When new opportunities arise overseas, businesses often struggle to determine how they are going to fill the positions. Many multinational corporations turn to their proven domestic employees and look to leverage their abilities to develop markets, monetize product offerings and grow their business overseas.
However, the transition from a home country to another country is complex and could dissuade talent from taking expatriate assignments. Housing, cultural acclimatization, family adjustments, and entering a new work environment are just a few of the factors that need to be considered when going international. To counter this, expatriates are offered benefits and assistance to make the experience as smooth as possible. One of these benefits, tax equalization, takes the guesswork out of the change in income and social taxes that come about when an employee moves across a border.
What is Tax Equalization?
Tax Equalization is a method of taxation management where the international assignee is expected to remain at the same level which they would have, relative to taxes, had they remained in the home country. In short, the assignee should not receive a tax benefit nor should they be taxed at a rate that is detrimental.
As an example, expatriates coming from the United States have a unique obligation to fulfill. U.S. citizens are required to file taxes on their global income regardless of where it was earned, so they don’t have the benefit of being able to break their home country tax obligation. Additionally, they’ll have a tax filing requirement in the host country as well.
While the U.S. does provide foreign tax credits that can be applied to the employee’s U.S. return, it may not be enough of a credit to off-set their entire U.S. obligation. With companies that provide tax equalization, expats whose combined taxes are higher than what they would hypothetically be without the assignment are reimbursed by the company for the additional taxes incurred. Conversely, if the combined taxes are lower, the assignee will reimburse the company for the difference.
Therefore, the assignee is paying no more or no less had they not left their home country, regardless of the actual tax burden in the home and host country.
How Does Tax Equalization Benefit Expatriates?
Moving your career, and potentially your family, overseas is a stressful experience; having systems in place to make relocation easier should be one of a company’s top priorities. An expatriate who benefits from tax equalization has less on their plate, as they know they are subject to the same level of taxation as well as the same net reimbursement. The less economic stress an employee is under, the more they can focus on the personal and professional development that taking an international opportunity can present.
At WHR Group, we pride ourselves at making the complex simple. This includes our comprehensive global mobility solutions. Regardless of whether the relocation is short-term, localized, or permanent, we have the resources and expertise to make your employees’ experience exceptional.