For many consultants, the chance to spend time living abroad is a welcome opportunity to explore a new part of the world and often implies plumper paychecks. Recently, though, the U.S. government gave consultants, and other professionals considering work abroad, a reason to reconsider that option.
In the form of a last-minute addition to a $70 billion tax cut, the government — ironically — increased the amount of money that temporary expatriates must pay in taxes to their homeland. The adjustment, which is retroactive to the beginning of 2006, is expected to cost Americans living abroad $2.1 billion over the next ten years. The bill raises taxes on overseas Americans by about 6 percent on average. Essentially, most individuals will pay nothing more, while others will see their taxes quadruple, depending on where they live.
Since the law changes the way taxes are calculated on subsidies such as housing allowances, those living in countries with low tax rates and high housing rates will be the hardest hit. Consultants: Beware of places like Singapore, Bermuda, and Hong Kong, where living costs can be colossal.
Thousands of Americans abroad will be pushed into higher tax brackets, and in many cases, companies will have to adjust their compensation packages accordingly. Consulting firms should expect to spend extra cash for every extra dollar their overseas employees pay in taxes.
Americans are going to be more expensive to hire, and companies will have to reconsider them as a viable option. Pricewaterhouse Coopers predicts that the backlash will not go unnoticed. The company estimates that the cost of a greater tax will be about 24,000 domestic jobs.
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