What is the difference between tax equalization and hypothetical taxation?
Expatriates often work in foreign countries where the tax rates, brackets, credits, deductions, and many other items are different than in their home country.
This can create drastic swings in their tax position causing an expatriate to pay much more in taxes or create a boon through lower tax rates and/or foreign tax credits.
Many multinational companies use tax equalization agreements to alleviate these tax issues.
Tax equalization is often offered to expatriates by multinational companies in an effort to reduce additional taxes employees may face while working abroad.
Through the use of tax equalization agreements, expatriates would pay the same amount in taxes as they would if they had worked within the United States and usually their current location.
This is a way to make them whole for any imbalances so that the expatriate ends up tax neutral regardless of destination.
Hypothetical tax calculations are used to determine the amount of taxes their employer withholds from an expatriate's wages.
The multinational company pays their employee's increased tax burden both in the home country and in the host country, ensuring employees pay no more, or less, in taxes had they not gone overseas.
A hypo tax is the amount that is actually withheld by the employer.
Although most taxable assignment related benefits are not included in the calculations for initial tax equalization, hypothetical taxation is often applied to the following types of payments:
- Base salary
- Bonuses
- Housing allowances
- Travel allowances
- Commissions
- Stock options and other equity compensation
- Foreign taxes
Adjusting hypothetical tax deductions
Tax equalization calculations are done annually when the final income and deductions are known.
This is then compared to the hypo tax deduction being held by the company. At that point, the expatriate settles the actual difference with their employer.
Typically, the hypo tax is adjusted accordingly every year.
The ultimate goal means the expatriate is paying the same amount in taxes as though all the work had been done in the home country.
Companies with overseas assignments do not have to use tax equalization agreements. The same company may even have tax equalization policies that are enacted within some assignments, but are not utilized in other territories.
Professional tax advice
With the countless tax changes being instituted around the world, it is important to seek out professional tax advice for understanding when and where tax equalization policies are the best options for you and your company before beginning an overseas assignment.
PIASCIK has over 75 years of combined international tax experience with over 90 expatriates represented in over 49 countries.
Our international tax professionals know how everything from totalization agreements to the potential accumulation of foreign tax credits that can influence hypo taxes and your standard of living years after your assignment has ended.
PIASCIK even offers you initial consultation FREE without any further obligations from you.
PIASCIK international tax professionals continue to save you money by offering flat fee engagements with no hidden surcharges. You have nothing to lose and valuable information about hypothetical taxation that can ultimately save your bottom line.
Contact PIASCIK today and let us show you why we are considered an industry leader by our peers.
