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Under a tax equalization policy, an assignee pays no more and no less tax as a result of the assignment.
This policy is designed to make tax a neutral factor in an assignee's compensation package. That is, the assignee should bear a tax burden equal to that which would have been borne had the assignee remained at home. The assignee is responsible during the assignment for "hypothetical" or "stay-at-home" tax, which would be calculated on the remuneration the assignee would have earned if the assignee continued to live and work in the home location (i.e. it excludes all assignment-related compensation). Hypothetical tax will normally be withheld from the assignee's normal pay and is retained by the employer as a "tax reserve". The company would then pay all required home and host country taxes on company income (including taxes on expatriate benefits) during the assignment. For a number of companies, the assignee would not be tax equalized on income from non-company sources, e.g. net investment income from home and host countries, which means that the assignee will remain fully liable for all actual worldwide taxes payable on the personal income. Under an equalization policy, any tax savings will go to the employer but, similarly, any additional tax liability will be borne by the employer.
Some employers may implement a tax protection policy instead of tax equalization policy. Under the tax protection policy, an assignee's total income tax burden (host and home countries' tax) is limited to the hypothetical home country's income tax. In case the actual home and host countries' income tax are less than the home country's hypothetical income tax, the assignee could keep the benefit.
How can PwC International Assignment Services help you?
Our service team could provide the following services to you:
- Tax equalization policy and Tax protection policy design and review
- Calculation of hypothetical home country's income tax and preparation of tax equalization / tax protection calculation
- Projection of assignment tax costs
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