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.
Businesses often struggle to determine how they are going to fill positions when new opportunities arise overseas. 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. Considering the benefits of tax equalization can help.
What is Tax Equalization?
Tax Equalization is a method of taxation management where the international assignee is expected to remain at the same level. Relative to the taxes they would have had in their 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’s 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 offset their entire U.S. obligation. A company’s tax equalization program reimburses the expatriate for the potential higher 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 the relocation process easier should be one of a company’s top priorities. Expatriates who benefit from tax equalization have less on their plate, as they know they are subject to the same level of taxation as well as the same net reimbursement. Reducing the economic stress an employee is under, helps them focus on the personal and professional development that taking an international opportunity can present.
At WHR Group, we pride ourselves on making the complex simple. This includes our comprehensive global mobility solutions, including tax equalization program help. Regardless of whether the relocation is short-term, localized, or permanent, we have the resources and expertise to make your employees’ experience exceptional.
