How are COL adjustments usually calculated?

[origami]

DH's firm bases our payment on COL indices. Our COL adjustment fluctuates monthly based on changes in the index. They didn't tell us which ones they use. I'm guessing it's not anything they came up with on their own though so I'm sure there are published indices you could pick from.

ETA: DH gets the same salary here as in the US. They just add the COL adjustment on top of that each month. (He gets paid once a month because of this). Definitely negotiate this and do it based on cities, not England as a whole. You'd be taking a HUGE paycut otherwise.

[fbf2006]

Aug 10, 2014 18:21:09 GMT -5 origami said:

DH's firm bases our payment on COL indices. Our COL adjustment fluctuates monthly based on changes in the index. They didn't tell us which ones they use. I'm guessing it's not anything they came up with on their own though so I'm sure there are published indices you could pick from.

ETA: DH gets the same salary here as in the US. They just add the COL adjustment on top of that each month. (He gets paid once a month because of this). Definitely negotiate this and do it based on cities, not England as a whole. You'd be taking a HUGE paycut otherwise.

Please let me know if I'm wrong, but it seems this is common. My husband's transfer letter states that he will be paid once a month. It has nothing to do with a COL adjustment.

[origami]

Aug 10, 2014 20:56:43 GMT -5 fbf2006 said:

Aug 10, 2014 18:21:09 GMT -5 origami said:

DH's firm bases our payment on COL indices. Our COL adjustment fluctuates monthly based on changes in the index. They didn't tell us which ones they use. I'm guessing it's not anything they came up with on their own though so I'm sure there are published indices you could pick from.

ETA: DH gets the same salary here as in the US. They just add the COL adjustment on top of that each month. (He gets paid once a month because of this). Definitely negotiate this and do it based on cities, not England as a whole. You'd be taking a HUGE paycut otherwise.

Please let me know if I'm wrong, but it seems this is common. My husband's transfer letter states that he will be paid once a month. It has nothing to do with a COL adjustment.

I have no idea how other companies work it out. I just know everyone other than people on foreign assignments are paid semi-monthly, with his particular company. I'm sure taxes are a big part of the reason too because it's an epic PITA to figure out what our pay is supposed to be and from what I understand it will fluctuate somewhat because of that too.

[Brit]

My H and I are both paid twice per month. Our COL adjustment is an extra differential that is added on top of our pay. It changes each quarter based on data provided by a third party. You can probably research the differentials. The differential should also vary based on your income level - if you earn more, you likely spend more, so a COL difference will cost you more $$.

[origami]

@rock-n-voll, I think you said in your other post that your company is going to do your taxes (phew!). Just wanted to ask if they are also going to ensure you aren't footing the giant tax bill.

[frlcb]

Aug 10, 2014 20:56:43 GMT -5 fbf2006 said:

Aug 10, 2014 18:21:09 GMT -5 origami said:

DH's firm bases our payment on COL indices. Our COL adjustment fluctuates monthly based on changes in the index. They didn't tell us which ones they use. I'm guessing it's not anything they came up with on their own though so I'm sure there are published indices you could pick from.

ETA: DH gets the same salary here as in the US. They just add the COL adjustment on top of that each month. (He gets paid once a month because of this). Definitely negotiate this and do it based on cities, not England as a whole. You'd be taking a HUGE paycut otherwise.

Please let me know if I'm wrong, but it seems this is common. My husband's transfer letter states that he will be paid once a month. It has nothing to do with a COL adjustment.

It's more common in the uk than the US

[origami]

Aug 10, 2014 22:35:31 GMT -5 RockNVoll said:

Aug 10, 2014 21:27:21 GMT -5 origami said:

@rock-n-voll, I think you said in your other post that your company is going to do your taxes (phew!). Just wanted to ask if they are also going to ensure you aren't footing the giant tax bill.

My firm employs a full-time tax professional in both the U.S. and London.  They'll be handling all the tax prep so the firm is footing that bill for sure.  Are you asking about paying the actual taxes themselves though?  We're paying those; not sure there's any way around that!

I don't know if this depends on the type of company or how you get paid. We are paid in $US by a company that is HQ'd in the US. we had to sign a power of attorney so that the company could collect our tax refund. In return the company pays our taxes for us (our actual taxes, not just the bill for the accountants) and when we file they will make us responsible only for what we would have paid in taxes if we had stayed in the US. they will pay the rest. The housing, car, lump sums, etc bennies are all taxable and the US tax structure completely sucks for expats even for regular wages, from the small amount i understand about it. If your company has hired tax pros for you I assume they know this and won't screw you. I just wanted to mention it because you said this is a new thing for them. Maybe someone with a more similar situation to yours can chime in in case the taxes are different for people paid in GBPs...

[Deleted]

We didn't get an explanation on how COL was calculated. h took a promotion to move over and between COL and the promotion ended up with about a 35% raise.

However, I quit my job in the states and found a new job here. With the market the way it is for my field here I took a 20% pay cut than in Seattle.

Also, part of our relo package included h's company paying any taxes and fees associated with our move. We were only on the hook for our normal tax payments.

[GilliC]

There are multiple independent firms that actually calculate COL differentials. For example, The Economist has some reports and tools that are specifically designed for this:
www.eiu.com/public/topical_report.aspx?campaignid=Wcol2014

In our company, there are a few different ways that compensation are adjusted.

First, since we have a very mobile international workforce, they use a basic system to translate salaries between locations when you move. They consider a percentage bracket comparing your salary to others in your location at the same seniority and job level. Then they'll set your salary accordingly in the new location. So if you were in the 90th percentile at your origin, you'll be at the 90th percentile in the new location, regardless of whether it's a higher or lower COL. (This is independent of any international expat incentives like housing, travel, etc. It's also independent of the "mobile premium" which is a percentage salary increase for those on fixed-term international contracts.)

Second is the calculation of hardship bonus. In locations where it's more difficult/costly to maintain a typical western lifestyle, there is an additional fixed percentage. This percentage is decided at a global level and is fixed according to location. They explained once how it's calculated, and it takes into account things like "cost of a round of golf" and "distance/availability of tennis courts." I remember this, because "likelihood of being hospitalized over food poisoning" didn't seem to weigh into it, which annoyed the hell out of those of us moving to Beijing (since we didn't all play golf or tennis, but we all needed to eat).

[GilliC]

Re: taxes, the company pays for Deloitte to do the return both for the local taxes and for the US tax return the year we move to/from the US. While I was in China, the company actually paid our Chinese taxes on our behalf as part of the contract.

We also have a lot of engineers who are on a truly international contract, where they're moving between countries multiple times per year. Instead of paying taxes to the local government, they pay into a company-wide system, and the company then pays the local taxes out of the pool. That way the employees have a somewhat fixed tax rate, and it alleviates the competition for assignments in no-tax countries over high-tax countries.

[rupertpenny]

Aug 10, 2014 23:08:52 GMT -5 origami said:

Aug 10, 2014 22:35:31 GMT -5 RockNVoll said:

My firm employs a full-time tax professional in both the U.S. and London. They'll be handling all the tax prep so the firm is footing that bill for sure. Are you asking about paying the actual taxes themselves though? We're paying those; not sure there's any way around that!

I don't know if this depends on the type of company or how you get paid. We are paid in $US by a company that is HQ'd in the US. we had to sign a power of attorney so that the company could collect our tax refund. In return the company pays our taxes for us (our actual taxes, not just the bill for the accountants) and when we file they will make us responsible only for what we would have paid in taxes if we had stayed in the US. they will pay the rest. The housing, car, lump sums, etc bennies are all taxable and the US tax structure completely sucks for expats even for regular wages, from the small amount i understand about it. If your company has hired tax pros for you I assume they know this and won't screw you. I just wanted to mention it because you said this is a new thing for them. Maybe someone with a more similar situation to yours can chime in in case the taxes are different for people paid in GBPs...

Doesn't this just add to your income and increase your tax burden? Or are they just basically insuring that you end up with the same amount of $$$ in your account at the end of the year? Not trying to call you out or anything, just curious. My H is a tax attorney and it's must be rubbing off on me haha.

Anyway, we both get paid monthly, but we always were paid monthly in the US too. I didn't know that was weird?

We are both local hires so I have no idea about COL adjustments, sorry. Luckily we both make just under the Foreign earned income exclusion and the tax rate is lower here, so the IRS can suck it. I don't anticipate sending them money anytime soon.

Of course this assumes we can file separately and both claim the exclusion. If we can't we are getting divorced

[origami]

Aug 11, 2014 8:28:49 GMT -5 rupertpenny said:

Aug 10, 2014 23:08:52 GMT -5 origami said:

I don't know if this depends on the type of company or how you get paid. We are paid in $US by a company that is HQ'd in the US. we had to sign a power of attorney so that the company could collect our tax refund. In return the company pays our taxes for us (our actual taxes, not just the bill for the accountants) and when we file they will make us responsible only for what we would have paid in taxes if we had stayed in the US. they will pay the rest. The housing, car, lump sums, etc bennies are all taxable and the US tax structure completely sucks for expats even for regular wages, from the small amount i understand about it. If your company has hired tax pros for you I assume they know this and won't screw you. I just wanted to mention it because you said this is a new thing for them. Maybe someone with a more similar situation to yours can chime in in case the taxes are different for people paid in GBPs...

Doesn't this just add to your income and increase your tax burden? Or are they just basically insuring that you end up with the same amount of $$$ in your account at the end of the year? Not trying to call you out or anything, just curious. My H is a tax attorney and it's must be rubbing off on me haha.

I have no idea how they do it. I used to be a bookkeeper who did payroll for a living so I was curious about this too but I wasn't at the tax meeting and of course DH remembers almost nothing about what they said. I think it works like this - they are paying the super high taxes that are withheld from our gross wages now and when we file and are due a huge refund (b/c I believe we are essentially double taxed now but will get the US portion back when we file) the company will keep the refund. I think this is a fairly common procedure though, at least for US citizens.

[origami]

Aug 11, 2014 8:38:59 GMT -5 RockNVoll said:

Crap, now I'm really worried about my potential tax bill.  I have no idea how I would go about negotiating that since I don't even know if it will be a problem (or how big of one).  On top of no COL adjustment, this could hit my income harder than I expected.

The tax attorneys your company hired should know the answer to this.

[rupertpenny]

Aug 11, 2014 8:52:20 GMT -5 origami said:

Aug 11, 2014 8:28:49 GMT -5 rupertpenny said:

Doesn't this just add to your income and increase your tax burden? Or are they just basically insuring that you end up with the same amount of $$$ in your account at the end of the year? Not trying to call you out or anything, just curious. My H is a tax attorney and it's must be rubbing off on me haha.

I have no idea how they do it. I used to be a bookkeeper who did payroll for a living so I was curious about this too but I wasn't at the tax meeting and of course DH remembers almost nothing about what they said. I think it works like this - they are paying the super high taxes that are withheld from our gross wages now and when we file and are due a huge refund (b/c I believe we are essentially double taxed now but will get the US portion back when we file) the company will keep the refund. I think this is a fairly common procedure though, at least for US citizens.

Ok, that makes sense. I guess because you are with a US company you have normal withholdings. We have to do our own savings for taxes. The HK government actually doesn't withhold either, it is just on us to keep enough money in savings to pay the eventual bill.

[origami]

Aug 11, 2014 8:57:51 GMT -5 rupertpenny said:

Aug 11, 2014 8:52:20 GMT -5 origami said:

I have no idea how they do it. I used to be a bookkeeper who did payroll for a living so I was curious about this too but I wasn't at the tax meeting and of course DH remembers almost nothing about what they said. I think it works like this - they are paying the super high taxes that are withheld from our gross wages now and when we file and are due a huge refund (b/c I believe we are essentially double taxed now but will get the US portion back when we file) the company will keep the refund. I think this is a fairly common procedure though, at least for US citizens.

Ok, that makes sense. I guess because you are with a US company you have normal withholdings. We have to do our own savings for taxes. The HK government actually doesn't withhold either, it is just on us to keep enough money in savings to pay the eventual bill.

That makes way more sense to me than this ridiculous withholding for 2 countries thing. It annoyed me when we had to withhold for 2 states at the same time, much less this BS. Grrrr.

[rupertpenny]

Aug 11, 2014 8:38:59 GMT -5 RockNVoll said:

Crap, now I'm really worried about my potential tax bill.  I have no idea how I would go about negotiating that since I don't even know if it will be a problem (or how big of one).  On top of no COL adjustment, this could hit my income harder than I expected.

You should get a credit for taxes you pay to the UK. I think their tax rates are higher so you might not to pay much more to the US after that. And the first $90ish thousand you earn should be tax free as far as the IRS is concerned.

[rupertpenny]

Aug 11, 2014 9:00:28 GMT -5 origami said:

Aug 11, 2014 8:57:51 GMT -5 rupertpenny said:

Ok, that makes sense. I guess because you are with a US company you have normal withholdings. We have to do our own savings for taxes. The HK government actually doesn't withhold either, it is just on us to keep enough money in savings to pay the eventual bill.

That makes way more sense to me than this ridiculous withholding for 2 countries thing. It annoyed me when we had to withhold for 2 states at the same time, much less this BS. Grrrr.

That sounds like it would ruin any normal kind of cash flow, that sucks. Hopefully whatever the company is doing makes it work better.

[GilliC]

Aug 11, 2014 8:28:49 GMT -5 rupertpenny said:

Aug 10, 2014 23:08:52 GMT -5 origami said:

I don't know if this depends on the type of company or how you get paid. We are paid in $US by a company that is HQ'd in the US. we had to sign a power of attorney so that the company could collect our tax refund. In return the company pays our taxes for us (our actual taxes, not just the bill for the accountants) and when we file they will make us responsible only for what we would have paid in taxes if we had stayed in the US. they will pay the rest. The housing, car, lump sums, etc bennies are all taxable and the US tax structure completely sucks for expats even for regular wages, from the small amount i understand about it. If your company has hired tax pros for you I assume they know this and won't screw you. I just wanted to mention it because you said this is a new thing for them. Maybe someone with a more similar situation to yours can chime in in case the taxes are different for people paid in GBPs...

Doesn't this just add to your income and increase your tax burden? Or are they just basically insuring that you end up with the same amount of $$$ in your account at the end of the year? Not trying to call you out or anything, just curious. My H is a tax attorney and it's must be rubbing off on me haha.

Anyway, we both get paid monthly, but we always were paid monthly in the US too. I didn't know that was weird?

We are both local hires so I have no idea about COL adjustments, sorry. Luckily we both make just under the Foreign earned income exclusion and the tax rate is lower here, so the IRS can suck it. I don't anticipate sending them money anytime soon.

Of course this assumes we can file separately and both claim the exclusion. If we can't we are getting divorced

Why do you have to file separately to both claim the exclusion???  Do you mean the housing exclusion?

XH and I filed jointly and both claimed the foreign earned income exclusion. I claimed the housing exclusion, because we received a housing allowance as part of my compensation, but we submitted two copies of the 2555 with our joint return.

[origami]

Aug 11, 2014 9:08:27 GMT -5 RockNVoll said:

Aug 11, 2014 9:01:23 GMT -5 rupertpenny said:

You should get a credit for taxes you pay to the UK. I think their tax rates are higher so you might not to pay much more to the US after that. And the first $90ish thousand you earn should be tax free as far as the IRS is concerned.

Oh, that makes me feel a little better. 

This blind leading the blind bit is no fun.

I think it would be good for you to ask if they will be withholding for 2 countries or just GB. If both, then the company needs to pony up so you don't end up with almost nothing in your paycheck. If just GB then ask what your net income will be so you will be able to ask for a salary increase to offset the higher taxation there. At least, I'm assuming GB has higher taxes than MA, but I don't know. Foreign income can be excluded under certain circumstances (your tax attorneys should spell this out for you), as can some housing costs and stuff, but over a certain amount cannot be excluded. It's ridiculously complicated so really they just need to break it all down for you. It's way too much for someone not well versed in it to figure it out on their own.


ETA: also ask if all your taxable bennies (housing, etc) will be included in your gross wages because that will really rack up your tax bill too. Although some to all of that can be excluded when you file you just need to know what your net income will be before then.

[GilliC]

Aug 11, 2014 9:08:27 GMT -5 RockNVoll said:

Aug 11, 2014 9:01:23 GMT -5 rupertpenny said:

You should get a credit for taxes you pay to the UK. I think their tax rates are higher so you might not to pay much more to the US after that. And the first $90ish thousand you earn should be tax free as far as the IRS is concerned.

Oh, that makes me feel a little better. 

This blind leading the blind bit is no fun.

I did a very simplified version of the math to explain it to a friend who worked overseas for the first time last year. Here's the example I used:

Assume:
- You earn $100K
- Your US tax rate is 30%
- Your foreign tax rate is 40%
- The limit for the foreign earned income exclusion is $90K (it changes every year)

That means that you end up paying $40K in foreign taxes.

When you file your US taxes, it basically works out like this:
Your income: $100K
Your exclusion: $90K
Your adjusted income: 100K - 90K = $10K
Your US tax: 30% * 10K = $3K
Your foreign tax credit: 40% * 10K = $4K
Tax you owe to the US: 3K - 4K = $0 (Too bad you don't get the difference back!)

[GilliC]

The tough part is that you have to include your total compensation in your income. Paid housing, home travel, even tax prep (Yes, I had to pay tax on the $800 the company paid Deloitte to do my taxes the first time).

Depending on what and how much your host country taxes you, you can end up owing extra to the US. Even if you don't, it's a pretty big headache, and off-the-shelf tax software isn't really set up to handle it easily.

Oh, and if you move mid-year, it's an absolute PitA, because you have to qualify for the foreign earned income exclusion, and if you haven't lived abroad for the full calendar year, you have to qualify under the physical presence test. We moved abroad in October, so we couldn't file our taxes for that year until the following fall! Ugh.

[iammalcolmx]

The company should use a tax professional and they will take care of your taxes for the next couple of years for you and honestly the company should directly pay the taxes. Since all your allowances as an Expat are taxable fringe benefits ( with the exception of your trip home) it adds a ton of money to you gross earnings reported to the IRS. The tax professional should be calculating your tax liability and the company should be paying the taxes you owe as a result of the taxable fringe benefits. You will still be responsible for the taxes on your regular wages. My US Citizen Expat in the UK had to file in both the US and UK and the following year he got refund from the US( which he turned over to the company) for the taxes paid in the UK. Or maybe it was the other way around.

[origami]

Aug 11, 2014 9:44:10 GMT -5 RockNVoll said:

Thanks for the math example, GilliC. It sounds like there's no way mere mortals could handle the tax issues so I'm grateful for the pro help. The down side is it being so complicated means I will have no idea whether the accounts have handled things appropriately or how to check their work. I always seem to find some errors with the tax returns various accountants have prepared for us in the U.S. :^)

And of course I'm moving mid-year (October, in fact).  How many people really move on January 1?

you just get your tax deadline extended until you've been out of the country long enough to qualify for the foreign income exclusion. We moved in July so ours is effed up too. It does suck having no idea what's going on. The more I thought about this the less I think we even have money withheld for both countries. It may just be the fringe benefits that rack up our tax bill. So really I'm completely talking out of my ass and need to stop posting.

[GilliC]

For the record, my company never paid (or filed) my US taxes. They withhold my Norwegian taxes as they do with all the employees in Norway, but they don't withhold anything for the US. Since Norwegian taxes are so high, they do try to compensate for it slightly, so when we reimburse our home travel expenses, they actually give us back 125% of the ticket price, and there was an additional tax offset paid out with our housing allowance as long as we rented.

Unfortunately, I have to ask them to withhold extra for my Norwegian taxes, because we get paid monthly, and the basic tax withholding is calculated for the usual system, where people get paid 11 times per year. Seriously. That's "normal" here. WTF?

[rupertpenny]

Aug 11, 2014 9:08:55 GMT -5 GilliC said:

Aug 11, 2014 8:28:49 GMT -5 rupertpenny said:

Doesn't this just add to your income and increase your tax burden? Or are they just basically insuring that you end up with the same amount of $$$ in your account at the end of the year? Not trying to call you out or anything, just curious. My H is a tax attorney and it's must be rubbing off on me haha.

Anyway, we both get paid monthly, but we always were paid monthly in the US too. I didn't know that was weird?

We are both local hires so I have no idea about COL adjustments, sorry. Luckily we both make just under the Foreign earned income exclusion and the tax rate is lower here, so the IRS can suck it. I don't anticipate sending them money anytime soon.

Of course this assumes we can file separately and both claim the exclusion. If we can't we are getting divorced

Why do you have to file separately to both claim the exclusion???  Do you mean the housing exclusion?

XH and I filed jointly and both claimed the foreign earned income exclusion. I claimed the housing exclusion, because we received a housing allowance as part of my compensation, but we submitted two copies of the 2555 with our joint return.

I didn't think we definitely did, we just haven't looked into it too in depth yet. I'm glad to hear you and your ex could both claim it easily. I'm mostly scarred by the fact we have to share the student loan interest deduction so I always assume the worst from the tax code.

[Deleted]

I know obviously the military is different....

We get paid in USD, with a cost of living allowance added on top (figured monthly based on geographic region in the UK, ie: middle-of-nowhere Norfolk is less than London).

We aren't taxed on "allowances", only "pay." So my cost of living allowance, housing allowance, etc are not taxed by the US Government (they aren't stateside either). We file normal US taxes every year. We don't pay any income tax in the UK, but pay TV tax, road tax, and VAT (we could technically get exempted for VAT, but it's on an item-by-item basis and costs money to file the paperwork, so only makes sense for large items).

Assuming you work for an American company and just happen to be overseas, I would think your US tax picture would be like ours. We purposefully use US banks to the max extent possible (transferring only what we need for bills/direct debits into our UK account) to avoid having >10k in a foreign account.

[origami]

Aug 13, 2014 22:00:06 GMT -5 RockNVoll said:

The company paying any part of my taxes is not going to happen. I'm making some sacrifices to make this experience happen so this might just be one of those things. I've discussed some of the tax issues with my internal tax professional and while there's lots I'm sure I don't know, I'm comfortable with things at the moment.

I've already previously mentioned that yes, they'll be doing my U.S. and U.K. tax returns.

I hope they are giving you a COL increase at least.

[GilliC]

Aug 14, 2014 14:26:41 GMT -5 neeps said:

The OP of this thread. I have no doubt this is just a terminology error. The same way people say tax return when they mean tax refund. It's not my intent to piss you off. However, in this case it makes a big difference in the advice you receive from those of us who have expat packages with firms that do this all.the.time - which is what you asked for - and what is "reasonable to ask for" (or what we get) in an expat package.

I must make this mistake all the time then. Our company has two packages: "international mobile" and "geo mobile" (defined by geographic region, so mine was "Europe mobile"). I have always called mine an expat contract, because it included housing, travel, children's schooling, a premium percentage, and tax prep. But I was paid locally and the company did not pay any of my taxes. I didn't realize "expat package" was specific terminology and that the "mobile" terms were just the names our company came up with. I guess I was wrong all these years?

Since the company is officially based in the Netherland Antilles, and only a fraction of our expat employees are from the US, I guess it doesn't make sense to pay us in the US. And a lot of people like the Venezuelans would definitely not want to be paid in their home countries!

[GilliC]

In looking up more information about the official terminology (which seems to vary by source), I did find this article, which may answer your original question RockNVoll :
www.eca-international.com/news/articles/7271/Alternative_approaches_to_expatriate_compensation#.U-21yvmSwnU

It's from 2010, but at the time, their survey showed that just over half the companies employ a home-based pay system similar to what neeps was describing. The other half is divided between four categories. Our company's two systems fall into the groups they describe as "Local national plus" and "Third country salary structure."

(These days I'm considered a local employee, so my contract falls under "Local national" but I'm also not considered an expat by the company. I'm considered a Norway employee, and all they provide is my letter of employment. Keeping my visa current is now up to me in terms of admin and expense. The only difference between me and a local hire is that if I were to move somewhere else, my "home country" is still the US instead of Norway, because that's where I was hired.)

ETA - I mention this, because I would avoid "Local national" if you can. Unless you're planning to stay put in the new country for a long time, it will be a huge financial blow, because even with relocation benefits, the overhead of the move can be a drain. I did fine on "Local national plus" because the "plus" was more than enough to compensate the additional costs. Of course, living in a high tax country meant that I didn't need to pay additional taxes to the US, but I imagine the UK tax rates are still higher than the US. The company did provide additional compensation to offset the extremely high local taxes on our housing and travel benefits. The remaining tax burden was less than we would have spent on those things in the US.

[UnderProtest]

To answer the original question, my husband is paid an additional cost of living amount based on international indexes. It is added to his paycheck.

If you can negotiate that your company will pay the tax on the assignment benefits (housing, relo, cola, tax prep, etc) that will help you a bunch. An ideal package would be for them to pay the additional tax due to the UK's higher tax rate, but it doesn't sound like you have too much negotiating power with that. Paying the tax on the assignment related income seems logical though.