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hypothetical tax reimbursement may entity and whether expatriate allowances restructuring performance of their job
represent extra taxable income. are available. to their own fiscal advantage or simply
It should be remembered that as the failing to report income.
What About Real Taxes? company is paying the individual’s tax on
As part of the tax equalisation process their behalf, this might itself be a taxable Ad Hoc Policy
the individual’s obligation is to pay benefit. For example, if an individual’s net Some companies decide a formal policy
hypothetical tax to the company. The pay is 60 and the tax rate is 40% the gross is inappropriate and simply deal with
company’s obligation to the individual is pay becomes 100 and the tax 40 (not each situation on a case by case basis.
to pay both home and host country actual 24). This is the ‘gross-up calculation’, A major drawback to this approach is
tax liabilities relating to the assignment. A where tax becomes payable on tax. Using that each individual seeks to negotiate
continuing home country liability may or planning to reduce the tax liability has a a better, increased, package. Whilst
may not be relevant depending on factors far greater impact where tax equalisation an ad hoc approach may work for very
such as domestic legislation, the length applies, as there is less to gross up. It small expatriate populations, as soon as
of the assignment and continuing ties to is acknowledged that variations on a numbers increase, so do the problems
the country. If it is relevant the company straightforward gross up calculation can caused by the lack of a coherent policy.
pays any home country tax due for the and do apply in different countries.
assignment period. The cost of tax equalisation can also Laissez - Faire
In the host country the company pays lead to a variation in the nature of On your own! In such cases the employer
taxes that arise on all taxable income assignments with a trend towards short- plays no role in the individual’s tax process
including assignment related allowances term and commuter assignments and and simply pays the individual their gross
and payments. The assignee does extended ‘business trips’. This needs to salary. The individual then files their own
still, of course, need to comply with be monitored as tax authorities around tax returns, or not, without company
individual filing requirements and legally the world are increasingly focussing on assistance. A number of companies prefer
the tax liability generally remains the short-term business visitors. this approach, as it is simpler and cheaper
responsibility of the individual. from a compliance perspective to administer.
Alternatives To Tax Drawbacks remain as, for example, both tax
Managing Reputational Risk Equalisation planning and actual compliance with tax
Payment of an assignee’s salary in multiple Tax equalisation arguably arose as a legislation may not occur.
currencies and multiple countries gives result of US multinationals sending Naturally there are many additional
rise to the potential for an assignee US nationals on assignment where the issues associated with tax equalisation,
that is left to their own devices, to file a individuals had a continuing liability to which cannot be covered within this
return somewhat different to the correct US tax. The European model tended to article. Many of the issues are not
position, either through tax evasion be one of tax protection as more often tax centred but focus on a company’s
or aggressive tax avoidance schemes. there was no continuing liability to tax in philosophy towards its international
Without tax equalisation such a stance the home country whilst the individual assignee population.
can improve the individual’s net pay. was on assignment. Whilst tax equalisation has attracted
Either approach exposes the company criticism in recent years, notwithstanding
to financial and reputational risk. After Tax Protection this, for the global employer wanting
all, the company is usually the static The principle concerning tax protection international mobility and fairness and
entity in the assignment process whereas is that the employee cannot be worse off equity for its international assignees, tax
individuals come and go both between from a tax perspective as a result of their equalisation has many advantages and will
countries and employments. assignment. It differs from tax equalisation remain with us for the foreseeable future.
One advantage of tax equalisation is as under tax protection an individual can
that by assuming responsibility for all be better off and obtain a tax windfall if Andrew Bailey
is national
real taxes the company assists in the tax host country taxes are lower than they head of human
return process, thus helping to ensure the would have been without the assignment. capital at BDO
individual files and files correctly. The The principle advantages of tax LLP. He has
company’s reputation and good standing protection are that it can be cheaper for over 30 years’
should therefore be preserved. the employer as there may be no gross-up experience
in the field
and the individual can be better off. of expatriate
Tax Planning However, disadvantages can arise, as until taxation. BDO
Tax planning still has a major role to play the year-end it is not known what the has offices in
in determining the structuring of the comparative liabilities are until the returns 151 countries
assignment package and in minimising are filed, taxes paid and a reconciliation and is able to
provide global
the tax liability in the host country. undertaken. Without advances or loans assistance for all your international
Proper planning may well reduce the to pay taxes there can be a negative cash assignments. If you would like to
tax liability payable by the company. flow for the individual. Additionally, discuss any of the issues raised in this
Companies should therefore look to see as mentioned above if the individual article or any other expatriate matters,
for example, whether benefits or cash files their own taxes and they get any please do not hesitate to contact
Andrew Bailey on +44 (0) 20 7893
should be provided, whether payment tax windfall it may encourage differing 2946, email Andrew.bailey@bdo.co.uk
should be made by the home or host attitudes towards tax reduction, including