U.S. companies have long provided added benefits as an added incentive to lure American workers overseas. Among the common perqs are housing allowances, subsidies to send employees’ children to private schools, and business class tickets to fly families back to the States at least once a year. Under the new tax code, the cost of these items will now be counted as income received, and will thus all be taxable. Congress added this increased tax burden on American expats to the recent Bush tax cut bill to raise much-needed additional revenue. As a last minute addition to the tax bill—retroactive to the beginning of 2006—tax revenue will increase by an estimated $2.1 billion over the next 10 years.

So who will pay for these additional taxes? Ernst & Young tax partner Michael Abdalian reports, “Most companies have programs designed to protect their employees from additional taxes.” Most of the impact—or incidence—of the tax increase will fall on the employing companies, since the companies will simply increase employee salaries to cover the increases without any effect on the employees’ take-home pay. This change could be a very expensive proposition for companies with U.S. employees working overseas. Because the new rules will push many Americans overseas into higher income tax brackets, companies will spend up to $2 for each $1 their overseas employees pay in U.S. taxes. The corporations will be able to deduct the entire $2 from their corporate tax bill as a cost of doing business. Mr. Abdalian made rough calculations that indicated that a married couple receiving $300,000 per year, of which $20,000 was a housing allowance, would see their income tax bill rise by about $20,000. This means the couple’s employer would see their cost rise by about $40,000. Since most countries exempt their citizens overseas from income taxes, the new tax law will give U.S. companies incentive to hire workers from those income tax exempt countries like Australia, England, Canada, and any other nationalities for whom the companies would not have to pay the additional tax in the form of salary increases.