In contrast, the fiscal equalization method may require additional oversight and management on the part of the company, but it offers more fairness, higher tax compliance rates, and more 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 because the individual can move from one country to another, depending on the work or project, without having to take into account changes in tax levels. A fiscal equalization policy has four main objectives. I hope this will give you a basic understanding of the rationale for fiscal equalization policy and a first understanding of the basic wage structure in the United States. 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. Do not hesitate to contact me if you have any questions about fiscal equalization or expatriation programs and policies in the meantime. Given the objective of maintaining the fiscal neutrality of workers, why should fiscal equalization not be preferred for all types of allowances? The reason for this is that the implementation of fiscal equalization typically results in additional salary and tax compliance costs. Your mobility tax provider should be able to make tax cost projections to help your organization provide home and host income and the additional social security costs of fiscal equalization. It is important to regularly review these provisions to ensure that the provisions are adjusted for changes in assumptions such as tax laws and employee compensation. For companies that want to introduce fiscal equalization, it is important to understand how fiscal equalization works for both the employee and the organization. Dealing with this complexity without help can make your expat`s head spin. Do not worry.
This is where fiscal equalization policy comes into play. In many cases, the TEQ directive sets the employee`s tax liability roughly at what it would have been if he had stayed at home. In its most basic form, the TEQ Directive is an agreement between the company and the employee that states that: For international missions where tax equalization applies, employers generally assume the tax liability 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 “parallel payroll” or “parallel payroll” to meet payroll and withholding tax requirements in the host country for their mobile workers. If a company uses parallel or parallel invoicing, it pays the tax due in the host country, while the mobile worker from their home country is on the company`s payroll for the actual execution of the salary. Tax protection has similar objectives to fiscal equalization, but it achieves them in a different way. Tax protection largely burdens the employee by complying 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 conducted. 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 reimburse the employee.
If the amount of tax actually paid is less than the hypothetical amount that remains at home, the employee will not receive a transfer. Many people who have to live and work abroad may fear paying excessive taxes or suffering double taxation. However, the U.S. Tax Code has considered both the possibility that a U.S. taxpayer who has to work in a foreign country may face extremely favorable or extremely unfavorable tax treatment due to the interaction of U.S. tax law and the laws of the country in which the taxpayer is employed. 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 objective of fiscal equalization is to align the level of taxation so that it is similar to what the taxpayer would have assessed if he or she had remained in the United States. But is fiscal equalization the best policy for all types of allowances? According to previous surveys conducted by GTN, a large majority of companies will use fiscal equalization for long-term assignments (generally defined as orders lasting more than one year and less than five years). Companies also typically apply fiscal equalization for short-term assignments (one year or less) if there are tax complexities at the host site.
However, fiscal equalization is not so common for transfers or scenarios without fiscal complexity in several places. Fundamentally, tax equalization is a compensation approach used to neutralize the impact of an overall assignment on an assignee`s personal tax liability. Under the fiscal equalization approach, the transferee would have to pay roughly the same taxes if he had remained in his or her home country. Does your fiscal equalization policy discourage individuals from acquiring real estate abroad? Finally, companies implementing fiscal equalization policies need to remember that international taxation is a complex issue that their mobile workers may not clearly understand. A fiscal equalisation policy will not be reassuring for a mobile worker posted abroad if he cannot see the benefits. Therefore, it is essential that employers offer tax preparation and business mobility tax service provider advisory services to their mobile employees to help employees understand the complexity of their new tax situation and let them know who to contact if they have any questions or concerns. Because of their complexity, most tax equalization policies are created by a company`s mobility tax service provider. A policy should include the following provisions: Many corporate tax equalization policies include provisions relating to a hypothetical tax (also known as a hypothetical tax). Under a mortgage tax, a company reduces a mobile worker`s salary based on estimates of the amount of tax the employee would have paid in his or her home country if he or she had not been posted abroad.
The company retains ownership of the hypo taxpayers` money and uses it to pay the employee`s tax obligations in the home and host country. An adjustment is prepared via fiscal equalization in order to approximate the estimated mortgage tax. For example, if an employee moves permanently to another location (i.e., that it is on the host country`s payroll under a local contract), does your organization want to keep the person responsible for taxing the home country? Here, it may be possible to simply apply gross amounts of tax to certain agreed services, instead of paying indefinitely for the preparation of the tax return and the calculation of the tax compensation at the end of the year. .