Short-Term Assignments May be Just the Ticket for Your Company
by William Kavanaugh, KPMG LLP, New York
(KPMG LLP in the United States is a KPMG International member firm)

Companies have used short-term assignments (STAs) for many years, particularly in certain industries, such as oil and gas (field and site workers) and construction. Today, KPMG sees short-term opportunities growing among technology consultants and emerging businesses. STAs are also popular as an educational vehicle for management trainees. As compared with longer term assignments, STAs are generally less costly, largely because the spiral of tax reimbursement costs does not have time to explode out of control, and the basic allowance package may be less substantial than for longer term assignees. There are also favorable tax rules that reduce the U.S. tax for U.S. assignees on STAs. Of course, the foreign tax must also be reviewed and taken into consideration.

While the majority of international assignments tend to be three to five years in duration, it is apparent that shorter assignments, often one year or less, are on the rise. According to the ongoing KPMG International Human Resources Survey (The Short Term Assignment Survey at, 38 percent of respondents indicated that of all their company's current international assignments, nearly one-third were STAs. Forty seven percent responded that the use of short-term assignments has increased over the past year. The decision to send an employee on a STA is shaped by a number of variables including, compensation, taxation, career planning, and operational needs. This article will explore some of these variables, examine how they differ from those related to long-term assignment decisions, and highlight some of the policy and benefits distinctions between long- and short-term assignments. In general, one year is the maximum period defining a STA, primarily because of U.S. tax consequences and because it has become the standard used in many international assignment policies.

Compensation and the Tax Element

Often, the compensation costs for short-term assignees are substantially lower than for longer term assignees. This may be partly due to seniority and position factors, as well as the likely "single" status of the short-term assignee or the probability that he or she will take the STA unaccompanied by a spouse or partner. Moreover, living allowances generally are lower for short-term assignees based on the market basket pricing methodology used by consultants in the field. With STAs, both U.S. and non-U.S. taxes can be significantly lower, as compared with long-term assignments, and, therefore, the tax reimbursement cost — very often the most significant assignment cost — can be lowered substantially. If the individual is tax equalized, his or her hypothetical tax cost is fixed, with the tax benefits flowing to the employer. The tax angle is discussed in further detail below.

Tax Equalization and Other Policy Issues
Because the tax costs of STAs can be substantially lower than for longer assignments, many employers use a policy of tax protection, rather than equalization, for short-term assignees. For U.S. purposes, the treatment is similar to reimbursed business expenses; only the foreign tax, if any, needs to be reimbursed. The individual pays his or her own U.S. tax on base and bonus, without a hypothetical, and the living and transportation costs are not taxed. If a foreign tax is imposed on all or part of the income, a foreign tax credit is available. Only the excess foreign tax not available for credit, if any, needs to be reimbursed.

Other employers treat all assignees, long and short term, the same. That is, like the long-term assignee on tax equalization, the short-term assignee pays a hypothetical tax based on company policy, and the employer then pays all home and host country taxes. The advantage of tax equalization, rather than protection, is that the employer (not the employee) reaps the benefit of any tax windfall.

U.S. Tax Factors

Under U.S. tax rules, an individual on an assignment of less than one year will generally not qualify for the earned income exclusions because he or she may not meet the bona fide residence or physical presence tests. More importantly, because of the nature of the assignment, the short-term assignee may also not have established a tax home outside the U.S.

Under current U.S. tax law, an assignment of one year or less will be treated as an "away from home" trip, if the individual has a "tax home" (defined below) in the U.S. to be away from. By having a tax home in the U.S., the individual is treated for tax purposes as "away from home," as on any business trip, and can be reimbursed for ordinary and necessary business expenses. This can be done, as with any business travel, by having the individual provide receipts on an expense report and by reimbursing the full cost of the travel. However, this method:

  • Can become costly unless tightly controlled
  • Is cumbersome because of the requirement to document all expenses
  • Does not take into account the longer than average length of the business trip.
State tax rules vary considerably, but many states adopt the federal Internal Revenue Code by reference so that income not taxable for federal purposes is generally not taxable for state purposes. Each state should be looked at as required. Because the assignee's tax home remains in the U.S., he or she will normally be required to file a resident state tax return.

Tax Home
The term "tax home" is not specifically defined in the statutes but has been interpreted by the courts and defined by the IRS in rulings. The accepted definition of "tax home" is the geographic area of the individual's principle employment, and:

  • Where he or she returns to on a regular basis
  • Where his or her family resides
  • Where he or she has a place of permanent abode.
It is a requirement of the foreign earned income exclusion statute that an individual not only meet one of the two tests (bona fide residence test or the 330-day physical presence test) but also have a tax home in an overseas jurisdiction. Likewise, in order to take a deduction for "away from home" expenses, the individual must have a tax home in the U.S. to be away from and must be away temporarily. In Revenue Ruling 83-82, the IRS has defined "temporary" for this purpose as not more than one year.

Accountable Plans

If expenses are reimbursed under what is defined as an "accountable plan," it is not necessary to document each amount expended. Rather, a fixed amount may be paid, on a daily basis (per diem), without further documentation. The plan must require:

  • The individual to be away from home on business
  • That the nature of the business be documented
  • That he or she return to the employer any amounts drawn as an advance in excess of the allowable amounts.
The use of away from home concepts and of accountable plans comes largely from the traveling sales forces of the U.S.

Use of Per Diems
In its rulings, the IRS has published an allowable per diem amount for the U.S., in general, and specific allowable amounts by state and city throughout the U.S. There are also published allowable amounts for most countries and major cities outside the U.S. These amounts are based on the State Department guidelines for government employee travel. The per diem amounts are updated at least annually. New rates have been published, effective October 1, 2000, based on the government's fiscal year, with transition rules and options available from the prior calendar year basis.

By effective use of per diem payments, many employers are able to pay for local housing and living expenses in a manner that is not only tax free under U.S. rules, but also not reportable for payroll purposes. The published per diem rates are reported in two separate components: 1) local housing, and 2) meals and incidentals. Under the accountable plan rules, an employer may pay an amount up to the allowable per diem for a locality. Likewise, an employer can pay or reimburse actual housing costs and pay the per diem only for meals and incidentals. Normal documentation rules apply in this case for the housing, although it is generally most common for the employer to sign the lease and pay the rent directly.

Excluding Income Versus Deducting
If payments meet the accountable plan rules, it is not required that these amounts be included in reportable compensation. However, where the employer payments are less than the per diem amounts allowed, the employer may consider including the amounts in wages and the employee may be able to deduct the full amount of allowable per diems. In this situation, the income would be subject to social security tax, and the deduction would be subject to certain percentage limitations for itemized deductions. Comparison calculations are helpful and should be used to determine whether or not to include employer payments in wages.

Since housing, per diem, and airfares can be paid outside payroll as expenses of a business trip, compensation can generally remain within the normal payroll process, which makes administration easier and less costly. The large majority of short-term assignees remains on the home country payroll while on assignment.

Social Security and Benefit Coverage

It is generally much easier, and much more logical, to keep short-term assignees on a home country benefits and social insurance package. By utilizing Totalization Agreements and home country payroll where possible, this can be accomplished with minimal disruption to the employee and his or her family. Also, considering that many STAs are unaccompanied, the prospect of a host country benefit package, with the employee in one country and the spouse or partner and family in another, holds little attraction.

Foreign Tax Factors

In evaluating the cost of a STA, an employer must also consider potential taxes imposed by the host country. Many, if not most, countries will impose a tax on the wages of short-term assignees, as nonresidents, after a relatively short period of time.

Tax Treaties and Local Concessions
While foreign taxes can be significant for STAs, just as they are for long-term assignments, it may be possible in many situations to reduce or eliminate foreign taxes by use of tax treaties or local tax concessions. Generally, under the U.S. treaty system, if the individual remains on the U.S. payroll, and the assignment does not require presence in the country for more than 183 days, the individual can be exempt from foreign tax. The treaty will typically also impose some chargeback restrictions on the employer. Depending on the language of the specific treaty involved, and how local tax authorities interpret that language, it may be possible to have qualifying STAs in consecutive calendar years.

Some countries offer tax concessions for STAs, such as Hong Kong and Singapore, where no tax is imposed on assignments of 60 days or less. The U.K. has implemented rules similar to the U.S., but for assignments of up to two years. Also in the U.K., certain assignment-related costs, such as housing, meals, and local transportation, may not be taxed upon approval of Inland Revenue. Concessions need to be looked for and utilized to the extent possible to help keep tax reimbursement costs under control.


While anecdotal and survey evidence point to increasing use of STAs to meet companies' overseas business objectives, STAs do not solve all problems faced by companies. While often less expensive, they may contribute to turnover problems and can be counterproductive where continuity is a valued attribute of an assignment. STAs, however, can be very cost effective when based on well thought out (and executed) policies, and are used to support well-defined business goals. Decisions to use assignees, whether long or short term, should be made based primarily on operational needs, and not on their tax consequences.