. Teams that have had a chance to meet before they start working virtually tend to be more effective. Without this, team meetings can be challenging, especially for a team that spans multiple cultures. Some may wish to speak but find it difficult to interrupt a conversation in mid-flow and so will opt to stay silent.

Sales of telepresence videoconference technology, which uses multiple screens and high-quality audio to simulate people sitting at the same table, have increased rapidly. In 2010, the market grew 18%, totaling US$2.2 billion, and analyst firm Frost & Sullivan expects it to more than double to US$4.7 billion by 2014.

Accenture is just one example of a multinational that is rolling out a significant number of telepresence systems globally; it already had over 50 in place by early 2010. In an internal poll, 97% of Accenture employees said that the technology was a good substitute for face-to-face meetings.

“To see people’s faces makes the discussion just more productive,” says Thomas Efkemann, an Executive Director for Assignment Services at Ernst & Young. “You see, for example, when someone doesn’t agree with your comments – how someone is shaking their head or trying to get into a call.”

Technology isn’t the only answer

But technology alone is not the answer; management practices have to adapt too. “One consideration is to reduce the number of meetings,” says Efkemann, “but to make sure that those you do hold have very clearly defined aims.” Shedden agrees, not least due to often challenging time zone considerations. “You’ve got to pay a lot of attention to the managing of the team in terms of who’s going to be there, what’s the purpose of the meeting, what are the outcomes we expect, because for some people it will be at an unsocial time.”

To grapple with this, some teams opt to rotate the times of meetings. Managers also need to ensure that everyone has a chance to speak, particularly when there isn’t a common first language. With meetings typically defaulting to English, some team members may need more thinking time, rather than being rushed into a response.
One way of helping this along is to give team members in different locations a turn at chairing meetings. Another common solution is to record a teleconference and make it available later for those who were unable to take part, allowing them to add written comments.

A further consideration relates to cultural differences. Team members in different countries will be used to different meeting styles. INSEAD Professor Erin Meyer says that Swedish teams, for example, make decisions through lengthy consensus building, while in Japan, decisions tend to be made in informal one-on-one discussions before larger meetings.

Going social

What happens between meetings can be even more important. While email and phone are tried-and-tested ways of staying in touch, they can suffer from being overly formal.

In recent years, however, a range of new enterprise social networking software tools, such as Yammer or IBM Connections, have emerged. These mimic consumer applications like Facebook and Twitter as a more effective way of holding informal discussions, sharing tips and ideas or getting a group conversation started. Edwards describes such tools as a “glue to provide the connectiveness that we have lost as we become more distributed in our working locations.”

These methods of working enable those who find it difficult to speak up in meetings to express themselves in their own time, thinking through their response. They can also be a valuable way of sharing personal and organizational insights, which a number of multinational companies are now adopting as part of a suite of collaboration tools. Gratton argues that such tools are even helping to deformalize organizational structures, replacing traditional hierarchies with a more meritocratic structure. Many are realizing the potential for such social-style tools to help cut email overload, freeing up workers to collaborate more effectively.

As part of this, Efkemann also suggests using what he calls a “virtual coffee corner” – a web space where team members can just chat, whether it’s about personal issues or work issues, without the pressure of an agenda. Others make use of instant messaging tools, which can be a useful replacement for either the phone or email for quick, informal communication. This is especially popular among younger employees who have grown up with the technology.

Even with all this, some of the basics of management remain the same:

• Focus on what the team has to achieve
• Keep lines of communication open between meetings
• Make sure issues are brought out in the open and dealt with swiftly

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By Fergal Byrne

In an increasingly competitive business environment, the role of the chief executive is more demanding than ever. As a result, the average length of CEO tenure is shrinking, while failure rates are climbing. All this makes effective succession planning crucial to a company’s long-term success.

For those that don’t, the risks are high: badly planned succession processes can become prone to internal politics, with firms risking the loss of their best talent, and, increasingly, bad publicity. Bank of America’s long and circuitous search for a chief executive is just one example of this, taking two-and-a-half-months to complete, amidst constant media and industry speculation.

This global phenomenon can be even more of a challenge in emerging markets that don’t have strength in depth at higher executive levels. Yet despite all this, the overwhelming majority of companies do not plan for succession. According to a December 2010 Korn/Ferry survey, only 35% of global companies have a succession plan in place and are ready to deal with a CEO’s departure.

In his book The CEO Within, Joseph L. Bower suggests a figure of about 40%. Olga Gorbanovskaya, Head of Human Capital at Ernst & Young Ukraine, believes that firms cannot underestimate the importance of good planning.

“Having the right people, in the right place, at the right time, particularly when it comes to the CEO, is a pre-requisite for long-term resilience and success,” she says. “This is especially true as current demographic trends suggest that a shortage of the appropriate talent is becoming a major issue for businesses.”

Companies with a well-planned, fair and objective succession process not only have better chances of securing the best leaders, but also find it easier to attract and retain key talent. A sideline benefit is less internal politics, with a tighter focus on achieving the organization’s goals.

Given such benefits, why has succession been poorly dealt with for so long? One reason is that the outgoing CEO often manages the process. And as Sacha Sadan, Director of Corporate Governance at Legal & General Investment Management (LGIM) notes, chief executives often don’t want to hand over power.

“Historically, I think CEOs overstaying their welcome has been a problem in the UK,” he says. “When CEOs stay on too long, they get tend to get stale, or overconfident, or too dominant. And the company ends up losing key people, as talented employees give up trying to be the CEO.”

Rakesh Khurana, Marvin Bower Professor of Leadership Development at Harvard Business School, and author of Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs, believes that the real legacy of a CEO should not only be measured by their own performance, but the performance of their successor. “In many ways, I think that’s ultimately the real judge of the quality of the CEO,” he says.

More succession attention

In the UK, Sadan has noticed a substantial improvement over the past decade in the professionalism of approach to succession, with a positive impact from better stewardship and corporate governance codes in particular.

“It is much more professional now than it used to be,” he says. “It’s not perfect, but I see much more evidence that CEOs are thinking about their support staff, thinking about who is going to get the job, and good CEOs are moving their lieutenants around the business to try and get them the skills that may be needed next.”

Gorbanovskaya also notes that succession is an increasing focus of many companies, not least to support talent retention. “Our research suggests that development and retention is the number one issue on the agenda of HR managers at the moment, especially bearing in mind the overall increase in personnel mobility, which we have noticed during 2010–11.”

There are a number of factors that are driving companies to take succession more seriously. Increased competition is one.

“It’s simply become harder for companies to succeed, in virtually every industry,” says Sadan. “It is imperative that companies recruit the best people. At the same time, they can’t afford to lose the best people.”

Another factor is greater engagement at board level, which Sadan believes is largely due to the UK’s 2003 Higgs Report on the role and effectiveness of non-executive directors. Similarly, more chairmen are taking the issue seriously.

“I think many of the new chairmen coming through now are much more proactive. They’ve all been CEOs in the past, or most of these new chairmen have been, and they understand this is crucial.”

The increasing involvement of stakeholders is a further factor: investors do not like uncertainty, and CEO succession is receiving unprecedented scrutiny. In 2009, the US SEC, for example, proposed more transparency and shareholder disclosure about succession risk.

While more companies are looking at succession more closely, many of those that do engage in succession planning are unhappy with the quality of their planning. Korn/Ferry’s research suggests that less than 1 in 10 UK business leaders, for example, rate their own company’s succession planning practices as ”excellent.”

So what elements constitute best practice here?

1. Start the succession process early
The first element is that succession planning can’t be started too early. “The succession process is never-ending,” says Gorbanovskaya.

“The best companies view this as an ongoing, real-time process. Companies should try and create a self-renewing succession culture that develops leaders at all levels.”

Khurana points out that succession is not a punctuated event. “Succession is a process that should be part of board-level discussions throughout the year.

Leadership development is not a decision to be made in weeks, but something to be made over years,” he says. “In really good companies, it’s something that boards get involved in years in advance of the tenure of the CEO.”

2. Focus on strategy, not personalities

Any well-planned succession should start with a thorough review of the business strategy, says Gorbanovskaya. Unfortunately, this rarely happens. Khurana’s research suggests that boards often start thinking about the people first:

“Too often it ends up being a contest of personalities,” he says. “Companies should first think about the company’s strategic direction, and only then think about the necessary skills and backgrounds of the leadership team, not only the CEO, that are going to be needed to meet those challenges.”

Furthermore, moving away from a focus on skills – assessing people against the strategy and the skills that you’re looking for – can unduly magnify the strengths of outsider candidates, while discounting weaknesses, argues Khurana.

This helps explain why many companies turn to external CEOs, which can be risky. A study by AT Kearney on S&P 500 companies in the US, between 1988 and 2007, identified 36 highperforming companies and argued that much of their success was due to “home grown” talent.

Gorbanovskaya notes that one of the main CEO succession challenges concerns the reluctance of current leaders to create a strong pool of candidates to replace them. To counter this, she recommends creating a blend of material and non-material incentives for current leaders to put succession planning on their agenda.

To ensure this is embedded, it can be formalized within a management scorecard and linked to a significant part of an executive’s bonus (in certain cases, up to 30% of the total).

3. Give HR a seat at the table

Somewhat surprisingly, HR is all too often excluded from the process, and merely treated as a support function. Khurana notes that the best companies respect the importance of HR and invest very deeply in their internal development process.

“If you look at successful companies HR is seen as key to the company’s success. They spend a lot of time and attention on developing people,” he says.

Companies that realize the importance of talent give HR a major role. “The head of HR is usually treated as equivalent to functions like chief financial officer. In these companies, HR is given a seat at the table in succession discussions and is integral to the process,” he says.

4. Define the role of external recruiters

External consultants and recruiters often play an important role in sourcing a new CEO. But some worry that companies expect too much from the executive search firms.

Khurana believes that the roles of the search committee and external recruiters need to be clearly distinguished. A good search committee needs people with a deep understanding of the context and the functional backgrounds and requirements for senior positions, and who are cognizant of their own biases.

For example, one bias to overcome is that of the stereotype CEO, to ensure a broader variety of candidates is attracted. “There’s a dangerous ’ideal form’ as to what a CEO should look like,” says Khurana.

“It’s typically a male who’s over six feet tall and of European descent. In the global world, those biases will kill you.”

One thing is certain. Given the changing balance of the global economy, the future stereotype of a CEO is sure to include an executive with considerable experience in rapid growth markets.

Being able to demonstrate an understanding of the diversity between different cultures and a global mindset will be essential for tomorrow’s CEOs.

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By David Balchover

Summary: Despite the obvious benefits to both employees and the firms they work for, a significant proportion of foreign placements end in failure. But various measures can help ensure a greater likelihood of success, from better initial planning through to better support for the expatriate’s family.

Anecdotal evidence strongly suggests that a significant proportion of expatriate placements end in failure, with workers returning earlier than planned to their home country, thus giving their company an organizational headache and creating further costs.

So what causes these placements to end in disappointment for both worker and employer? And, more practically, what can be done to help expatriates overcome these difficulties and thrive in their new role in a distant land?

Many expatriate postings might actually be doomed to failure before they have even begun, simply because the particular employee is poorly suited to living and working abroad. Nearly three-quarters (73%) of respondents (all of them current or recent expatriates, or those who had overall responsibility for assignments) to a 2010 Economist Intelligence Unit survey cited “cultural sensitivity” as the most important attribute in a successful expatriate.

If you don’t have the ability to perceive cultural differences, you are destined to struggle in both the workplace and your wider social life in a foreign environment.

“Managers who struggle are the ones who aren’t sufficiently flexible to adjust their management style; what has been successful in their home country for years suddenly doesn’t work anymore, and they find it difficult to adapt to the new situation,” says Thomas Efkemann, an Executive Director for Assignment Services at Ernst & Young. “You need to have different managerial approaches available, and then you select the best one according to the circumstances.”

Several management thinkers, most notably Geert Hofstede and Fons Trompenaars, have sought to measure cultural differences in the workplace, comparing attitudes across the world to various concepts such as teamwork, hierarchy and risk. Any expatriate who ignores the intricate subtleties of national culture will soon pay the penalty.

“I once went to a meeting with a fellow Westerner in Japan,” recalls Ellen Shipley, Head of Mobility and International Assignments at BT, a major telecommunications company. “He took a business card from our Japanese hosts, didn’t look at it, and flipped it on the table. You just can’t do that there. There are a lot of little rules you simply have to pick up on, wherever you go.”

Getting the right person

Because many workers are just unsuited to conditions abroad, careful selection of the expatriate is vital. To avoid potential conflict and the resulting failure of the placement, companies routinely test for cultural sensitivity in prospective expatriates.

But all too often, company headquarters will play down the importance of the test’s findings, and go ahead in selecting candidates purely on their performance on home territory. “I have seen people who were superstars in their own country,” recalls Efkemann. “And based on this record, their management assumes they will perform just as well in a different country. But then they fall flat on their faces because their approach didn’t fit the local market at all.”

Cultural training, prior to departure, can teach some of the essential dos and don’ts and help reduce the risk of major clashes. Large companies also routinely offer language training to ease the transition. Although no one will become fluent in a language after a short course, a basic grounding can demonstrate respect for the local culture, and a willingness to learn more about it.

Indeed, language ability, or at least the desire to learn, doubtless correlates strongly with the cultural sensitivity that is so essential to expatriate success. After all, it must be difficult to be sensitive to a culture when you have very little idea what is being said around you.

The Economist Intelligence Unit survey seems to confirm this link. Former expatriates were much more likely to crave another posting if they found dealing with a foreign language to be “highly attractive.”

Despite the apparent benefits of cultural and language training, the current economic climate is prompting some companies to cut back on it.

“There is a real lack of understanding within the corporate world about what it actually means to pack up and move to another country,” says Shipley. “Consequently, when times are hard, heads of departments can see the investments that have traditionally been made to help an expatriate settle as dispensable items.”

The importance of family integration

The adjustment for the expatriate may be difficult enough, but many believe that assignments more often than not fail because the worker’s partner and children don’t acclimatize well to their new surroundings.

“Family issues are the biggest obstacle to expatriate success,” says Yvonne McNulty, an academic specializing in global mobility at Monash University in Australia. “If the organization is focusing only on the expat and not on the family, problems can quickly surface.”

When you look at the available evidence, it’s not hard to understand why. According to an extensive 2008 survey by the Permits Foundation, interviewing more than 3,000 expatriate spouses and partners of 122 nationalities, 89% of spouses were working prior to the assignment, but only 35% during the assignment itself.

Three-quarters of those not working said they wanted to work, inevitably leading to frustration, disillusionment and boredom. Eight in 10 working spouses reported a positive adjustment to their adopted country, compared with only 32% of non-working spouses.

“The location may have changed, but the expat worker’s routine of getting up and going to work hasn’t,” says Shipley. “But the partner doesn’t know a soul – he or she’s not working and, unlike the expat, has no ready-made networks to tap into. Three or four months down the line, you’re both fed up, and we’re talking about bringing you home.”

Many companies, including BT, try to help partners (also known as, “the trailing spouse”), by offering them a few thousand pounds to be used for anything that might help them to integrate, be it a vocational training course, language classes or club membership.

However, McNulty says that the amount of corporate attention devoted to helping the spouse and other family members is simply insufficient, given the impact of their potential unhappiness on the success of the overall assignment. “HR departments have a hugely difficult time getting sufficient funding for something that doesn’t have a clearly measurable return on investment,” she says.

“Family support has rarely been seen as an essential part of expatriate management. Maybe companies shy away from it because the issue is too challenging, or perhaps they are wary of crossing a line and interfering in their employees’ personal lives.”

Further statistics from the Permits Foundation appear to verify these views. About three quarters (76%) of expat partners, for example, would have welcomed some guidance or advice on their job search, but only 11% believed they received adequate support in this regard.

Taking matters into their own hands, expatriates and their partners have established informal networks throughout the world, including clubs to meet each other face-to-face and websites for sharing ideas, anxieties and local recommendations.

Most partners’ websites and blogs are set up by women (according to a 2010 survey by Brookfield Global Relocation Services, 83% of expatriates are men), but there are signs that support groups for male partners are emerging, such as the Brussels-based STUDS (Spouses Trailing Under Duress Successfully).

Careful consideration

Thomas Efkemann of Ernst & Young recommends that expatriates should discuss the potential international assignment in depth with their partner and family prior to accepting the offer.

“Company managers should allow them the time to consider all the implications,” he says. “Sometimes, after the initial wave of enthusiasm for this exciting opportunity to work abroad, problems begin to arise. Where will they live? What about schooling and health care? Is the partner able to work abroad as well? By the time worker and partner both realize they don’t really want to go, they may have already made a commitment.”

A “look-and-see” trip to the relevant destination, often paid for by the company, can give the family the knowledge they need to make an informed decision, prior to formal acceptance. If they then do decide to take the plunge, a good destination service provider who can assist with the practicalities of the move is also invaluable.

“Having someone there to help you find the right property to live in, sort out your bank account, get you a driving license or show you the local grocery store, can greatly ease the stress involved in the transition to a new country,” says Shipley.

“Cutting back on this service is a false economy for companies. They need their expatriates to hit the ground running, not spend their days worrying about how to pay an electricity bill.”

For any potential expatriate family, an open and curious mind, and the motivation to make the assignment work, along with the initial assistance an employer might provide, will make for a good start to what can be a fulfilling and successful venture.

But those who are inflexible by nature, or are accompanied by a family member dragged to the foreign destination against their will, are unlikely to get successfully through the long days, weeks and years that lie ahead, even with the most expert tax advice or instructive cultural training course in the world.

Read all web articles from T Magazine issue 07

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By Paul Kielstra

Summary: The traditional expatriate model is changing as companies get to grips with a changing global economy. Executives are not just flowing from West to East, but in all directions. Overseas postings can be a powerful tool to share expertise and build leadership talent, but there are many practical difficulties that can impede their success.

Viewed through a narrow lens, the traditional corporate expat seems alive and well. Cost cutting during the recent downturn dented the enthusiasm of companies for sending people abroad, but now firms are stepping up the number of such assignments.

Ernst & Young’s recent Global Mobility Effectiveness Survey found that, although the number of companies with at least 1% of employees on a short-term international assignment declined precipitously from 48% in 2008 to just 20% in 2010, it bounced back up to 33% during 2011.

Longer-term assignments, which are harder to cut rapidly, never went out of fashion: the proportion of businesses with more than 1% of employees on long-term postings rose steadily from 27% in 2008 to 46% in 2011.

In line with the rebalancing of the global economy toward high-growth emerging markets, these are the primary destinations for expatriate postings. About six in 10 (61%) of companies polled have seen an increase in the number of international transfers to emerging growth markets in the last three years.

Nearly seven in ten (68%) expect to see a further rise in the next three years. Other studies back this up. A 2010 Economist Intelligence Unit (EIU) survey indicated that by far the most international transfers still originate from Western Europe and North America, with China and the rest ofAsia the most common destinations.

The key drivers for such assignments are strategic and managerial needs. In the EIU’s words, “The traditional expat model is alive and well”.

New patterns of postings

But all this misses some significant changes. The most obvious is the evolving traffic patterns of executives. Philippe Waty, Group Head of Compensation and Benefits at Novartis, the Swiss-based global pharmaceutical company, has seen a “rapid change with respect to executives moving out of developing countries, with many people from India and China coming to developed countries over the last few years.”

Others agree. Susan Steele, Global Chief Human Resources Officer at Millward Brown, a global brand insight consultancy, explains that, “In the past, it was one-way traffic from the United States and Europe to the rest of the world. Now, in sending people to Africa, we are taking folks from India and vice versa. It is becoming much more blended and less one-way. Going on assignment will be the norm for this current generation, so they will become more global.”

Ernst & Young’s research backs this up: companies expect to increase the number of international transfers originating from China by 80% between 2010 and 2014, and those from Russia and Africa by 67%. India will see less growth (13%), but from a far higher baseline, given it has an average of three times as many outbound assignees as incoming ones.

This highly visible change reflects an even more fundamental one: if the expat executive model seems still to be thriving, it is because its very purpose has adapted to a more globalized business environment.

“The idea of people being sent out from head office to colonize the world ended more than 10 years ago,” says Peter Ferrigno, the EMEIA Area Leader for Human Capital at Ernst & Young.

This reflects the way in which many companies have moved away from a model in which a central head office, frequently with distinct characteristics shaped by the business’s country of origin, controlled what were essentially branch operations abroad. Instead, leading firms today are seeking to create more integrated, global operations.

Inevitably, this has affected the role of the global executive. At a broad level, executives going abroad no longer resemble high-ranking foreign dignitaries from the corporate center, but are increasingly arriving to work as equals with others. In line with this, the primary objectives in sending them have grown more complex. The main ones now include:

Filling vacancies/project support

This objective has always been an important driver of international transfers and remains the most common reason for sending employees across borders. Globalization and modern technology, however, allow a greater use of international talent in this way and new forms of assignment for global executives.

Indeed, Waty notes an increasingly common phenomenon, especially within Europe, of business travelers who spend weekdays in one country and return to their homes in another country for the weekend. Others companies are embracing “virtual” international assignments, notes Steele, with executives working as part of teams in another country while remaining in their own home countries.

“It is not ideal but, with technology, it is increasingly feasible and increasingly being done,” she says. This also avoids many of the practical difficulties and costs of sending people to another country.

Knowledge transfer

The benefits of bringing knowledge from one part of the company to another have also always been a driver in the use of international executives, but the direction of flow is no longer one-way. For example, Indian and Chinese executives often have more experience with the intricacies of outsourcing, says Waty. They can bring such expertise along on placements in Europe or North America.

Greg Schupp, Partner for Human Capital at Ernst & Young in the United States, sees this cross-fertilization as an important benefit of modern expatriate postings. “The more diverse and inclusive your teams can be, the more global and thought-provoking they become. The solutions they propose tend to be better for the organization.”

Developing executives

International transfers have also always been used for executive development, and as a benefit to retain talent. But in global companies, the scope of these opportunities has changed. These sorts of assignments – especially short-term ones – are happening earlier in careers, notes Steele.

Her own company has found that, in emerging markets, taking new local hires and giving them international exposure is a fast and efficient way of growing talent. Ernst & Young’s Global Mobility Effectiveness Survey indicates that this practice is common in emerging markets with, for example, junior executives making up half of outbound assignees from India – in part to make up for the lack of experienced senior executives to provide mentorship.

“If you find decent people in a small country, sometimes they outgrow the local market,” says Ferrigno. “You need to take people like that into the global talent pool.”

Creating the company’s future leaders

International exposure is becoming ever more important for businesses seeking to train leadership prospects. The reason is simple. “If only 5% of your business is in the home country, and you’ve only worked there, how qualified are you to sit on the board?” asks Ferrigno.

Novartis has institutionalized this in its leadership development processes. Once a year, its executive committee looks at people who have the potential to become future leaders of the company and then considers how international postings should figure in their development.

“We are 150 countries,” explains Waty. “A successful global executive is someone who can hit the ground running, can pick up the nuances of the new location quickly, can spot the issues quickly and begin delivering on the issues in a very short space of time. They should also be able to bring an insight into how other markets operate and other ways of doing things.”

Getting the most out of international assignments

If these goals are met, sending executives across borders can create substantial value for companies, but at a cost. Although dependent on the location and position, Schupp estimates that the total expense may be as high as three to five times that of the base salary of an executive who stays at home. “The cost is such that you have to make sure there will be a benefit,” adds Steele.

One difficulty facing companies, however, is that the goals outlined above are not complementary, and can even be contradictory. To give one example, a person sent primarily to learn about a foreign market may encounter a completely different set of tasks and responsibilities from one sent to plug knowledge gaps.

To get the full benefit of such assignments, says Ms Steele, companies have to aim for global executives to do both teaching and learning. However, as she says, most businesses do neither.

“Doing neither has a cost. Doing both is not difficult but it does require planning.” Comprehensive planning, though, is too often absent when executives are sent abroad because very few companies approach such activity holistically.

Instead, foreign placements are frequently driven by an ad hoc desire of an individual business unit. Ernst & Young research shows, for example, that human resources departments play little role in helping to decide who would benefit most from going abroad – for nearly 6 in 10 companies, global mobility professionals are not involved at all in candidate selection.

“People aren’t always looking strategically. Instead they are looking tactically and short term,” says Ferrigno. “There is a massive difference between companies who treat transfers as a way to invest in people and those who see them as a way to fill positions.”

The first step, then, toward getting the most benefit out of international placements is for companies to recognize the multiple objectives involved and to try and align the varying interests of distinct parts of the organization around meeting as many of them as possible.

But the million-dollar question, says Schupp, is working out how to bring this together. This is especially true amid the tension between business units and HR in trying to align strategies.

“You get pressure from business units to quickly fill the open positions. To maximize the value of an assignment, the best thing to do is to get the two groups to sit at the table together to begin to understand each other and collaborate on how to meet the multiple objectives they each have,” says Schupp. “It sounds simple, but many organizations have a difficult time doing that.”

One way that some companies have found to improve cooperation is to fund international postings jointly, especially of junior executives. In this model, the budget is split between the receiving business unit and corporate level training funds, as both parties have an interest in the assignment.

Such alignment allows a coherent approach to another crucial element of success: defining how each assignment will benefit the business and what is expected of the executive. Millward Brown’s Steele notes, “Every transfer is looked at individually and as part of a broader strategic plan.”

Not only are executives properly prepared, but corporate expectations are made explicit. Being very clear about why you are sending people on assignment is hugely important, agrees Ferrigno. “You see people go with the wrong expectation to markets, thinking they are there to show and tell when they should be there to listen and learn,” he says.

Indeed, appropriate metrics are a central part of defining the assignment properly. Global executives should not be evaluated against traditional business measures such as revenue goals, but they should also be measured on how well they are adapting to their assignment.

“From there you can quantify the return,” says Schupp. A clearly defined assignment also helps significantly in finding the right person for the job.

The ideal attributes of potential international executives is one of the most studied aspects of global transfers. But barring some obviously useful aspects – cultural sensitivity, ability to interact with others, and a desire to succeed – no definitive list exists.

Inevitably, choosing a candidate is a balancing act between the talent available, the ability of candidates to thrive in a foreign environment, and the skills needed to do the particular job at hand. “There is no perfect test. Each case has to be looked at individually,” says Steele.

Practical issues

Once the job is defined, and the correct person found, international assignments throw up a wide range of challenges for the sending company. Many of these have long been present – from the basic need for appropriate visa and working permits, to the more complex need to align assignment strategies with overall business goals – but several are worth noting here given how they are changing.

All of these issues are discussed in greater detail in other articles throughout Issue 07 of T Magazine. Nevertheless, as the list highlights, there are many practical complexities of using global executives.

The social network

Any transferring executive has a network of social connections at home that will be disturbed as a result. This is especially true of close family.

“It is also increasingly difficult to move some employees on assignment when their spouses work,” says Waty. “We do provide spousal support to find work in the new location and support to complete further education. Very often we can ‘sell’ the assignment on the basis that it is a great experience for the whole family in terms of personal development.”

A separate issue is that an increasing number of people may be together but not married, raising challenges over immigration rights. Addressing family issues is more than just a practical matter: it may define how well international executives fulfill their assignments.

“Very often, if an executive has been successful, it is thanks to a spouse and family who have a global mindset,” says Waty. “Companies are not doing enough to assess how well the family can adapt.”

Compensation arrangements

As the goals of international placements evolve, payment arrangements need to keep pace. “If you send people around as part of their development, you are going to need to look at how these costs get people to take on the right challenges without overly enriching them,” notes Ferrigno.

It might be valuable, therefore, to tie compensation to metrics designed around those challenges. Another current trend is for companies to use “localization” packages, with executives receiving a lump sum up front to cover moving costs, but then being compensated in the same way as their new local peers, including in terms of eligibility for bonuses.

Not only does this control costs, but it leads to executives being taken more seriously by their colleagues because they now have an obvious stake in local success.

Dealing with tax

International employment has always brought income tax complications, but the current economic climate can make this even tougher. “Many countries are looking for additional sources of revenue, so revenue agencies are turning over rocks to make sure organizations are compliant on income or payroll tax,” notes Schupp.

Over half of companies polled by Ernst & Young describe tax compliance as very challenging. Although the most pressing specific issues vary by jurisdiction, some tax issues have a growing profile internationally.

For example, the payment of stock options to executives. Depending on where the executive is resident for tax purposes when these are earned and exercised, a variety of countries – which may or may not have relevant double taxation treaties – might wish to tax the proceeds. There is also the important need to adhere to social security obligations in all relevant jurisdictions.

Bringing them back again

“Assigning a person abroad creates a retention issue. It is not always easy to bring back a former assignee,” says Waty. Indeed, Ernst & Young research indicates that just over 1 in 10 executives resign within two years of returning from foreign assignments.

Given the significant investment made into the development of these executives, this can be a costly loss for any company. The broader picture is that the expat has, in recent years, evolved into the global executive.

Within this, the key factors of who is being sent, why they are going, and where they are headed to, are all changing as companies have transformed themselves from centrally run multinationals to globally diverse enterprises.

In order to manage this new species, however, businesses have to keep up. In particular, different functions in the company need to work together in a way that too few are currently doing.

Read all web articles from T Magazine issue 07

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Has your non-EU business incurred VAT in Europe in 2011? If so, you may be able to recover the cost by applying to the relevant EU country(ies) for a refund — provided you comply with the rules.

In general, claims by non-EU businesses must be submitted within six months after the end of the calendar year. The deadline for applications for 2011 for most EU countries is June 2012.

Most multinational enterprises (MNEs) incur VAT in countries where they are not established. A business may, for example, incur foreign VAT on trade fairs and conferences, meals and accommodation, travel, transportation and fuel costs, business entertainment, marketing and advertising costs, professional services, telecommunications, printing materials and stationery and training.

Even for large business expenses, recovering foreign VAT may be an issue. Although there are mechanisms for VAT recovery, it may be difficult for foreign businesses to fulfill the requirements in practice.

According to an Organization for Economic Cooperation and Development (OECD) survey from 2010,1 over 80% of businesses incur more than US$10,000 of VAT on foreign business expenditure every year. Yet, half of such businesses recover 50% or less of this foreign VAT — even when they are entitled to recover it all.

Not every country allows non-residents to recover VAT or to recover VAT on all items of expenditure. In addition, tax authorities apply strict criteria before they will authorize a repayment.

Barriers to recovering foreign VAT include a lack of understanding of the VAT rules in different jurisdictions, difficult administrative procedures, language barriers, insufficient or incorrect documentation to support the application and missing important deadlines.

So, planning ahead, understanding the detailed rules and applying them thoroughly can improve your organization’s chances of success in reclaiming European VAT on your business expenses.

EU 13th VAT Directive — who can use it?

The EU 13th VAT Directive grants the right for a business established outside the EU to recover VAT incurred in one of the 27 Member States. Similar refund rules also apply for expenditure incurred in Norway and Switzerland.

You can use the 13th Directive to reclaim VAT paid in the EU if you are registered for business purposes in a non-EU country, provided that all of the following hold:

• You are not registered, liable or eligible to be registered for VAT in the EU.
• You have no place of business in the EU.
• You do not make any supplies in the EU (other than transport services related to the international carriage of goods, or services where VAT is payable by the person in the EU to whom the supply is made).

In addition, the expenses must be incurred by a business person or entity that would be considered to be engaged in a VATable activity if its activity were carried out in the EU. For example, financial services are generally VATexempt in the EU; therefore, a bank established, for example, in India may not be entitled to file a VAT refund application, as it may not be considered a VATable person under EU VAT legislation.

However, this is not always a simple issue to decide, as it depends very much on the actual activities that the claimant undertakes.

Eligible expenses

Only VAT paid on business-related expenses can be reclaimed. Therefore, any private expenditure is not allowable under this refund procedure. In addition, some business expenditure may not be eligible for a VAT refund.

Each EU Member State has specific rules concerning which expenses can be subject to a claim in that country, and the rules can vary considerably from country to country. Some Member States, for example, do not allow recovery on hotel accommodation or fuel costs.

In general, to be eligible for reclaim, the goods/ services you include must be expenses that would be deductible if your business was carried on locally. For example, if local businesses are not entitled to take a VAT deduction for business entertainment, your non-EU business cannot lodge a VAT refund application for business entertainment incurred in that country.

Non-EU reciprocity

Some EU Member States also require that your country allows similar refunds to EU traders in respect of any turnover taxes levied in your country. This is called the “reciprocity” principle.

So, if your country does not levy a VAT or if it does not refund a local VAT to non-residents, you may not be able to claim VAT incurred in some EU countries. But it is worth remembering that not all EU Member States apply this rule in the same way.

EU 13th Directive claim forms

EU VAT can be claimed quarterly or annually. The EU VAT refund process for non-EU businesses is still largely a paper-based system.

A separate claim must be lodged with each country where you want to reclaim VAT. Although the claim form can generally be printed off from the relevant tax authority’s website, it must then be filled in and filed together with the original paper invoices.

Difficulties can arise if the form needs to be completed in the local language. Assistance from the country of claim may sometimes be necessary to comply with this requirement.

Deadlines

The deadline for annual claims is generally 30 June of the year following the calendar year when the expenses were incurred. This means that for 2011 (invoices dated 1 January to 31 December 2011) the deadline for submission is 30 June 2012.

There are, however, certain exceptions to the period covered by claims and the deadline. In the UK, VAT refund claims for non-EU businesses are based on a “prescribed year” running from 1 July to 30 June.

The deadline for submission of annual claims in the UK is six months after the end of the prescribed year, i.e., 31 December. The deadline set by the EU Member States is a firm date and late claims are not accepted.

This is an area where foreign businesses often struggle to meet the requirements. Although six months after the year-end seems a generous time limit, it can prove difficult to meet without forward planning.

Claimants should have all the necessary paperwork, including certificates of taxable status and supporting documentation, ready well in advance to make sure the claim is submitted within the time limit.

Minimum claim amount

All countries have a minimum threshold for the amount of VAT that can be reclaimed. The threshold applies to the claim as a whole, not to every single expense.

For example, in Germany the minimum value for a quarterly claim is €500 and the minimum value for annual claims (or the remaining period of the year) is €250. If the VAT incurred for a quarter is less than the minimum claim amount, the VAT can be included in the next claim (subject to the existing time hand value limits).

Tax representatives and signatures

Some countries require the appointment of a locally accredited tax representative before a claim for refund can be filed. In addition, countries have strict requirements on who has the right to sign the application form (e.g., president of the board of directors).

Again, it is advisable to check these requirements well in advance and certainly before filing the claim. It can take time to appoint a representative, for example, especially if the mandate needs to be translated and notarized.

Documentation is key to successful claims

You can increase your chances of making a successful claim by planning ahead and by complying meticulously with the detailed rules in each country with respect to the invoices you submit.

Original invoices

The first requirement is that the claim must be supported by an original VAT invoice for each expense. Generally, PDF copies or other copies are not acceptable. If you wish to reclaim VAT, the first step is to ensure that you receive an original invoice from your suppliers.
VAT invoice requirements

The VAT invoice requirements differ between EU Member States. However, in general, a valid VAT invoice should include all of the following information:

• Date of issue
• Invoice number
• Full name, address and VAT registration number of the supplier
• Quantity and nature of goods or services received
• Unit price or the consideration for the service supplied
• The date of the supply
• VAT rate applied
• VAT amount payable

The invoice requirements are subject to change from time to time, so it is advisable to check that the invoice received complies with the latest requirements. As many foreign VAT claims relate to expenses incurred on business trips, it is vital that all employees understand the documentation required to support EU claims.

Electronic invoices

Most EU Member States permit electronic invoices. But not every electronic invoice is considered to be valid for VAT purposes.

Most countries require that an electronic invoice contains an advanced electronic signature. In the past, some companies have lost considerable VAT reclaim opportunities because the electronic invoices they submitted did not comply with the rules of the Member State where they wanted to reclaim the VAT.

If you wish to include electronic invoices for your refund claim, you should check whether that is permitted by the country where you are seeking a refund and make sure your supplier’s invoices comply with the rules in that country — as they differ between member states.

What to do now

If your business incurred VAT on business expenditure in the EU, Switzerland or Norway in 2011, you should begin identifying this VAT, the supporting invoices and other documentation you will need to make a claim. This process is likely to be time-consuming.

For most countries, the strict filing deadline is 30 June 2012 for 2011 applications — so there is no time to lose! In gathering the necessary information and documentation, you may want to consider the following approach:

• Ensure your business does not have an EU establishment and that the other requirements for a refund are met
• Identify the VAT costs
• Analyze the VAT costs incurred in each country
• Gather supporting valid VAT invoices and ensure that the invoice requirements in relation to each invoice are met
• Determine if it was correct for the supplier to charge VAT
• Determine if the VAT suffered is refundable in the country concerned
• Obtain a certificate of taxable status (tax certificate) from the tax authorities where your business is resident
• Appoint a tax representative where necessary
• File the application for a VAT refund before the deadline

This article was first published in the Ernst & Young Indirect Tax Briefing which can be accessed using the link below:

• Indirect Tax Briefing, Issue 4, January 2012 (pdf, 6.33 MB) 

The Proposal, which includes draft statutory language and a detailed technical explanation, would reduce the maximum corporate tax rate to 25% and would move the United States to a largely territorial tax regime. The announcement indicated the Proposal would be combined into a comprehensive tax reform package with other individual and corporate tax changes.

Introduction

Chairman Camp released the Proposal as part of the Ways and Means Committee’s effort on comprehensive tax reform. The announcement states that the broader package will include reforms of the individual tax regime that will lower individual tax rates, broaden the individual tax base, and simplify tax compliance.

The Proposal’s reduction of the maximum corporate tax rate to 25% is to be offset by base-broadening changes that are being developed by the Committee. The announcement further indicates that the Committee released the discussion draft because the proposed territorial tax regime represents a fundamental change in the way the United States taxes crossborder activity and because input from stakeholders on such change is important.

The announcement also indicates that it is intended that international tax changes in the context of comprehensive tax reform will be revenue-neutral, so that international changes will not fund, and will not be funded by, tax policy changes in other areas.

Reduction in overall corporate tax rate

Under the Proposal, the top bracket of the corporate tax rate would be reduced to 25%. This is proposed to be effective for years beginning after 31 December 2012.

Dividends received deduction for dividends from CFCs

The Proposal would provide a dividends received deduction (DRD) of 95% for the foreign-source portion of dividends received from a CFC by a domestic corporation that is a US shareholder (within the meaning of Section 951(b)) of such CFC (95% DRD). The 95% DRD would apply only to the foreign-source portion of the dividend.

As with certain European countries that provide a similar 95% exemption, the taxation of the 5% residual dividend amount is intended as a substitute for a disallowance of expenses incurred to generate the exempt income. The Proposal includes the 95% exemption rate in brackets, indicating that further consideration may be given to the appropriate exemption percentage.

The foreign-source portion of a dividend qualifying for the 95% DRD would be determined based on the ratio of the CFC’s undistributed foreign earnings to total undistributed earnings. Undistributed earnings are the earnings and profits of the foreign corporation computed under Sections 964(a) and 986, but including earnings previously included by the US shareholder under subpart F.

This provision is intended to coordinate with the existing Section 245, under which a deduction is allowed for the US-source portion of a dividend from a foreign corporation. The 95% DRD would be available only if the US shareholder satisfies a one-year holding period requirement with respect to the CFC.

Specifically, the 95% DRD would be available only if the domestic corporation holds the CFC stock for more than 365 days during the 731-day period that begins on the date that is 365 days before the ex-dividend date, provided that the foreign corporation is a CFC and the domestic corporation a US shareholder of the CFC at all times during such period.

Additionally, the domestic corporation may not be under an obligation to make related payments with respect to positions in substantially similar or related property. The 95% DRD also would be available for dividends paid from one CFC to another CFC if the dividend qualifies for the 95% DRD, if paid directly to the US shareholder.

In this context, the 95% DRD would be taken into account in determining the subpart F income of the recipient CFC by reason of the dividend. The Proposal would disallow the foreign tax credit (FTC) under Section 901 for any taxes paid or accrued (or treated as paid or accrued) with respect to any dividend for which the 95% DRD would be allowed.

Additionally, no deduction would be allowed for any taxes that were disallowed as Section 901 FTCs because of the application of the 95% DRD. As discussed below, the 95% DRD would apply to foreign branches of a domestic corporation, which would be treated as CFCs, and to so-called 10/50 companies for which an election to be treated as a CFC is made.

Regulatory authority also would allow the Treasury to apply similar rules to a domestic corporation’s interest in a partnership or other pass-through entity that has a trade or business in a foreign country, but only where the domestic corporation would be a US shareholder if such interest were stock in a corporation.

This provision is proposed to be effective for taxable years of foreign corporations beginning after 31 December 2012, and taxable years of US shareholders in which or with which those taxable years of foreign corporations end. Foreign branches of domestic corporations treated as CFCs and eligible for 95% DRD Under the Proposal, a foreign branch of a domestic corporation would be treated as a CFC and the domestic corporation would be treated as a US shareholder.

Thus, as noted in the technical explanation to the Proposal: (1) foreign branches would become subject to subpart F; (2) all rules applicable to intercompany transactions (such as Sections 482 and 367) would apply to transactions between the foreign branch and its domestic corporation; and (3) no credit or deduction generally would be allowed for foreign taxes paid by the foreign branch (other than under Section 960 for a subpart F income inclusion with respect to the foreign branch).

The technical explanation indicates that the rules and principles applicable in determining whether a foreign corporation is engaged in a US trade or business would apply to determine whether a foreign branch exists. This provision is proposed to be effective for taxable years of foreign corporations beginning after 31 December 2012, and taxable years of US shareholders ending in 2012.

Election to treat 10/50 companies as CFCs eligible for 95% DRD

Under the Proposal, a domestic corporation could elect to treat all of its 10/50 companies as CFCs. As a result of the election, the domestic corporation would be treated as a US shareholder with respect to each 10/50 company. The election would be made by the domestic corporation and would cover all 10/50 companies of the domestic corporation.

The election would apply on a controlled group basis (as determined under Section 1563(a) but by substituting “more than 50%” for “at least 80%”), such that if one group member makes the election, all other group members would be considered to have made the election with respect to their 10/50h companies.

The proposal provides that an election would be required to be made by the due date for the tax return for the first taxable year for which the domestic corporation is a US shareholder of one or more 10/50 companies, and could be revoked only with consent of the Treasury Secretary.

The election would apply to 10/50 companies acquired after the election is made and to 10/50 companies that became 10/50 companies after the election is made. As in the case of foreign branches, treatment of a 10/50 company as a CFC with respect to the electing US shareholder would apply for all purposes of the Code.

Thus, as noted in the technical explanation, this treatment of 10/50 companies would mean that: (1) dividends from the 10/50 company would be eligible for the 95% DRD; (2) subpart F would apply to the US shareholder of the 10/50 company; and (3) FTCs would be allowed only with respect to income includible under subpart F.

It is also important to note that under the proposal, if the election is not made, neither a 95% DRD nor Section 902 FTCs would be allowed with respect to a dividend from the 10/50 company. This provision is proposed to be effective for taxable years of foreign corporations beginning after 31 December 2012, and taxable years of US shareholders ending in 2012.

95% exemption for gain from sale or exchange of qualified foreign corporation stock

The Proposal would exempt from gross income 95% of any gain recognized from the sale or exchange by a US shareholder of stock in a qualified foreign corporation, but only if the US shareholder has held such stock for at least one year.

Any losses realized from such a sale or exchange would be disallowed. For this purpose, a qualified foreign corporation would mean a CFC (including a foreign branch or 10/50 company treated as a CFC for purposes of the 95% DRD) provided that at least 70% of the CFC’s assets are active assets.

An active asset for this purpose is any asset that does not produce foreign personal holding company income as defined under Section 954(c). The determination of active assets would be measured both:

1. At the time of the sale or exchange of the stock
2. At the close of each quarter of the corporation’s prior three taxable years.

If the corporation was not in existence for the entire three-year period, the character of the assets would be tested at the close of each quarter for which the corporation was in existence. In making the determination required for purposes of the 95% exemption, any predecessor of the CFC also would be taken into account.

Section 1248 would not apply to the extent that the 95% exemption applies to a sale or exchange of CFC stock. The provision is proposed to be effective for sales and exchanges occurring after 31 December 2012, but would not apply to any sale or exchange occurring before the CFC’s first taxable year beginning after 31 December 2012.

Modifications to the current subpart F regime

The Proposal would modify but generally retain the current subpart F regime, which would be extended to foreign branches and 10/50 companies treated as CFCs for purposes of the 95% DRD. The technical explanation indicates that US shareholders of a CFC would remain subject to current US tax on “certain items of passive or highly mobile income” earned by the CFC.

The technical explanation states that subpart F would be retained to ensure that the 95% exemption applies only to income from the conduct of an active foreign business. The Proposal would modify the current subpart F regime as follows:

• Section 956 would be repealed because, as explained in the technical explanation, all the foreign earnings of a CFC generally would be eligible for the 95% DRD.
• Sections 959 and 961 would be repealed, which would mean that 5% of any earnings of a CFC that are currently taxed to a US shareholder under subpart F would again be subject to US tax when actually distributed. Thus, at a maximum corporate tax rate of 25%, a distribution of subpart F income would be subject to additional US tax of 1.25%.

These provisions would be effective for taxable years beginning after 31 December 2012.

Modifications to the current law foreign tax credit regime

Under the Proposal, the 95% DRD would be the primary mechanism for relieving double taxation of foreign earnings. However, the FTC mechanism would continue to apply to subpart F income inclusions and other foreign income not eligible for the 95% DRD.

In this context, the Proposal would make significant modifications to the current law FTC regime. The Proposal would repeal Section 902 (which treats a domestic corporation as paying foreign taxes paid by a foreign corporation in which it holds a qualifying interest) and Section 78 (which requires a dividend “gross-up” for deemed paid credits under Section 902).

The repeal of Section 902 would be significant with respect to 10/50 companies. A US shareholder that does not elect to treat its 10/50 companies as CFCs for purposes of the 95% DRD would be subject to full US taxation on dividends received from such companies without any credit for foreign taxes paid by the 10/50 company with respect to the distributed earnings.

Notwithstanding the 95% DRD, under the Proposal, a US shareholder of a CFC would continue to be taxed currently on any subpart F income of the CFC and would continue to be eligible for deemedpaid FTCs under Section 960.

However, any foreign earnings previously taxed under subpart F would be treated as foreign undistributed earnings of the CFC for purposes of determining the foreignsource portion of any dividend eligible for the 95% DRD.

The same treatment would apply to any 10/50 company treated as a CFC for this purpose. The Proposal would amend Section 960 to reflect the proposed changes to subpart F (including the repeal of Section 956, as discussed previously).

This means that the “anti-hopscotch rule” of Section 960(c) would be repealed as part of the overall repeal of Section 956. The Proposal would repeal the Section 909, “FTC splitter rules,” but does not address the Section 901(m) rules on covered asset transactions.

Finally, the Proposal would substantially modify the FTC limitation rules of Section 904 by repealing the separate FTC baskets of Section 904(d).

The Proposal also would limit the allocation of expenses in determining foreign-source taxable income to only expenses that are directly allocable to such foreign-source income.

The technical explanation clarifies that directly allocable deductions would be deductions directly incurred as a result of the activities that produce the related foreign source income, which would not include stewardship, general and administrative, and interest expense.

In general, these changes are proposed to apply to taxable years beginning on or after 31 December 2012, including to foreign taxes carried to such taxable years from any taxable year beginning before 1 January 2013. The Proposal includes regulatory authority to address the carryback of foreign taxes to taxable years beginning on or after 1 January 2013.

Disallowance of interest expense deductions — “thin capitalization” rule

The Proposal would add a new subsection to Section 163 that may deny a deduction for interest expense of a US shareholder that is a member of a worldwide affiliated group that includes at least one CFC. For this purpose, a worldwide affiliated group would generally be determined under Section 1504(a) by including CFCs and using a “more than 50%” ownership threshold.

The technical explanation clarifies that this provision is intended to address any potential for “excessive and disproportionate borrowing in the United States by limiting the deductibility of net interest expense.” The provision would deny a US shareholder’s deduction for interest expense if it fails:

1. A relative leverage test (which compares the leverage of the domestic group members to the comparable leverage of the group)
2. A percentage of adjusted taxable income (ATI) test. 

The relative leverage test would treat all domestic members of the worldwide affiliated group as a single member to determine whether the group has excess domestic indebtedness. Excess domestic indebtedness would be the amount by which the debt to equity ratio of the US member exceeds 100% of the debt to equity ratio of the worldwide affiliated group.

The percentage of ATI test references the earning stripping rules of Section 163(j) to determine whether the interest expense exceeds a specified percentage of ATI. The Proposal does not specify what percentage would be used for purposes of the percentage of ATI, and the 100% threshold specified in the relative leverage test is in brackets.

Thus, both of these thresholds are expected to be the focus of further consideration as the Proposal is further developed. If both tests are failed, the interest expense deduction is reduced by the lesser of the two amounts determined under the tests.

Interest expense disallowed under this provision could be carried forward to future tax years. Any amount disqualified under this provision would reduce the amount of interest expense disallowed under the earnings stripping rules of Section 163(j). This provision is proposed to be effective for taxable years beginning on or after 31 December 2012.

Transition rule deemed inclusion of accumulated foreign earnings at reduced tax rate

The Proposal would include a transition rule that would tax accumulated deferred foreign earnings of CFCs (including 10/50 companies treated as CFCs) at a 5.25% effective tax rate. Specifically, the Proposal would treat the accumulated deferred foreign earnings of a CFC as subpart F income in its last taxable year beginning prior to the adoption of the new territorial tax regime.

For this purpose, a CFC’s accumulated deferred foreign earnings would mean the CFC’s undistributed earnings, excluding subpart F income under Section 951, previously taxed income excludable from gross income under Section 959, and income effectively connected to a US trade or business determined as of the close of the relevant taxable year.

Undistributed earnings would mean the earnings and profits of the CFC computed under Sections 964(a) and 986. The transition rule would provide a US shareholder an 85% deduction for its subpart F income inclusion (if any) related to a CFC’s accumulated deferred foreign income, resulting in an effective rate of tax of 5.25% (85% x 35%).

The provision would allow an FTC (or deduction of foreign taxes paid) to be claimed only with respect to the 15% of the subpart F income inclusion that would be taxable. Additionally, the Section 78 “gross-up” would apply only to taxes with respect to the 15% portion.

Notably, the transition rule would apply to a 10/50 company regardless of whether the US shareholder elects to treat the 10/50 company as a CFC for purposes of obtaining the benefit of the 95% DRD. The Proposal would permit the US shareholder to elect to pay any US tax on its subpart F income inclusion in equal annual installments over two to eight years, with interest.

Under an acceleration rule, any unpaid balance would become immediately due at the time of one of the following events:

1. A failure to make a timely payment
2. Liquidation or sale of substantially all of the US shareholder’s assets
3. The US shareholder ceases its business
4. Another similar circumstance arises.

The accumulated deferred foreign earnings subject to US tax under this transition rule also would be subject to US tax a second time when distributed, but then generally would be eligible for the 95% DRD, resulting in additional US tax of 1.25%.

However, in the case of a 10/50 company that is not treated as a CFC, a subsequent distribution of its accumulated deferred foreign earnings would be subject to full US tax (i.e., the 95% DRD would not be available for such distribution).

Alternative anti-abuse rules to address potential base erosion

The Proposal includes three alternative approaches for preventing potential erosion of the US corporate tax base. The three approaches are included in the discussion draft as options, and the Committee has requested comments on these alternatives.

The first alternative option would treat as a new category of subpart F income any excess returns of a CFC from “covered intangible” property if such income is subject to a low foreign effective tax rate. This proposal was included first in the Obama Administration Budget Proposal for FY2011 and again in the FY2012 Budget Proposal (see International Tax Alert: Administration’s FY2012 Budget international proposals, dated 17 February 2011).

This proposal also was included in the statutory text for the President’s deficit reduction plan released on 23 September 2010. The option included in the Proposal is identical to the President’s proposal.

The new category of subpart F income would be defined as the amount of gross income (excluding same-country income) from transactions connected with or benefiting from “covered intangible” property that exceeds 150% of the costs (excluding interest and taxes, but including research and development expenditures allocated based on business line) allocated and apportioned to such gross income.

The amount of income treated as subpart F income would be reduced as the effective foreign income tax rate on such income increases.

For example, if the effective foreign income tax rate is greater than 15%, none of the income would be so treated; if the effective foreign income tax rate is below 15% and above 10%, the amount so treated would be reduced based on a sliding scale reflecting such rate; and if the effective foreign income tax rate is 10% or below, the entire amount would be treated as subpart F.

A covered intangible means any intangible, as defined in Section 936(h) (3)(B), transferred to a CFC from a related US person, or a cost-sharing agreement with one or more related persons with respect to an intangible.

This alternative option is proposed to be effective for income received in taxable years beginning on or after 1 January 2013, from transactions connected with or benefitting from covered intangibles. The second alternative option would create a new category of subpart F income for “low-tax cross-border foreign income.”

This new category of subpart F income would include the gross income of a CFC that is neither subject to an effective tax rate greater than 10%, nor derived in the home country of the CFC. For this purpose, income would be considered derived by a CFC in its home country only if:

1. The income is earned in the conduct of a trade or business of the CFC in such country
2. The CFC maintains an office or other fixed place of business in such country
3. The income is derived from the sale of property for use, consumption or disposition in such country or from services that are provided in such country. Whether the income is subject to an effective tax rate of greater than 10% would be determined under US federal income tax principles (excluding current or carryover losses) on a country-by-country basis. Thus, if a CFC has income in more than one country, such income and the effective tax rate with respect to such income would be separately analyzed for each country. This alternative option is proposed to be effective for taxable years beginning on or after 31 December 2012.

The third alternative option would treat all of a CFC’s foreign intangible income as a new category of subpart F income, foreign base company intangible income.

At the same time, this option would provide a domestic corporation that is a US shareholder of the CFC a 40% deduction for foreign intangible income, which would result in an effective 15% tax rate on such income of the US shareholder, whether earned directly or indirectly as a subpart F income inclusion with respect to the CFC.

This aspect of the option could be viewed as creating a form of “patent box” regime, a concept that is included in the tax systems of several European countries that also have territorial tax regimes.

Foreign base company intangible income is intangible income earned by a CFC. Intangible income is gross income from the sale, lease, license or other disposition of intangible property (as defined in Section 936(h)(3)(B)), or from services related to intangible property.

The technical explanation provides that foreign intangible income would be a subset of intangible income, and would be defined as intangible income derived in connection with property that is sold for use, consumption, or disposition outside of the US or services provided with respect to persons or property outside of the US.

This alternative option is proposed to be effective for taxable years beginning on or after 31 December 2012.

Unaddressed issues

The announcement of the Proposal acknowledges that the discussion draft is silent on numerous technical and policy issues that might need to be addressed in any final product, including the treatment of:

1. Overall domestic and foreign loss accounts
2. Tax redeterminations
3. Other aspects of subpart F, including with respect to recapture accounts
4. Dual consolidated losses
5. Tax treaty implications
6. Cross-border reorganizations. The announcement indicates that the Committee invites comments on how these issues should be addressed.

Specific requests for comments

The announcement of the Proposal indicates that the Committee invites input on all aspects of the discussion draft. The announcement also states that the Committee wishes to highlight the following topics on which it particularly seeks constructive feedback:

• Which of the three base erosion options would best protect the US tax base with minimum impact on the competitiveness of American businesses? What modifications could be made to make one or more of the options more workable? If these three options are undesirable, what other effective options exist to deal with base erosion, especially with respect to intangibles?
• How can thin capitalization rules be designed to effectively protect the US tax base with minimum impact on the competitiveness of American businesses?
• What are the pros and cons of treating foreign branches as CFCs? Should foreign branches continue to be treated as disregarded entities instead?
• How should foreign partnerships with US corporate partners owning interests of at least 10% be treated? What special rules might be necessary to incorporate them into the new regime?
• Is the 95% exemption for certain capital gains appropriate? Are any additional anti-abuse rules needed in this area?

Implications

Chairman Camp released the Proposal to advance debate on the important subject of international tax reform. The proposal builds upon a series of Ways and Means Committee hearings on issues regarding the competitiveness of the US international tax system and the need for international tax reform.

Those hearings reflected an increasing focus on the potential for a move toward a territorial tax system in the United States.

As the Ways and Means Committee explored in a hearing in May 2010 that focused on the international tax approaches of major US trading partners, the use of a territorial tax approach, typically in the form of a dividend or participation exemption system, has become the prevailing approach among developed countries, including recent moves toward territorial taxation by Japan and the United Kingdom.

Moreover, the President’s National Commission on Fiscal Responsibility and Reform, in its report released on 1 December 2010, also included a territorial tax approach in its corporate tax reform plan. The release of full draft statutory language and a detailed technical explanation will serve to focus the debate because, as with any tax reform of this magnitude, the devil is in the details.

The specifics provided in the discussion draft will allow stakeholders to carefully consider the full range of policy and technical issues. With the detail that has been provided, companies will be able to use modeling tools and do other in-depth analysis in order to understand what the proposal would mean for their businesses both currently and as anticipated for the future.

Full information about the implications of the proposal will be invaluable in informing companies’ engagement with policymakers in the debate over international tax reform. It will be critically important for companies to provide informed comments and reactions as this proposal, as well as others that may be developed, is considered and evolves through the legislative process.

Particular attention should be paid to the areas where the specifics of the proposal are bracketed or where alternative approaches are included in the discussion draft, as these areas are a continuing focus for the Committee staff.

In addition, consideration should be given to the particular requests for comments communicated by Chairman Camp in releasing the discussion draft. At the same time, companies should look at all elements of the proposed system, from both a policy perspective and a technical perspective, to determine the aspects of the system that would have the greatest impact for their businesses.

Moreover, companies should focus on the transition rule included in the discussion draft, which would provide for an immediate deemed inclusion of all accumulated foreign earnings of their CFCs and 10/50 companies at a reduced tax rate as a transition into the new territorial tax regime being proposed.

This deemed inclusion mechanism, which would generate federal revenues, is a key to Chairman Camp’s goal of an international tax reform package that is revenue-neutral in the context of broader comprehensive tax reform. Companies should begin to identify any steps that would need to be taken in order to be prepared for such a transition.

Chairman Camp’s release of the Ways and Means Committee discussion draft is a significant development. It is an important step in the larger fundamental tax reform debate that will play out over the coming months. We will continue to provide updates regarding developments in this area as we work with companies and engage with policy-makers.

Contact

• Barbara Angus, +1 202 327 5824, barbara.angus@ey.com

This article was first published in the Ernst & Young Global Tax Policy and Controversy Briefing which can be accessed using the link below:

• Global Tax Policy and Controversy Briefing, Issue 9, January 2012 (pdf, 9.57 MB)

By Manfred Kets de Vries, Professor of leadership and organizational change at INSEAD

Leaders face a baffling array of questions:

• How do you create high performance organizations?
• How can you design effective teams?
• How do you hold virtual and cross-cultural teams together, working for a common purpose, in complex, matrix-like structures?

As the pace of economic globalization continues, senior leadership teams are becoming increasingly diverse. And with the growing importance of the developing world, this trend is only going to continue.

Although most large corporations try and create all encompassing homogenous global corporate cultures — that only goes so far.

To succeed, CEOs and senior leaders need more than ever to understand the international dimension of leadership – to learn how to work with a diverse group of leaders from different countries and cultures.

Present-day leaders need to be savvy in building networks in these organizations through co-creation. They need to know how to tap the brains of an increasingly diverse workforce.

Managing a diverse team is challenging because people tend to like the familiar, what they know well and understand. Executives feel most comfortable working in teams where team members share the same background, values and experience: in such instances, they know what to expect.

But executives can be challenged when faced with the unknown, when they have to deal with individuals whose culture or mind-set is unfamiliar to them.

And in some cases this can trigger certain defensive psychological behaviors and fears — not least as our evolutionary history has programmed us to expect the worst when we do not understand something, which can lead to seemingly paranoid reactions.

This potential has become exacerbated in recent years because we now live in an age of virtual teams, where members need to work at a distance.

To be successful, leaders must learn to overcome and to manage these responses. They must understand that they do not always make decisions rationally and that they may have blind spots in their decision-making processes.

My work with CEOs focuses on helping them to become self-aware, to sensitize them to how and why they make decisions, to help them become more authentic, reflective leaders; to help them engage in the delicate balancing act between “doing” and “being.”

The best global leaders are open to new experiences. They are able to suspend disbelief when dealing with new cultures and different perspectives.

They are able take into account contextual factors and have a measure of flexibility. In addition, leaders must be resilient because they can be subjected to an enormous amount of stress.

I also like to emphasize that the most effective leaders are emotionally aware. They have a high degree of empathy that enables them to get along well with people from diverse backgrounds and cultures.

They know how to listen to other people’s stories, and can integrate these stories into the organization’s narrative.

How do you help leaders to become better global leaders?

I have learned from experience that one of the best ways to build trust is to get leaders together in a workshop situation to share and learn about each other. We are, after all, a story-telling species!

I have found that this group leadership coaching is a very effective intervention method to help organizations to become more agile. The impact of group coaching can be even stronger – and more beneficial for the organization – if the intervention method is applied to “natural” working groups, in particular top executive teams.

To jump-start the process, an in-depth leadership audit will precede the intervention to collect material that can be shared. Critical insights are requested from a wide variety of people, not only individuals at work but also friends and family members.

This material is then used for participants to deepen their understanding of themselves and each other. This kind of leadership coaching has proven to be highly effective in breaking down barriers and preventing silos.

By building trust, which is essential for successful teamwork, and enabling leaders to understand themselves more deeply, it can help to create “boundary-less” organizations.

The process also helps executives to deal with lingering “elephants in the room” – conflicts that should have been dealt with years ago but that continue to create major problems.

What’s more, this intervention method also helps leaders to become more authentic. A good example of this is Nelson Mandela, who remains the world’s most respected living leader because he lived according to his ideals and his values. His authenticity provides an inspiring lesson for leaders today.

Biography

A clinical professor of leadership and organizational change, Manfred Kets de Vries holds the Raoul de Vitry d’Avaucourt Chair of Leadership Development at INSEAD, France, Singapore and Abu Dhabi. He is the Founder of INSEAD’s Global Leadership Centre and the program director of INSEAD’s top management seminar: “The Challenge of Leadership: Creating Reflective Leaders.” His most recent book is The Hedgehog Effect: The Secrets of Building High Performance Teams (John Wiley & Sons, 2012).

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The goal was to eliminate budget deficits (or increase existing surpluses) and reduce the debt they had taken on during 2009. The figures shown in Table 3 demonstrate that many are succeeding in this endeavor.

Singapore, Korea and Hong Kong are projected to run budget surpluses in 2012, and every other nation except Thailand shows a trend toward lower projected deficits between 2011 and 2013, even Japan (see Table 3).

In Thailand, the budget deficit is trending slowly upward but not alarmingly so, considering its modest debt.

This may be largely the result of disastrous flooding in late 2011 that knocked at least two percentage points off Thai GDP growth.

With a recent flood–related stimulus package passed in Thailand and a very significant corporate income tax rate cut from 30% to 23% for 2012 (and a further temporary reduction to 20% for the next two tax years), it will be interesting to see how these figures change over time.

South Korea, meanwhile, reports a strong shift in stance towards consolidation, both raising headline personal income tax rates and also repealing a previously planned reduction of the marginal corporate income tax rate (from 24.2% to 22%) effective from the fiscal year commencing on or after 1 January 2012.

The successful transition from fiscal stimulus to fiscal consolidation in many of the region’s governments has justifiably built confidence in Asia–Pacific economic policy.

Leaders there have many reasons to believe that their nations have promising economic prospects and some of the soundest budgets in the world.

This should make it even more likely that strong capital flows will continue in their direction.

Growth is projected to be strong in 2012, surpassing that of many emerging markets in the Americas, and the tax policies Asia–Pacific nations choose will play a significant role in helping them fulfill hopes for economic growth.

Lowering statutory corporate tax rates to compete for investment

There are short–term and long–term strategies to raise government revenue, and most governments in the Asia–Pacific region have been pursuing both.

The long–term strategy is focused on attracting investment because the jobs and infrastructure created by companies locating there will increase wealth, grow the tax base and enable growth in tax revenue.

Usually, the legislative and administrative measures that attract investment in the long term have the short–term effect of diminishing tax revenue.

However, if those short–term revenues can be collected through other means, then both short– and long–term revenue goals can be met.

A longstanding tactic that nations around the world have been using to compete for economic development, assuring a healthy tax base in the long term, is lowering the statutory corporate tax rate.

Over the past few decades, that trend has intermittently slowed and accelerated, but it has never entirely stopped.

Recently, the strategy of lowering corporate rates received academic support from the influential Organisation for Economic Co-operation and Development (OECD), which ranked corporate income taxes as the most damaging type of tax, followed by personal income taxes, indirect taxes and property taxes.

An Ernst & Young survey of tax executives of global companies shows most agree with the OECD position.

Our survey asked what factors make them more likely to invest in a particular location, and senior executives cited a low corporate tax rate more frequently than any factor except the projected rate of economic growth.

Many countries seem to have taken the words of the OECD to heart and as a result, many commentators have talked of the “race to the bottom.”

After many mature markets in Europe and Canada saw stimulus as a useful way to fast–track reductions in headline corporate tax rates in 2009–10, many countries in the Asia–Pacific region are starting to react, putting in place a series of significant moves that may continue in 2012 and beyond.

Statutory corporate rates in Asia–Pacific currently range from 16.5% in Hong Kong to 41% in Japan, although that figure will soon fall as Japan has successfully enacted a long–delayed plan to cut its corporate tax rate by 4.5 percentage points, effective 1 April 2012.

Although the Japanese rate cut became law in December 2011, the disasters of 2011 have been so costly that legislators ended up giving the cut with one hand, only to claw back a substantial part of it with the other.

A 10%, three–year corporate surtax was enacted along with the statutory rate cut, which will result in an effective tax rate of 38.01% in 2012, 2013 and 2014, before falling to 35.64% in 2015.

This reduction will give Japan a tax rate lower than the current United States effective rate of 39.2%. Still, Japan will continue to have the highest rates in the Asia–Pacific region.

It is also worth noting that Japan’s headline rate cut, in common with the overall trend for headline rate reductions, is accompanied by base–broadening measures such as disallowing the deduction of excess interest.

Wishing to collect more revenue despite the corporate rate cut, Japan has not only enacted the three–year temporary corporate surtax but also a “temporary” personal surtax of 2.1% (that is set to expire in 2037) and a politically sensitive proposed doubling of its consumption tax, from 5% to 10%.

In 2008, China cut its headline enterprise tax rate to 25% from 33%. In the interim, China has sought to make the policies consistent and fair for its domestic companies by removing most of the incentives and deductions enjoyed by foreign companies.

This phase was perhaps most recently illustrated by the imposition of social insurance charges on foreign nationals working in China.

Rates vary by local government policy and in some cases could be as much as 20% to 40% of an average salary in a given location for an employee and employer, respectively.

Three nearby jurisdictions have established corporate tax rates significantly lower than China’s, and a fourth is just joining them this year.

Singapore cut its rate to 18% in 2008, and after Hong Kong lowered its rate to 16.5%, Singapore reduced its rate to 17% in 2010.

Taiwan competes in this cluster of ultra–low corporate tax rates, having cut its statutory rate from 25% to 17%, effective in 2010. Thailand is the newest entrant into this club.

While it maintained a comparatively high rate of 30% for several years, it has just announced a bold, politically controversial move.

The government will cut the headline corporate tax rate permanently to 23% effective in 2012, with another reduction to 20% that applies to tax years 2013 and 2014, even as the country copes with serious short–term fiscal pressures related to devastating floods in late 2011 that depressed agricultural, manufacturing and mining output.

The scope of the economic damage is immense, with many important facilities having spent several weeks underwater and government revenue reduced. As with all such calamities, criticism is intense.

Yet to the distressed business community, the government offers a huge incentive to profitable corporate facilities.

Thailand is also motivated by its need to conform its taxes more closely to the other members of the ASEAN Economic Community, which is aiming to create a free trade zone among its 10 members by 2015, the same year the organization convenes in Thailand.

Other Asia–Pacific nations have declined to cut their rates to 20% or less but have still followed the general downward trend.

Three have matched China at 25%. Indonesia’s rate had been 30%, but it dropped to 28% in 2009 and then to 25%. Similarly, Malaysia cut its rate in increments from 28% in 2006 to 25% in 2010.

Vietnam’s rate has been stable at 25%, though it offers a concession to small– and medium–sized enterprises. The Philippines lowered its corporate rate to 30%, effective 2010.

A new rate this year is New Zealand’s 28% rate, a cut of two percentage points. Australia has announced that it will cut its corporate rate from 30% to 29% effective 2013.

Keen to stay in the tax competition race, the Australian Government would have preferred to provide a larger reduction to business but was stopped from doing so by the need to narrow the scope of the controversial Minerals Resource Rent Tax (MRRT).

Finally, as noted, Korea lowered its headline corporate rate in 2009 to 22% (24.2% including surtax) and promised a 20% rate to be effective in 2012.

However, in November 2011, the government announced that it would apply the new, lower rate only to medium–sized firms, maintaining the current rate for large corporations.

Doing well by doing good? Pursuing a revenue–raising environmental policy

We have chronicled the downward trend in statutory corporate tax rates across the Asia–Pacific region and attributed the low indebtedness of the region’s governments to robust growth and fiscal consolidation.

But because Asia–Pacific governments are still increasing spending, they must collect revenue in other areas of the tax base. The green economy is proving to be one driver of tax policy is this area.

The world’s governments increasingly are labeling industries as “green” or “clean” versus “dirty.”

Companies that manufacture products that have a pro–environment reputation, such as those making high–tech batteries, wind turbines, solar panels or any product that consumes less power than its competitors, are deemed to be “green” and perhaps worthy of a tax concession.

On the other hand, mining companies, energy companies, power companies and any industries that use a relatively large amount of power and natural resources are “dirty” and targeted for additional taxes.

We have identified four basic ways in which the green movement is changing tax policy: higher taxes on mineral resources, higher taxes on all carbon emitted into the atmosphere, lower taxes on green industries and higher taxes to pay for recovery after natural disasters.

Raising taxes on mineral resources

During 2012, Asia–Pacific nations will continue to raise additional revenue from their natural resources. The method can be a straightforward legislative action raising the income tax rate or the amount per ton of mineral extracted.

For example, Vietnam’s 25% corporate tax rate does not apply to oil companies or other extractive industries; the rate on them varies from 32% to 50%. In China, the five–year plan states calls for tax measures to be used as a macroeconomic policy tool to control pollution and resource exploration to achieve a greener environment.

Measures could include increasing the tax burden on high resource–consuming products and reducing and/or suspending export refunds for such products.

Since 1 November 2011, companies extracting natural resources have been paying a tax based on value or weight. For example, the coal tax will vary from RMB2.5 to RMB8 per ton, depending on the type of coal and the location of the mine.

The tax on crude oil and natural gas will be 5% of the value. Foreign contractual companies exploring for oil on shore are included.

Further, a 5% tax plus local levies will be imposed for the transfer of resources in China by way of adding a new taxable item of “resources” to the existing list of intangibles subject to business tax (BT), effective 1 February 2012.

The taxable transactions include transferring the right of resources in exploration, exploitation or the right to the use of the resources on land and ocean.

The green effect is evident in consumption tax policy, too.

China plans to apply its VAT to all products that are resource– consuming or deemed as environmentally damaging. But revenue can be raised without new statutory tax rates.

For example, in Australia tax authorities have declared their intention to re–examine how generously mining companies’ expenses in exploration should be treated. And in Indonesia, transfer pricing audits are focused on mining, especially coal, oil and gas.

Taxing carbon

Despite widespread debate over carbon taxes and other carbon pricing regimes, few nations have enacted one. However, due to a remarkably even split between the two major parties in Australia, the minority Greens were able to enact their agenda, a new carbon tax.

Other nations in Asia–Pacific and around the world will be observing the Australian experience, including China, whose State Council has announced that it is considering a “green tax” and gradual expansion of the tax bases to preserve the environment and reduce carbon emissions.

In addition, China intends to pilot a number of carbon trading schemes. Korea and Japan have announced that they are working on introducing carbon trading schemes, and New Zealand has a limited carbon trading system already in place.

Taiwan, too, has declared its intent to promote a sustainable environment with its tax code and expresses interest in a “green taxation system,” and a proposal is pending in the Vietnamese legislature to enact an environmental protection tax.

Enacting tax breaks for green industries

Not all green tax policies raise revenue, and examples of special tax concessions abound. In China, green technology firms can qualify for an exemption from the BT and VAT.

One program offers a “3+3 CIT holiday,” which means that beginning with the first year that a green firm generates business–related revenue, it can claim a full corporate income tax exemption for three years, followed by three years of a 50% exemption.

Last year, Thailand enacted targeted tax breaks to encourage foreign investment in specific green and high–tech industries, and Japan has introduced an immediate deduction for investments companies make in energy–saving facilities or in developing energy–saving appliances.

In the Philippines, a tax subsidy for the manufacture, importation and development of hybrid and e–vehicles progressed in the legislature during October 2011 and is expected to be enacted in 2012.

The incentives include exemptions from VAT, excise tax and duties for nine years. Originally scheduled to take effect in 2011, Australia’s green buildings tax credit will now take effect in July 2012. It offers a bonus tax deduction of up to 50% of the money companies spend on improving their existing buildings’ energy efficiency.

Recovering from natural disasters

Environmental disasters profoundly affected tax and spending policies in Australia, New Zealand, Japan and Thailand in 2011.

It is routine for tax administrators or legislators to offer some concessions after natural disasters. The series of earthquakes in New Zealand, for example, imposed the huge cost of rebuilding the Canterbury region.

Part of that assistance was delivered by the tax system as earthquake– affected businesses received concessions, particularly around the treatment of insurance proceeds and the destruction of depreciable assets.

Earlier in 2011, Australia announced a one–time flood levy to fund lost infrastructure in the wake of the Queensland floods.

The impact of the Great East earthquake on the Japanese people has been profound, affecting every aspect of life including the tax system. A corporate tax rate reduction that had been scheduled to take effect in the spring of 2011 was postponed when the devastating tsunami struck.

When finally amended by the addition of the Restoration Funding Bill and enacted in December 2011, the new law cut the national corporate tax rate to 25.5% but also imposed a 10% surtax on corporate income for 2012–14 and a 2.1% personal income surtax for 25 years, also starting in 2012.

Some climate change forecasters predict that natural disasters will become increasingly frequent and catastrophic, implying that governments should leave room in their budgets for more disaster relief and adjust their tax codes accordingly.

Targeting tax incentives more narrowly

Not long ago, many tax opportunities existed in Asia–Pacific, especially China, for all kinds of companies. Now the sought– after industries are fewer.

Vietnam is still offering some of the manufacturing incentives that China formerly offered and recently reduced its interest withholding tax to 5%, effective 1 March 2012, from current rates of at least twice that level.

Large infrastructure projects will gain significantly. The withholding tax reduction is accompanied by several other pro–business changes enacted on 27 December 2011. More commonly, though, incentives are industry–specific, with the financial services industry a major beneficiary.

Highly mobile and tax sensitive, that industry generates substantial incomes for workers and plays a very useful role in the promotion of economic growth more generally. In other words, the financial services industry is in an excellent position to play nations off against each other.

Hong Kong is the established leader in this field and during 2012 will focus on:

• Being the premier offshore provider of renminbi services, which is not a new distinction for Hong Kong but is more important with the rise of the renminbi as a major world currency
• Attracting overseas companies, especially from emerging markets, to list on Hong Kong’s stock exchange
• Seeking agreements on the avoidance of double taxation with more trading and investment partners to foster the growth of the asset management business

Malaysia, Singapore, New Zealand and Australia have all enacted advantageous tax provisions to attract high value–added financial services to compete with Hong Kong.

Vehicles to raise revenue: aggressive tax administration and higher indirect taxes

Higher taxes on “dirty” industries are probably not capable of raising the amounts of new revenue that governments want for spending initiatives.

For the bulk of their new revenue, governments have increasingly turned to stricter tax enforcement on international taxpayers and higher consumption taxes, and during 2012 we expect both trends to accelerate.

Increasing levels of tax enforcement: rejection of traditional holding company arrangements
China’s Circular 698 has been a source of consternation for taxpayers who depend on the traditional tax treatment of holding companies.

Repeatedly in 2011, when China’s tax authorities learned of indirect disposals of holding companies that were resident in tax–advantaged countries such as Mauritius or the British Virgin Islands, they ignored the holding company structures and imposed tax on the seller.

Counting both direct and indirect disposals, tax adjustments are up by nearly 500%, from RMB0.46 billion (US$72 million) to RMB2.66 billion (US$419 million) during the past five years.

In some cases, China’s tax authorities learned of indirect disposals during discussions with the taxpayer, but often a newspaper article or web posting was the original source.

As highlighted in Ernst & Young’s 2011–2012 Tax risk and controversy survey, media exposure is having a much greater effect on tax administration than in years past, and we expect the growing scrutiny of business tax affairs by news organizations and activist groups around the world to play an even greater role in 2012 and beyond.

From 2011 to 2016, China’s State Administration of Taxation (SAT) plans to improve its prevention of tax avoidance in five areas:

• Enterprises — extending to parent companies of domestic enterprises going overseas
• Industries — extending to financial services, trading and other service industries
• Transactions — extending to transfers of equities or intangibles and financial arrangements between related parties
• Locations — extending to central and western China
• Measures — extending to cost–sharing agreements, controlled foreign companies, thin capitalization and tax–planning activities involving overseas cost allocation or the use of intermediate holding structures and tax havens

Increasing levels of tax enforcement: other initiatives

In Australia, the tax authority has established a reputation for robust enforcement.

That will not change during 2012 as it intends to perform more tax audits, continue requiring pre–lodgement reviews from the top 120 companies and continue targeting those large companies who fall into their “high risk” definition.

New legislation will be enacted in 2012 to amend transfer pricing laws, giving the Tax Commissioner greater power to reconstruct or ignore legal transactions.

The new law promises additional contemporaneous documentation obligations and stronger penalties. Most controversially, it will authorize the tax authority to reinterpret transactions back to 1 July 2004.

In addition to surprising taxpayers who thought past years’ transactions were a settled matter, Australia’s retroactive changes might also encourage other countries, with weaker fiscal positions than Australia’s, to consider the same approach during 2012.

Philippine tax authorities continue to employ aggressive tax administration and enforcement measures to increase tax collection, such as specialized tax audits on conglomerates and professional individuals, close tax compliance monitoring of large taxpayers, and regular performance evaluations of revenue examiners and officers.

Increasing levels of tax enforcement: using the media

The Philippines may have strict audits, but it is best known for Run After Tax Evaders (RATE) and Run After The Smugglers (RATS), two publicity campaigns that have produced many civil and criminal charges against suspected tax evaders, smugglers and corrupt tax officials.

This is the type of media–related tax administration that we expect to see more often during 2012. Similarly, Singapore’s tax authority publishes the names of non– compliant taxpayers as a deterrent measure.

Increasing levels of tax enforcement: Asia–Pacific region confirms trend toward disclosure and transparency

The trend towards increased disclosure and transparency requirements was certainly illustrated in the region in 2011 and will likely continue to grow in 2012.

During 2011, Australia unveiled its Reportable Tax Position (RTP) strategy, which was broadly similar to the US’ Uncertain Tax Position requirements. Both programs require corporations to explain their reasoning, or “position,” whenever a tax calculation is not very likely to be correct.

Countries such as Malaysia and the Philippines, meanwhile, have sent large taxpayer forms requesting detailed information about cross–border transactions with related parties.

While many countries in the region are not part of the OECD (and its Forum on Tax Administration, in particular), it will be interesting to see to what extent similar requirements are unveiled in 2012.

After extracting more information from taxpayers than they had previously, tax authorities take transparency another step by sharing their taxpayers’ data with other tax authorities.

Governments have signed hundreds of bilateral and some multilateral tax information exchange agreements (TIEAs) during the past year, and the nations that were slow adopters are quickly catching up.

In addition to sharing data, some governments have tentatively begun combining their forces in a simultaneous audit. However, those have not become as popular as we thought a year ago that they might.

This article was first published in the Ernst & Young Tax Policy and Controversy Outlook publication which can be accessed using the link below:

• Tax Policy and Controversy Outlook, Asia-Pacific 2012 (pdf, 2.5 MB)