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Tax Equalization/Tax Protection

Executives and employees are often exposed to different tax rates, and even double taxation, when assigned to work in a foreign country, often despite tax treaties between the countries involved. To manage these tax costs, most companies will utilize a tax policy as part of their international assignment process.The two most common approaches are tax equialization and tax protection.

Tax equalization is a process that ensures that the tax costs incurred by an assignee on an international assignment approximates what the tax costs would have been had he remained at home. The intent of tax equalization is that the assignee neither suffers significant financial hardship nor realizes a financial windfall from the tax consequences of an international assignment.

When tax equalization is utilized, the employer bears the responsibility for paying the assignee the actual home and host country tax costs. In exchange, the assignee pays to the employer a stay-at-home hypothetical tax as determined under the company”s tax equalization policy.

Tax protection is a process that reimburses an assignee the excess taxes he incurs while on an international assignment. The employee is responsible for the payment of all actual home and host country taxes. The annual tax protection calculation then compares the stay-at-home hypothetical tax to the actual worldwide taxes paid by the employee. If the actual worldwide taxes exceed the stay-at-home tax amount (as determined under the company”s policy) the company reimburses the excess to the employee. If the actual worldwide taxes are less than the stay-at-home tax, the employee receives no reimbursement from the company. Tax protection generally puts the burden of filing and paying home and host country taxes on the assignee.

Every tax policy will have its own advantage and disadvantage. Hence, when deciding which, if any, tax policy is right for your company consider the goal of the international mobility program, the business needs of the company as well as the ability of the company to administer the policy. Contact us at info@3ecpa.com.sg if you’d like more information about taxation of international executives. We guarantee a same-day response, so why wait?