There are essentially two primary approaches to expatriate taxation: tax equalisation and tax protection. A Laissez Faire approach is considered a third option, but this leaves the employee to calculate and deal with all of their own tax liabilities.
There are a number of differences between tax equalisation and tax protection. Primarily, equalisation means that the employee will be tax neutral, and with neither gain nor lose from paying taxes while on an overseas assignment. In contrast, tax protection means that the employee can make financial gains in countries with lower tax, but will not lose out in a country with higher taxation laws.
The aim of tax equalisation is to ensure that the assignee is tax neutral. They pay a hypothetical tax, which is the tax that they would pay if they had remained at home, and the employer reconciles the difference with the appropriate tax department.
Where there is a deficit in tax payments, the company will make the additional payments, and where there is a surplus, the employer benefits from the reimbursement.
Tax equalisation is considered the most beneficial method for assignees, but it requires the most administration and tax calculation work on the part of the employer, so is considered expensive.
Through tax protection, the assignee should not pay any more tax than they would at home, but can still benefit from any tax savings that are possible. This can be used as an incentive to persuade employees to take assignments overseas, and usually requires less paperwork and tax calculations than equalisation demands.
A third option, Laissez Faire, essentially means that the assignee is left to deal with all aspects of their taxation requirements themselves. They can benefit or lose out, according to the tax laws in the host country, and errors on the part of the employee can reflect badly on the organisation too.
A professional expatriate tax consultant can help your organisation determine which is the most appropriate method for your organisation. We can design and assist in the implantation of your taxation plan, and assist in accurate and timely tax equalisation and tax protection calculations.
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