To Localize or not, that’s the question

Too many dread the request from headquarters every year or so, “Your term is coming to an end.” What follows is the all-too-common maneuver to renew.

As designed, and often so used, the generous bundle of compensation and perks commonly known as the expat package, is for short-term assignments typically of 2 to 5 years. At the end of the term, the individual returns to the home country. The trouble comes when one gets addictive to China. It is vibrant, culturally rich, and friendly. The expatriated wishes to stay for indefinite term but don’t want to give up the nice package.

From the corporate side, the arrangement is excessively expensive and conceptually difficult. The package usually costs 2 to 3 times the person’s US salary; how could a temporary deal becomes many years, seemingly not ending? The corporate wants things clean. It also wants compensation to be fair: to those hundreds of local employees as well as more in headquarters.

But there is no need for confrontation. There is a way to make both sides happy. Ready?

Assumptions

For ease of discussion, we will assume that you, the assignee, is from the USA. You are a senior person that provide good value to the company. In other words, you are competitive and worth your money.

With that assumption, the rationality for localization is not about saving money. The company should be willing to provide you with reasonable and competitive compensation. What they need is the right argument to justify it. If this assumption is not true, then you are not really competitive, from the company’s point of view. You should either accept the lower pay or seek other jobs.

The basis of the discussion starts from the simple principle: your income should remain relatively the same after the localization. The goal is not to degrade your quality of life drastically.

The company wishes to do good business in China. Otherwise, you have no value here anyway.

Considerations

China and the US agreed not to double tax. This means the same money will not be taxed in both China and the US. China, however, do not have the same agreement with the state of your residence. You will have to pay state income taxes for whatever income declared in your federal tax return.

Both China and the US has progressive tax rates. You should have a firm grip on your effective tax rate: the amount of taxes divided by your effective income.

Perks are generally not taxed in China if the company pays for them. They are taxable income in the US.

The working days you spent in the US are usually subject to the US income taxes. China’s tax process are not sophisticated enough to refund you those. How many days you will stay in the US? How many of them you will be working?v

Your company probably have a pre-tax 401k matching program for US employees. There is no such thing in China. You should consider asking for this.

If you have dependents in the US. Who will pay for their medical insurances?

Unlike the US, personal relationship is the foundation of all business interaction. As such, social prestige is part of the business. People do judge you on where you live, the car you drive, the clothes you wear, etc. The company should consider these with its compensation design.

Contrary to the common belief, the senior talents in China frequently receive equal or even higher pay than their US counter-parts. Only junior ranked are less expensive. This is really just the simple function of supply and demand. I found the “crossing point” to be at the director grade. This is true for both MNCs and local enterprises.

China citizens are not allowed to own foreign stocks. Many companies worked around the laws, but you may also find yourself excluded from future stock option grants.

Lastly, if you consider retiring in the US, what you really to compute is the rate your retirement fund accelerates. Does localization implies retiring in China? Both the company and yourself should make this point clear.

Calculator

Here’s China’s personal income tax table. You should verify its accuracy, since China adjust the tax-free income regularly.

To use this table, find your range, multiply the in-range portion with the tax rate and add in the “quick deduction” value. Don’t forget to deduct 800 first.

For example, if you make 90,800 a month, first minus 800 to get 90,000. Find the 8th rung. Your in-range portion is (90,000 – 80,000 =) 10,000. Multiple that by the tax rate of 40% (=4,000) and add in the quick deduction number of 10,375. Your monthly tax will then be 4,000 + 10,375 = 14,375. Your effective tax rate is then 14,375 / 90,800 = 15.8%.

Next figure out your US tax bracket. The simplest way is to average your 3-year total tax paid by your 3-year total adjustable income. Don’t forget state taxes.

Now, if your China effective tax is X and US Y. If your pre-tax US income is Z, the rough equivalent China income shall be Z * (1 – Y)/(1 – X). Convert that answer from US$ to RMB. If your company pays bonuses, or extra-month’s pay in China, factor those in.

Now the Perks

You should try to arrange most of perks to be paid out by the company directly. They are then not taxed in China, but still taxable in the US. So add them all up and multiply them by Y and add that amount to your China income. I know that your China income is then subject to its taxes and will become your US income again. The computation is too complicated and not really amount to much. This simple method will do.

How to Negotiate

At the end of the day, you must be worth the compensation. Be sensitive to the decision maker’s judgment. He or she will eventually decide whether you are worth whatever you are asking for. A totally fair deal may be too much for him or her to pay. You must accept this and know your bottomline. Most companies are willing to give you an enticing compensation package if it is justifiable according to the policies, reasonable, defensible to the general constituents, and scalable to a general class of employees.

The education assistance is easy. Your children have their future in the US and should not be jeopardized by your assignment in China. Family first, not compromisable.

House and car services are a bit trickier. Supposedly, a localized person should provide his or her own housing. But the company should really take care of the differences. China’s houses are in general more expensive and the mortgage terms much worse. Don’t forget management fees.

The same argument applies to car services. Cars are luxury items in China and are 30% or more expensive than the equivalent in the US. Given that, it is really not much more to hire a chauffeur. Note that normal social protocols expect senior managers to arrive at social functions driven.