Housing Allowance Essay

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Typically an allowance paid to expatriates on long-term international assignments, a housing allowance is a financial benefit included in an expatriate’s remuneration package to cover the costs of housing in a new location. With the possible exception of foreign taxes and school fees, housing is usually the most expensive portion of an expatriate’s international assignment costs. The cost of renting overseas is usually higher than in one’s home country because in many popular expatriate destinations, the presence of foreigners drives up rental costs for housing likely to be chosen by expatriates. Temporary rentals on a two-to-three-year lease also tend to be more expensive than permanent housing in one’s home country.

A housing allowance is usually included in an expatriate’s remuneration package to ensure that expatriates pay no more for housing while abroad than they would have paid had they stayed at home. This is commonly referred to as the “balance sheet” approach. However, inherent in the concept is the expectation that expatriates should still contribute a portion of their salary toward foreign housing costs, just as they would for housing in their home country. To determine the amount of housing allowance to be paid, most organizations base their decision on knowledge of a location’s rental market, experience in that market with other expatriates, and advice from external data sources (e.g., housing guidelines from consulting firms). Seniority, salary, and family size may also influence the amount of housing allowance paid or offered. Housing allowances are then set either at a fixed amount per month/year or using rental cost guidelines that allow for some flexibility if a specific need exists.

In addition to the above, other approaches to housing allowances may also be adopted. For example, some organizations share the cost of housing with expatriates by paying an approved amount and permitting an expatriate to pay the extra portion if he/she wishes to live in more expensive accommodations. Many organizations also prefer to hold the lease in the company’s name for tax purposes, as most countries consider cash payments for rent to expatriates (through remuneration) as taxable. When the organization holds the lease, it is treated as a business expense, which can substantially reduce the amount of tax due. There are also some locations where rental property owners require that a lease be held in a company’s name to ensure that if the expatriate moves out before the lease has expired, the rental income can still be obtained. In these locations, rental-property owners prefer to enter into a contract based on the security of a company’s continued presence in that location rather than risk leasing their property to nonpermanent expatriates. In some cases, particularly in remote locations, a company may provide accommodation in residences owned by the organization. This typically occurs in locations where a company may have a long-term presence, but it is more cost-effective to own homes or apartments for expatriates’ use.

Utility costs may or may not be included in a housing allowance. Since rental charges do not include utilities, it has become common practice in some locations (particularly in locations where utility charges are high) for organizations to pay all utility costs or a fixed monthly utility allowance. Utilities can include electricity, gas, wood, heating oil, water, septic tank or sewage connection, garbage collection, and cable television. If utility charges exceed a fixed monthly allowance, the expatriate is expected to pay the difference. If utility charges do not exceed a fixed monthly allowance, expatriates typically are not entitled to receive the shortfall.

The issue of maintaining an expatriate’s primary home-country residence is also of interest in calculating a housing allowance. As most organizations discourage expatriates from selling their home-country residence (due to the temporary nature of most assignments; expatriates will likely return to their home-country after two or three years), expatriates during an assignment will therefore continue to incur costs associated with their primary residence that may or may not be compensated via their housing allowance (especially if a housing allowance is shared between expatriate and employer). This additional cost can be of concern to expatriates. Most organizations overcome this problem by encouraging expatriates to rent out their primary residence during their absence overseas at a cost that will cover all or much of the mortgage payment. Where a shortfall exists, organizations often subsidize the interest payment of a mortgage, with the knowledge that full replacement of these payments is not necessary given that mortgage payments contribute toward a family’s overall equity position.

When rental of the home-country residence is not practical or advisable, organizations may adjust a housing allowance if the expatriate can present legitimate reasons. These reasons can include that the expatriate is required to leave his family at home due to the nature of the assignment (e.g., the children must remain in school), or that the assignee is unable to rent their primary residence and will thereby incur additional costs beyond their control. In these situations, organizations might not adjust a housing allowance but instead might increase an expatriate’s salary.

Bibliography:

  1. Organization Resources Counselors, Inc., International Assignments: Strategies for Compensation and Pay Administration (2007).

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