Companies are expanding fast beyond the shores of their home countries. As the world becomes a business place for all companies there is a need for employees to be sent abroad. Companies are forced to expand their operations to other countries as businesses become more competitive. Companies must find new markets where they can sell their products or services at a better price or better profits. They must look at newer markets when their production has risen and they need to sell more products. It is not always possible to employ people from remote countries. There must be at least a few employees from the home country to continue the company’s policies and culture in the right manner. These employees may have to pay tax in the remote country. This tax can be different from that of the home country. To offset this difference various companies use tax equalization so that the employees don’t suffer nor make too many profits from the tax difference.
It will be easy for tax consultants in various countries if the income tax charged by different countries are the same. However, the reality is different and there are different rules applicable in different nations across the globe when it comes to taxation. Each country has different revenue requirements and this will determine the kind of tax they levy on the people. There are also sometimes political compulsions that force the government to change the taxes that are charged. Tax on a person’s income is levied in many countries. Whether the person is a citizen or not, income tax will be levied if the person is a resident in that country.
When there are different personal income tax rates, this can affect the earnings of employees who are assigned to work abroad. Sometimes the tax rates in the remote country can be much higher causing great loss to the employee stationed abroad. This would greatly prevent employees from accepting assignments in those countries. On the opposite end, there may be countries that charge lesser income tax giving a huge benefit to the employee. This will create a rush for assignments in those countries. Both are not good situations for any company and this calls for good tax management to offset the differences. Tax equalization is one such method used.
This is the method that is used by most of the companies that have people working abroad. This is a simple system that makes certain that the employee doesn’t pay anything more or less than what he or she would have paid as tax had they been working in the home country. The tax that they would have paid in the home country is calculated on their earnings if they were posted in the home country. This means that the excess amount paid for their assignment abroad will not be taken into account when this hypothetical tax is calculated. This hypothetical tax will be deducted from the employee’s salary paid in the home country.
The employer will ensure that the tax at the home country and the remote country where the employee is placed is paid by them. This system will ensure that the employee doesn’t suffer if there is excess tax in the country where he or she is posted. It will also make sure that there is no difference in the employee’s earning even if the tax in the other country is lesser than tax at home. This ensures that employees will not be deterred from or tempted to work in a foreign assignment just because of the tax difference. Of course, this method puts an additional burden on the company because it has paid the tax on the full income of the employee including the excess paid for a foreign assignment.
Tax protection is another method of encouraging employees to work in other countries. Unlike the tax equalization method here all the taxes are paid by the worker who is assigned to a foreign country. Even if the taxes at the remote country are higher the employee must pay the amount. The company then calculates the difference between the hypothetical home tax and pays the difference to the employees. This will ensure that the employee doesn’t suffer a loss due to higher tax rates.
In the case where the taxes in the foreign country are lesser than that of the home country, the company doesn’t benefit in any way. The employee gets to keep the difference of the tax between the home country and foreign country as he or she will pay lesser than when at home. The disadvantage in this system is that there will be a rush to take assignments in the country where tax is lower than the home country. The countries with a higher tax rate will have no takers. The filing of tax returns and payment of taxes is the responsibility of the employee in this case.
There cannot be a strict rule as to which method should be used by the company. If there are going to be few assignees for foreign jobs, then it is better to decide the method on a case-to-case basis. This will ensure that neither the company nor the employee suffers any loss. Another factor that will decide the method are the countries where the employees are sent. If the difference in the tax rates is huge then the company must develop a clear policy so that it doesn’t suffer much loss because of the higher tax rates.
Taking the assistance of tax consultants to work out the right method will be better. They will also ensure that neither the company nor the employee falls into any violation of the tax rules in either country. The tax consultants are aware of the tax rates of most countries and will be able to work out a clear policy for the income tax working of employees working abroad. These consultants will also help you with the calculation of hypothetical tax.