Terror, Taxes Threaten U.S. Workers Abroad

For some U.S. citizens working overseas, the threat of the tax man could be even scarier than the threat of terrorism, and could soon have thousands packing for home.

Mounting terrorist threats and the possible end of a tax benefit for U.S. workers living overseas are conspiring to make life abroad more difficult for them, and could also make more and more U.S. companies replace Americans with local hires, a trend that has already begun in many industries.

The recent terrorist attacks in Saudi Arabia where nine Americans were killed, along with the outbreak of the SARS virus, have made many Americans who have considered working overseas nervous about the prospect, and some who are already working abroad more than a little wary.

"I have clients sitting in Greece who are too scared to fly even into neighboring Italy," says Andrea Elliott, an attorney for Global Visa Solutions, a Newport Beach, Calif.-based company that gets visas and work permits for multinational companies.

"They've become a target just by virtue of having a U.S. passport," she says.

Joe Gorman, chief of the Ann Arbor, Mich., Fire Department, recently returned to the United States in mid-April after serving as a contractor for 18 months in Saudi Arabia to Vinnell Corp., the Northrop Grumman subsidiary that lost nine employees in last week's terrorist attacks in Riyadh, Saudi Arabia.

Gorman, who returned to pursue his current opportunity, says despite being well-paid, many of his former colleagues are considering following in his footsteps.

"There's real doubt in some people's minds whether they're going to be able to continue," he says.

Thomas Webber, a franchise developer who lives in Jeddah, Saudi Arabia, and has been in the country for 21 years, says the recent developments won't send him back to the United States, but he is being more careful about security by checking his car and varying the routes he takes to and from work.

"Eight months ago I would have told anyone that Saudi Arabia is the safest place to come as an American," he says. "I still enjoy it but you have to be so careful today."

The End of Tax Breaks?

But perhaps even more than security fears, a proposal to repeal a tax break that American citizens working overseas currently enjoy may make many who would otherwise work overseas decide to stay home instead.

A plan to repeal section 911 of the tax code — which allows U.S. citizens to exclude up to $80,000 from their earned income from U.S. taxes — is among the items included in a tax-cut bill recently passed by the Senate Finance Committee. Repealing the loophole would contribute an estimated $32 billion to the U.S. Treasury over 10 years, say experts.

Without this exemption, some Americans working abroad could be taxed twice, because they may have to pay taxes in their host country as well. Since many U.S. multinational corporations pay taxes for their employees when they work overseas, this could prompt some companies to keep American workers at home.

"The concern is that fewer Americans will be going abroad because their take home pay will be diminished from one year to the next," says David Hamod, a Washington, D.C.-based consultant for American companies working overseas. "Couple that with facing terrorism, and it could be a serious disincentive."

Lower-paid workers like teachers, who often don't enjoy the perks and benefits of U.S. corporate executives when they live and work overseas, say they would be especially hard hit.

Ken Derby, a teacher at the American International School of Budapest, Hungary, who has worked overseas for 18 years, says he and many other American teachers abroad would likely return to the United States because of the tax burden.

"In American international schools that have a high percentage of American teachers, a lot of those people would leave and other nationalities would be hired," he predicts.

The tax threat is definitely scarier than the threat of terrorism for those workers living in relatively safe countries.

"The topic that does not concern us is terrorism," says Jeff Barber, a teacher at the American School of Dubai in the United Arab Emirates. "The one thing that concerns all Americans working overseas is the $80,000 exclusion that is about to be rescinded."

Some Fear Jobless Influx to U.S.

The exact number of Americans working overseas is elusive, but the State Department says it has tracked around 4 million U.S. citizens who are currently abroad. However, that number is probably a low estimate, since that only counts those who have registered with the local U.S. embassy or consulate, a State Department spokeswoman says.

Because of the large numbers of U.S. citizens making a living overseas, another concern for the U.S. economy is that these workers losing their jobs and returning home would add even more job seekers in a climate where the unemployment rate is steadily rising and work is hard to come by for many.

"There will be a massive amount of Americans who are working for American companies who are sent back home," predicts Andy Sundberg, director and founder of American Citizens Abroad, a Geneva-based nonprofit group that serves the interests of U.S. citizens living overseas.

David Hamod, one of the most vocal advocates for keeping the tax exemption in place, started the Section 911 Coalition, which is lobbying to keep the exemption intact. He argues that having U.S. workers and companies overseas helps the U.S. economy because these firms will order goods and services from other American companies.

A study he commissioned from Price Waterhouse (now PriceWaterhouseCoopers) in 1995 found that the repeal of the exemption would result in the loss of 143,000 U.S.-based jobs and that U.S. exports would decline by 1.89 percent or $8.7 billion.

Kelly Gates, vice president of international business development for Birmingham, Ala.-based construction company B.L. Harbert, says his company would ultimately end up charging more to its clients to recoup the costs of hiring U.S. workers for international construction projects. One of those clients is the U.S. government.

Thinking Globally, Hiring Locally

While industry watchers doubt that companies are dramatically cutting back the number of their U.S. employees who work overseas, there are indications that many industries are turning more to local workers rather than exporting Americans abroad. The cheaper cost of local labor, especially during the current economic doldrums, has made hiring native workers more attractive for some companies and industries than sending American citizens abroad.

For example, U.S. financial services firms like banks and brokerages are planning to relocate more than 500,000 jobs offshore, or 8 percent of their work force, in the next five years, according to a recent study by management consultant firm A.T. Kearney.

"You probably are finding maybe companies resorting to the expatriate type of approach less often," says Mark Haering, senior partner for executive search firm MRI Worldwide in Indianapolis. "More often, they're going ahead and trying to utilize people within the country."

Webber, for example, hires a work force based mainly of Saudi nationals because of the language and cultural barriers for Americans.

Many American workers overseas lament this trend, noting that more U.S. citizens should work in other countries to better compete in a global economy. And many argue that their hard-earned dollars often return to the United States in the form of real-estate purchases, school tuition and investments.

Says Barber, "I don't invest in Thailand. I invest in American mutual funds — which I pay taxes on."