Tax equalization for expatriates

Global mobility will be easier if employment tax rates are the same in every country. Well, it isn’t! The tax liability of an employee often changes during an international assignment. If an expatriate is tax resident in a foreign country, such income will be taxable. Likewise, an expatriate may still attract tax and/or social security contributions in their home country are tax resident. This arouses two questions in the minds of some expatriates and Human Resources. 

  1. Who gets the tax benefit if the employee moves to a country with a lower tax rate than the home country? 
  2. If the tax rate in the home country is higher than the host country, who bears the tax liability? 

A sound assignment policy should ensure that tax is not a major criterion for selecting or rejecting an assignment. Thus, multinational companies will adopt either a tax equalization or tax protection or laissez-faire policy. 

What is tax equalization?​

Tax equalization means that irrespective of the tax rate in the host country, the expatriate pays tax at a rate like employee in the home country. Under a tax equalization approach, the employer bears the tax due in the home and host countries. The employee contributes to the total tax liability by paying hypothetical tax (hypotax) on the salary in the home country. Tax equalization began as a result of US multinationals sending employees to work overseas while these individuals remained tax resident in the United States. It aims to shield the employee and employer from large costs on the assignment. Furthermore, it creates an unbiased tax rate for assignees. 

Why tax equalization?

Tax equalization will help employee and employer in several circumstances: It

  • Builds a fair and even tax rate throughout the assignment, particularly where the range of tax rates between countries is high 
  • Increases mobility since the tax rate remains constant whether the employee stays in the foreign country or returns · 
  • Is easier to comply with tax regulations in many jurisdictions.


How to deal with tax equalization when using BRC Solutions?

A company that uses BRC for payroll solutions in Nigeria (the host country) would still withhold taxes in the home country. BRC, as local employer of record, would withhold Nigerian taxes to comply with local laws. Another striking feature is that BRC handles the payroll tax returns in Nigeria instead of the company. This eases local compliance. Meanwhile, the company will be responsible for any tax credits or balances either in the home country tax return or under a tax treaty.

Alternate approach to tax equalisation

1. Tax protection

Tax protection emerged as European model for assignees who remain tax resident in Europe. It is a bit like tax equalization since the employee will pay tax like an employee in the home country. In contrast with tax equalization, the employee will be responsible for paying taxes in the home and host country. The employer’s contribution to the employee’s tax liability depends on the tax rate in the host country. If the tax rate in the destination country is higher than in the originating country, the company will reimburse the employee for extra tax. Meanwhile, if the tax rate in the host country is lower than the tax rate in the originating country, the employee enjoys the benefit. Tax Protection seeks to ensure that the employee on assignment is not worse off due to tax. Besides, the employee could pay less taxes if the tax rate in the destination country tax is lesser than in the origination country.

2. Laissez-faire

Laissez-faire is a French term that means leave alone. The principle relieves the employer from participating in the employee’s tax affairs. Rather, the individual receives their gross salary and then determines whether to file tax returns. This approach is easier and cheaper to administer. Yet, tax planning and complying with tax laws rarely takes place.

Apart from tax, other issues associated with global mobility are foreign exchange control, political and social factors. This article focused on the guideline, benefits and drawbacks of each mobility policy on tax. Hence, when deciding which tax policy to choose, a company should consider the aim of the global mobility program, corporate culture and administrative capability.

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