58% of companies that apply fiscal equalization use a number of standard assumptions to calculate hypotaxis instead of trying to reproduce a person`s exact tax situation. In this way, they find a balance between accurately estimating a person`s tax and social security obligations in the home country and maintaining the process using a standard calculation methodology for all agents. Under tax equalization programs, the employer often provides the employee with the services of a tax advisor specializing in international income tax. This way, the employee doesn`t have to spend time or effort learning how to handle all the permutations and complexities of the house/host. The employee, in turn, remains liable only for his or her share of tax ($20,000 in this example) and the employer bears the ACTUAL costs incurred in both jurisdictions. An alternative to fiscal equalization is tax protection. With this approach, the employee does not pay more taxes during the mission than in the home country, but could end up paying less if the host country`s tax burden is lower than that of the home country. Since the employer funds the entire REAL tax ($18,120) on behalf of the employee, the ACTUAL tax is considered compensation for the employee and must also be taxed. In this case, at the same income tax rate of 15% plus FICA and Medicare, the additional total tax would be $4,104. But you know what? This payment is also taxable.
The final gross amount (tax plus tax on tax, etc.) in this case is $23,426. You can prove it as follows: Although the tax protection method is often favorable to companies in this sense, the company does not have to pay taxes for the whole year until the annual assessment is done. However, this type of system can lead to other negative consequences. First, if the employee lives in a high-tax jurisdiction under a tax protection system, the person may have significant cash flow problems. In addition, the employee can reap a significant tax benefit if the hypothetical tax has been calculated too low. Tax protection has similar objectives to fiscal equalization, but it achieves them in a different way. Tax protection largely weighs on the employee due to compliance with tax regulations at home and abroad. The employee is responsible for paying all local and international taxes. At the end of the taxation year, an annual assessment of the taxes paid should then be made.
If the taxes actually paid are higher than the hypothetical amount of taxes that would have been paid if the employee had stayed at home, the company must compensate the employee. If the amount of tax actually paid is less than the hypothetical amount of the stay at home, the employee will not receive a transfer. Effective tax management policies can help promote mobility by ensuring that the generous or punitive tax system of the destination country is not the deciding factor in accepting or rejecting a contract. In general, companies will use either fiscal equalization or tax protection, but some use a laissez-faire approach© that leaves it to the transferee to take responsibility for its own tax affairs. Whichever tax administration policy you choose, this will affect the total cost of the order, especially if it is taken into account that a tax refund is likely to result in an additional tax burden. For the majority of businesses, the fiscal equalization approach offers at least the potential for savings for the business. This is not only the elimination of the tax as an obstacle to mobility, but also the reason why it is so widespread. Two common approaches are used, known as fiscal equalization and tax protection.
I hope this will give you a basic understanding of the rationale for fiscal equalization policy and an initial understanding of the basic coding of U.S. wages. The second summary in this series will delve deeper into some of the most likely wage transactions you can expect as part of the fiscal equalization process. Feel free to contact me if you have any questions about fiscal equalization or foreign programs and policies in the meantime. The complexity associated with calculating tax relief and filing U.S. and foreign taxes for expatriate employees usually means that employers choose to hire a company that specializes in expat taxes. It calculates the amount of home country tax liability for non-resident components of a person`s compensation scheme – in other words, salary, standard benefits in kind, bonuses, stock options, etc. Cost-of-living allowances and other foreign benefits such as disruption allowances, tuition fees, home leave and local housing, etc. are not taken into account. Understanding what it means to increase fiscal equalization can help you create a policy and apply it to the most appropriate segments of your mobility program. Thus, a person seconded to the US by (say) the UK would withhold an amount of `hypothetical tax` on their income each month equal to what they would have paid for the non-expatriate parts of their salary if they had remained in the UK. Many people who have to live and work abroad may fear paying excessive taxes or suffering double taxation.
However, U.S. tax law has considered both the possibility that a U.S. taxpayer destined to work in a foreign country may face extremely favorable or extremely unfavorable tax treatment due to interaction with the United States. The tax legislation and laws of the country in which the taxpayer is assigned. The purpose of fiscal equalization is to offset the amount of tax paid so that the taxpayer living and working abroad pays what he or she would have paid in taxes at home. That is, the purpose of fiscal equalization is to balance the tax level in a manner similar to what the taxpayer would have appreciated if he had remained in the United States. For businesses considering using fiscal equalization, it is important to know the pros and cons of the approach. What does it really mean to apply fiscal equalization and what impact does it have on the employee and the organization? With a thorough understanding of the concept and the implementation of appropriate policies, fiscal equalization can be an important tool to promote and support a high-performing mobile workforce. In contrast, the fiscal equalization method may require additional monitoring and management on the part of the company, but it offers more fairness, higher tax compliance rates, and greater flexibility. Fairness is present in tax equalization systems because the employee assigned to a foreign country is placed in a fiscally neutral position. This scenario allows for greater flexibility, as the person can move from one country to another depending on the needs of the work or project without having to take into account changes in tax rates. Note that all compensation is taxable in the host country (subject to local tax laws), and not just non-expatriate items.
Unlike fiscal equalization, the employee is responsible for paying all taxes actually due. Simply put, fiscal equalization means that a transferee pays neither more nor less taxes on the transfer than he would have paid if he had stayed at home. Fiscal equalization remains the most common approach to tax management, according to our latest survey on managing expatriate salaries, with 75% of companies using it. Tax equalization is likely intended to encourage expatriates to work for their employers wherever they are sent, knowing that they are not at a tax disadvantage and that their tax affairs are managed by the tax advisors appointed by the company. Of course, if someone does not become a resident of their home country, it is unlikely that there has been a significant tax liability anyway, but we must not forget that the purpose of fiscal equalization is to ensure that the individual is not better or worse off through the allowance. One thing to keep in mind when it comes to tax equalization is that paying taxes on behalf of an employee is generally considered a taxable benefit in itself, resulting in an additional tax liability. ECAEnterprise, the ECAEnterprise allocation management system, automatically takes this “tax tax” into account in salary calculations and cost projections. We look at the pros and cons of tax equalization and tax protection to help you decide which approach is best for your business. According to the expatriate salary management survey, it is much less common than tax equalization, with only 7% of companies applying tax protection policies. Tax equalization and tax protection are advantageous for transferees because they ensure that the tax does not disadvantage them during the transfer. Under tax protection, they could even receive a monetary blessing.
In the case of missions abroad where fiscal equalization applies, employers generally meet the tax obligation in the host country. This can be done in several ways. One of the most common means is foreign payroll. Employers sometimes use what is known as “shadow pay” or “parallel payroll” to meet payroll and withholding tax requirements in the host country for their mobile employees. If a company uses parallel or parallel payroll, it pays the tax due in the host country, while the mobile worker in their home country remains on the company`s payroll for the actual payroll. .