If you’re an expat or are on a short-term contract abroad, you may find yourself in the interesting situation where you live in one country and work in another. Whether you’re an employee or company owner, keeping track of currency exchange rates — with an eye on estimated future values — can help both with current cash flow and when making long-term business decisions.
Business Concerns Affected by International Currency Exchange Rates
Travel ExpensesPerhaps you live in the United States but your business is based in the United Kingdom, so you and your employees often go there on business. Maybe you call France home but work in the United Arab Emirates. Whatever the situation, when you or your employees to visit another country, your travel expenses become tougher to navigate. “Currency exchange rates change on a daily basis,” says financial resource ExpensePoint. “If your employee can’t remember which charges were made on which days of a multi-day business trip, it may be impossible to accurately process your expense reports in your home currency.” While this may seem like a headache, according to ExpensePoint, expat business owners can rely on automated expense report software. This takes care of converting currencies so you don’t have to.
IncomeOnce you’ve figured out the hurdle that is dealing with international business travel expenses, what about paying employees? What about your own salary? Shield Geo, an employment resource, says “for longer-term assignments, it is not difficult to imagine scenarios where there could be an imbalance created by exchange rates that benefit either the employer or the employee.” What should you do to avoid this imbalance? Shield Geo offers a few tactics:
- Equalization — The company defines equalization as when “the expat salary is fixed at a rate based on the home currency rather than the local, foreign currency.” This means then that the payment amount itself fluctuates as international currency exchange rates change.
- Localization — As an alternative to equalization, employees can be paid a fixed amount in local currency. This allows “them to budget for living expenses in the local economy with no unexpected surprise due to fluctuating currency rates,” writes Shield Geo.
TaxesNow that you know how you’ll take care of paying salaries, you also have to think about what will happen around tax time. Gerardo at Expatistan writes from the angle of a US resident moving to another country; check your country of origin tax rules to see if you can take advantage of similar exclusions and credits. Some governments, he says, “have provided a number of exclusions and credits to help offset dual taxation and allow expats to earn money tax-free.” In the US, these are the Foreign Tax Credit, the Foreign Housing Alliance and the Foreign Earned Income Exclusion. Here are the potential savings to expect with these:
- Foreign Tax Credit — With this option, expats get “a dollar to dollar credit for any taxes paid to a foreign country.”
- Foreign Housing Alliance — If you pay rent or something similar in your home country, you can possibly get a deduction through the Foreign Housing Alliance.
- Foreign Earned Income Exclusion — Under the FEIE for 2015, you may exclude foreign earnings of up to 100,800 USD from being taxed. “If you make less than this, you will not owe the US anything in taxes.”