Tax equalization

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The problem of tax equalization arises when an individual is working for an international company and starts to work abroad his home country. There are questions of who should pay taxes and how much should they pay. Usually, the individual is receiving a net pay, which is the money they would have received in their home country after taxation. However, the company is obliged to pay taxes for its employee. If they are working in a country with lower taxes, the company takes the savings. On the other hand, if they work in a country with higher taxation, the company pays the excess. Either way, the amount received by the employee is same. If the policy only benefits the employee (reducing taxes if working abroad results in higher taxes, but not raising them if working abroad results in lower taxes), then it is referred to as a tax protection policy.

The term "tax equalization" is also used by some American states, such as Nebraska and North Dakota to refer to property appraisal in the context of property tax.

Theory

The idea is that an individual's income stays the same. There are some steps on how to determine the tax:

Calculate the amount of money paid on taxes in an individual's home country. This sum of money is the hypothetical tax liability.

Reduce the pay of the individual by his/her tax liability.

Add any allowance that is necessary to be paid while he/she is abroad as a result of an assignment. This is his/her net assignment pay.

Complications

Although it may appear easy to calculate your net pay, there are some other difficulties influencing your net pay. For example, if you are using company car in your home country, should you receive some subsidies when you are abroad and unable to use it? Or how is your partner's income treated?

For whom is the split-year tax system beneficial?

What if an individual leaves the company?

Does your tax equalization policy discourage individuals from acquiring property abroad?

and many more.

Practice

In practice, it is usually about agreement of both sides. Both parties should know on which basis is the tax calculated. After this is calculated, the amount is deducted from an individual's net pay on a regular basis throughout his/her assignment abroad. It is common, that the company deducts a hypothetical liability at the beginning of the year and then undertakes tax reconciliation at the end of the year.

References

• Tax Equalization, Tax Advice by Tim Lenneman, CPA
• [1], What is tax equalization by Andrew Bailey