Equalising expatriates tax burden

Why Tax equalisation?

Today, with economies going global, companies are deputing its skilled and experienced employees (referred to as 'expatriates') all across its global locations to carry out their businesses. In such a situation, the expatriate's salary and effective purchasing power are depleted, in comparison with his former home place. One cause of salary and purchasing power reduction is - no doubt - the taxation effects.

An expatriate, being a person of ordinary economic prudence, would not agree to being assigned to a host country, with tax rates higher than in his home country and end up paying higher taxes on his income. At the same time, an expatriate would prefer being assigned to a host country with a lower tax regime to benefit by saving taxes on his income. Such disparity in tax rates between the home and host country gives rise to the concept of TEQ.

The principle behind a "TEQ" policy is that the expatriates will not need to suffer, neither a financial hardship nor experimenting a financial windfall, all being the result of the tax consequences of an international assignment. It means an expatriate pays no more and no less tax as a result of his assignment than he would have paid had he never left his former home. The company would be paying all related worldwide effective taxes for the expatriate.

How does TEQ work?

TEQ policy is designed to make tax a neutral factor in an expatriate's compensation package. That is, the assignee should bear a tax burden equal to that which would have been borne had the expatriate remained at home. The expatriate is responsible during the assignment for "hypothetical" or "stay-at-home" tax, which would be calculated on the remuneration the expatriate 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 expatriate'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 assignment income (including taxes on expatriate benefits) during the assignment.

For a number of companies, the expatriate would not be tax equalised on income from non-company sources, for example net investment income from home and host countries, which means that the expatriate will remain fully liable for all actual worldwide taxes payable on the personal income.

TEQ- the process:

The tax payable by an expatriate in the host country is calculated based on the tax system of the host country after claiming all the relevant exemptions and deductions given by the applicable tax laws of the host country. On the other hand, the taxes payable in the home country would be computed using the relevant tax laws of the home country. Tax calculations of both the counties would be compared and then if the host country taxes are more than home country taxes, the difference would be borne by the employer company. And if the taxes of the host country are less than those of the home country, the difference would be recovered from the salaries of the employees.

Under an equalisation policy, any tax savings will go to the employer but, similarly, any additional tax liability will be borne by the employer.

Benefits of the TEQ policy:

Such policy will put the assignee in a tax neutral position during the assignment. Mobility is promoted because several assignment locations are producing no tax benefits or detriment to the assignee. The company will be paying all worldwide actual taxes and the employee only paying his usual home country.