International business travel is on the rise. Nearly two-thirds of international organisations have seen an increase in the number of business trips taken in the last two years and the same proportion expect the number to increase again in the next two. The main reason for the increase is that companies are sending staff to more locations than previously, reflecting broader trends in globalisation and slow economic growth in many parts of the world forcing companies to explore new markets where returns may be higher.
As the number of business trips and the locations involved increase, successfully managing these trips becomes more challenging. In our 2017 International Business Trips Survey the greatest concern to participants, particularly those working in larger companies, was keeping track of business travellers. Tracking is crucial for ensuring compliance with tax and immigration requirements, as we shall see later. The second biggest concern was monitoring and controlling the costs of business trips.
A documented business travel policy is essential to make it clear exactly what expenses will be covered in what circumstances to prevent the cost of international business trips spiralling out of control. This will typically specify the class of flight and accommodation that is permitted (which may vary by seniority and, in the case of flights, duration) and the other subsistence costs that will be paid for, such as meals and transport.
A major expense associated with international business trips is the cost of airline tickets. The class of travel used can significantly affect the cost of the flight as, on average, the cost of an economy class ticket is around one-third of the cost of a business class ticket on the same flight.
Companies should carefully consider the flight class permitted by their business travel policy to strike an appropriate balance between cost management and employee comfort. Most policies determine the flight class according to flight duration and/or the seniority of the traveller. Our survey found that companies most commonly specify economy class for all employees on flights up to three hours and for junior employees on flights of any duration. Senior managers are more likely to be permitted to travel in premium economy or business class for flights exceeding three hours; the vast majority travel in business class once the flight exceeds eight hours.
Considering the significant difference in price, it is not surprising that organisations are moving towards using economy class more and business class less. In the last five years, the percentage of middle managers flying business class has dropped from 55% to 40% overall. Although there will always be a need for business class travel for executives who need to arrive fresh for meetings after a long flight, the continued focus on cost-effectiveness by organisations globally means that for shorter flights we can expect senior employee flight class to be downgraded in the future.
Accommodation is a necessity for any overnight business trip and contributes significantly to the overall cost. The cost of providing a hotel typically accounts for 54% of total daily business travel costs.
Despite the emergence of homestay services like Airbnb, nearly 100% of participants in our survey confirmed that their policy is to provide hotels for their business travellers. The main decision facing most trip planners and policy drafters regarding accommodation is therefore what standard of hotel to provide.
Overall, four-star hotels are the most popular choice for business travel, although organisations vary provision for their staff based on seniority. Junior employees are most commonly provided with three-star hotels while four-star accommodation is typically provided to middle and senior management. Around one-third of companies provide five-star hotels for their senior staff, but it is rare to provide these for less senior employees. Only 4% provide hotels below three-star standard, even to junior employees.
The class of hotel stipulated within a business travel policy can have a significant impact on the overall cost of a trip. In Bangkok, for example, a four-star hotel costs on average 80% more than a three-star one and a five-star hotel nearly three times as much. A company that chooses to house its senior business travellers in four-star hotels rather than five-star stands to save USD 142 per night in this location.
Business travel policies that specify the standard of hotel that employees are required to stay in therefore not only ensure consistent treatment of travellers but can help to manage costs. Most companies do however allow some flexibility when there are issues with availability, location or security, or where the company has a preferential-rate deal with certain hotel chains.
Almost all business travel policies provide cover for the costs of flights and hotels, but the extent to which daily necessities, or subsistence costs, are paid for and how varies considerably between organisations.
Most companies will pay for meals and local transport for their business travellers. A smaller number of companies (but still the majority) will pay for laundry and soft drinks too. Companies perhaps do not expect laundry to be required on shorter business trips, and employees are more likely to be expected to pay for soft drinks out of their own pocket, as they would at home.
The costs of non-essential items such as personal phone calls, alcoholic drinks and personal internet are less commonly covered by business travel policies. Food for self-catering is also not commonly covered as most travellers will stay in a hotel where it is difficult to prepare meals.
Companies pay for subsistence items using a variety of methods, the most common being to reimburse the employee after they have submitted their receipts. The reimbursement method has decreased in use by 9% over the past five years, however. At the same time, it is becoming increasingly popular to pay employees a non-accountable per diem; our survey saw a 42% increase in the number of companies using this method compared to five years ago. A third, slightly less popular alternative is to provide a company credit card.
Per diems make it easy to control expenditure by imposing a daily limit on what a company will provide towards subsistence, with any expenditure exceeding this amount being at the employee’s expense. Even when companies pay for subsistence by reimbursement or credit card, per diem figures can still be used to set limits on expenses.
There are many advantages to paying per diems compared to other methods, not least of which is that they help companies to anticipate the costs of business trips before they happen. They save time and money by reducing the amount of administration involved in paying expenses. They ensure all business travellers at the organisation are treated fairly and consistently because the same assumptions are used to calculate the required expenditure in each location. Another advantage is that tax authorities in many countries set daily amounts for business expenses that can be paid tax-free, so per diems can also reduce the risk of non-compliance with tax regulations.
Setting consistent per diems for all business trips requires detailed knowledge of specific costs in each location, which may explain why an increasing number of organisations (51%) are using third party data providers like ECA to supply per diem figures. That said, a surprising finding of our survey was that 75% of companies who provide per diems set them at a national or even regional level rather than varying them according to the specific city being visited. In doing so they may be over- or under-paying some of their business travellers, as the daily cost of business trips can vary widely within a single country and even more so within a region.
As the number of locations to which companies are sending business travellers is rising along with pressure to be more cost-effective, it is likely that companies will move increasingly towards setting per diems at a location- rather than national- or regional level in the future.
Tracking and compliance
As the diversity of business trip destinations increases and government scrutiny intensifies, it is becoming increasingly important for companies to accurately track the movements of their business travellers and assess any possible compliance risks. Yet keeping track of travellers was cited as the most challenging area of business trip management by participants in our survey.
While 71% of companies keep track of some or all of their business travellers, the remaining 29% are leaving themselves open to the risk of non-compliance with tax or immigration regulations. This in turn could lead to unforeseen costs in the form of fines and damage to the company’s reputation.
There are three types of business traveller that companies are more likely to track. These are employees:
- travelling to countries where there is a known immigration, tax or other compliance requirement;
- on trips which exceed a certain length of time;
- frequently travelling to other countries.
Broadly speaking, these are all situations where a tax or immigration compliance obligation is more likely to arise. This suggests that many of those companies who only track some of their business travellers take the decision on whether to do so based on a risk assessment (a more mundane reason is the challenge of ensuring all employees follow the required processes to track business travel).
Just over a third of participants in our survey carry out a risk assessment before every business trip and a further 44% do so some of the time. Companies are more likely to carry out risk assessments before trips to countries where employees have not previously been sent or before longer trips (typically over a month).
The area most commonly assessed is immigration. The personal health and security of the traveller is also of great concern, with three-quarters of companies assessing the safety of the destination and two-thirds checking the adequacy of the employee’s medical insurance.
It is interesting that the risk of incurring a personal income tax liability or creating a permanent establishment are assessed less frequently. This is perhaps because it is assumed these scenarios are unlikely to become a risk until the trip exceeds a certain length of time (most companies define business trips as lasting no more than either one or three months). Pre-selecting certain trips for risk assessment and not others based on assumed knowledge, however, is not good practice. Legislation changes frequently and the personal security situation in some counties can be extremely volatile. Therefore all business travellers and business trip destinations should be regularly assessed to ensure the company and the assignee are protected.
Looking forward, we expect to see the number of international business trips continue to rise. As a result, many more companies will be focussing on the challenge of tracking their business travellers to avoid the financial and reputational cost of non-compliance with tax and immigration obligations. At the same time, policy makers and administrators are likely to remain under pressure to contain the costs of business travel, meaning that we can expect to see further downgrades in the class of air travel permitted for more senior employees and an increase in the use of per diems to set limits on expenses.
FIND OUT MORE
Please contact us to speak to a member of our team directly.
This article is abridged from ECA’s latest Global Perspectives on International Business Trips, a free white paper providing an overview of the costs and best practice involved in managing business travel around the world.
ECA's Daily Rates Calculator helps you to calculate and manage daily subsistence allowances for international business travellers. The calculator makes it easy to adapt ECA's established Daily Rates data to produce per diems in line with your company policy, ensuring fair, accurate and consistent allowances for your global business trips.
To purchase a copy of the 2017 International Business Trips survey report, please get in touch.