Housing allowances and norms

Housing allowances and norms

The most common concerns with housing allowances and norms.

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I have heard that housing in foreign countries is more expensive. Why is that?

In some locations, in fact, housing may be less expensive than in your home location. But, in cases where the cost is higher, there may be several reasons for the difference. First, it is important to remember that we are addressing expatriate housing. Expatriates normally rent, and rents are generally higher than if one was paying a mortgage to build equity in a home. Also, expatriates have different needs as compared with locals in the same location. Expatriate children often attend international schools. Therefore, housing near the international school tends to be expensive, as there is a demand for the location. Security is also an issue. Depending on the host location, some areas may be considered safer for expatriates. Expatriates from one part of the world moving to another (e.g., United States to Thailand or vice versa) would encounter drastic differences in living situations. Therefore, a limited amount of housing deemed suitable for the expatriate is available depending on his or her countryof origin. Along these lines, it is not unusual, especially for expatriates who are not fluent in the host country language, to gravitate towards areas/communities that are also home to expatriates who share the same language, culture, etc. Given the desirability and usually limited housing stock in such areas, prices are typically higher.

How will I be able to afford housing in foreign countries where the costs are so much higher than in my home country?

As part of the cost equalization process or balance sheet approach, multinational employers generally take the cost of housing into consideration when structuring international assignment compensation packages. Policies are designed to equalize your housing costs while you are abroad. The intent of providing housing assistance, in most cases, is not to transfer the entire cost of host country housing to your employer. Rather, your employer may provide financial assistance in the form of an allowance, furnished or unfurnished company-owned quarters, or accommodation rented in the company name. In a majority of cases, the assistance provided will normally equal the excess of the assignment housing costs above a standardized home location cost.

How do I identify appropriate housing for my family and myself?

Locating housing in a foreign country can be a challenge without assistance. Your employer may have in -house relocation professionals to help you. Or you may engage an outside vendor specializing in relocation or destination services. Suitable housing for assignees typically is identified based on a number of factors, including compensation level, proximity to the workplace, safety, access to colleagues and compatriots, and the image that your employer wants you to project at the host location. The input for this decision can come from outside advisers, as mentioned above, assignees already ‘on the ground,’ and local management at your employer’s host country offices.

Will I be required to sign a lease in the host location?

There is no global standard addressing whether the assignee or the employer should legally be the tenant and sign the lease. Most decisions are based upon two factors: the local custom and practice, and the significant tax advantages to be derived from a particular lease structure.

In certain jurisdictions, landlords will not rent residential premises to an employer unless a higher rent is charged. In other locations, landlords will not rent to international assignees unless the employer is listed as the tenant. In addition, it is sometimes tax effective for the employer to be the tenant and pay the rent directly to the landlord.

If the policy requires that your employer’s legal or human resources group review the lease prior to your signing, make sure before you sign that they have completed their review and you have complied with any recommendations and requirements. Lastly, regardless of who signs the lease, it is a good idea to assess the need for personal liability insurance to protect against unforeseen events, just as you would at home.

Will I have to bear a significant portion of the housing costs while I am on assignment or is my employer going to provide me with some assistance?

You will generally be expected to bear the same level of housing costs as your peers at home. Many companies facilitate this process by retaining a home country housing norm from base salary. This norm is unlikely to equal your pre-assignment costs, as it is a statistical blend of the costs of owning (less mortgage principal) and renting across a broad cross-section of the population.

In some cases, if your employer decides not to charge a norm, it will often not provide any type of home country housing support as a result (e.g., property management, storage). Either way, the employer’s aim is not to provide free housing to an employee — so, contributing to your housing will come in one form or another.

However, employers may offer some form of housing assistance. This can be delivered in a number of different ways. For example, a housing allowance may be added to your compensation and included in each paycheck. Also, your contribution to housing costs may be subtracted from your paycheck (known as the housing norm/offset/deduction). Other organizations may deliver a ‘net’ allowance, that is, the housing allowance minus the employee’s contribution is delivered.

Another important aspect to delivering housing allowances involves the host country’s tax rate on an employer’s contribution to housing. In some locations, it is more beneficial for the employer to pay the landlord directly in order to obtain the lowest tax rate on the amount of the housing allowance, as opposed to paying the allowance to the employee and having the employee pay the landlord. In those locations, the employer may pay the rent in full and still deduct a monthly housing norm from the employee’s compensation.

Should I buy a residence in my assignment location?

Policies differ, but generally employees are discouraged from purchasing a home in the host country. From a policy perspective, if an employer provides housing assistance to an employee who rents and to another who owns, the employer is helping the home-owner build equity, while the renter has nothing to show for the rental payments made to his or her landlord. This results in unequal treatment of employees. The intent is for the employer to aid the employee in securing suitable safe housing, not fund investments in real property.

In addition, purchasing a home can trigger tax issues, which, in most tax reimbursement policies, will not be covered by the employer, even if you argue that the house was purchased as a result of the assignment. Domestically, when you sell your home for more than what you paid, that capital gain is taxed (this tax may be mitigated depending on your having fulfilled certain conditions). However, when selling a home in the host country, income can result not only from selling the home for more than what you paid, but there could also be an exchange rate gain or loss depending on what the rate of exchange was at the time of purchase and at the time of sale. Therefore, it is possible to be taxed on two types of gains for the sale of the home.

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