Tax equalization
HANG ON
This article may meet Wikipedia's criteria for speedy deletion as a copyright infringement(Copyvios report) of http://www.expatexchange.com/lib.cfm?networkID=274&articleID=718 (Copyvios report). This criterion applies only in unequivocal cases, where there is no free-content material on the page worth saving and no later edits requiring attribution – for more complicated situations, see Wikipedia:Copyright violations. See CSD G12.
If this article does not meet the criteria for speedy deletion, or you intend to fix it, please remove this notice, but do not remove this notice from pages that you have created yourself. If you created this page and you disagree with the given reason for deletion, you can click the button below and leave a message explaining why you believe it should not be deleted. You can also visit the talk page to check if you have received a response to your message. Note that this article may be deleted at any time if it unquestionably meets the speedy deletion criteria, or if an explanation posted to the talk page is found to be insufficient.
Note to administrators: this article has content on its talk page which should be checked before deletion. Note to administrators: If declining the request due to not meeting the criteria please consider whether there are still copyright problems with the page and if so, see these instructions for cleanup, or list it at Wikipedia:Copyright problems. Please be sure that the source of the alleged copyright violation is not itself a Wikipedia mirror. Also, ensure the submitter of this page has been notified about our copyright policy.Administrators: check links, talk, history (last), and logs before deletion. Consider checking Google. This page was last edited by Hglopez (contribs | logs) at 23:26, 26 October 2006 (UTC) (18 years ago) |
Tax Equalization
An Overview of Tax Equalization and the Global Economy
"Tax equalization" is a policy that is followed by many employers of expatriate employees. The underlying theory of tax equalization is to ensure that the expatriate assignment is "tax neutral" to the expatriate employee. In other words, while the expatriate employee is on foreign assignment, the employee will pay approximately the same amount of income and social security taxes (referred to as "stay-at-home" or "hypothetical" tax liability) as they would have paid had they remained in the U.S., or their home country, and only earned the items of compensation that they would normally earn such as base wages and bonuses.
The company pays any taxes that exceed the expatriate's hypothetical tax liability. Companies also implement tax equalization policies so that expatriate employees are treated fairly and consistently throughout the world (an expatriate in Saudi Arabia is treated the same as an expatriate in the U.K. although the tax laws in these countries are vastly different). Further, tax equalization policies allow large expatriate employers to standardize and streamline administrative processes.
Expatriate employees are subject to a worldwide tax burden during their foreign assignment that is ax Protection versus Tax Equalieither higher or lower than what they would have paid had they not left their home country. The reasons for their worldwide tax burden being higher or lower include:
• Higher Tax Base Employers typically provide additional compensation to the expatriate to cover increased housing, tax, and cost of living expenses. In many cases, these additional compensation items are subject to tax in the home and host locations.
• Tax Rates - Depending on the host country, foreign tax rates may be significantly higher or sometimes lower than the U.S.
Most of the time, the expatriate employee is subject to higher taxes, so tax equalization provides for great comfort and piece of mind for the employee.
Although tax equalization policies and procedures are very similar among companies, the key differences are usually related to the treatment of the following items when calculating the tax equalization settlement calculation:
What items of income are subject to tax equalization? Some will tax equalize company compensation only, while others will tax equalize some income from other sources including investment income and spousal income. Also, companies may, or may not, tax equalize stock option income.
What deductions are allowed when computing the hypothetical income taxes? Companies generally have special methodologies for determining itemized deductions.
Will the expatriate be tax equalized to their former state of residence or some other state (an expatriate's hypothetical tax liability for the tax year generally includes, when looking at U.S. expatriates, federal and state income taxes, as well as FICA taxes)?
Tax equalization policies may or may not address items such as the sale of a principal residence or rental properties.
Tax Protection versus Tax Equalization
While the objective of both tax equalization and tax protection policies are similar in that both are intended to ensure that the employee suffers no additional tax burden as a result of the foreign service assignment, full tax equalization provides a much more cost effective approach for the employer and is most equitable. Procedurally, this is accomplished by discontinuing U.S. tax withholding at the time that the employee begins the foreign assignment and is expected to qualify for expatriate tax benefits. The employees’ base salary is then reduced by the amount of “hypothetical tax” that the employee would be expected to pay had the employee not been on foreign assignment. The employer then assumes full responsibility for paying all domestic and foreign income taxes that are associated with the foreign assignment income. Because all tax benefits associated with the foreign assignment are claimed for the benefit of the employer the cost of providing tax assistance is significantly reduced while avoiding an unintended tax windfall to the employee at the employer’s expense.