Are you an Expat? Have you been Tax Equalized?

“Expatriate” or “Expat” is a person residing in a country temporarily or permanently which is different from his/her home country i.e. the country in which he/she is a resident. Usually this term is used in case of technicians and professionals sent by their companies to their associated enterprises or foreign subsidiaries.

Expatriates often work in a country or they are deputed to another country wherein the tax brackets, credits, deductions immensely differ from their home country. This creates a dicey situation for an Expat. Either the expat shall end up paying more taxes or take the benefit of the tax situation by paying comparatively lower taxes.

“Tax equalisation” is a measure used to neutralize the impact of taxation on an expatriate worker in respect of his/her assignment in a country where he is not a resident. This basically encourages the workers to work for their employer wherever they may be sent, having an assurance that they are not disadvantaged due to the tax policy of the host country. for eg. Under tax equalisation, if an employee who is a resident of India and working in India is sent to America for employment, would continue to bear taxes at the same rate, as he would have borne had he continued in his /her employment in India.

A tax equalisation policy is formulated by employer. Under this policy hypothetical tax is calculated. Hypothetical tax is calculated before assignments, based on the amount of income earned by assignees, irrespective of their place of work, which usually comprises salary and bonuses. For purposes of tax equalization, employers may calculate hypothetical tax for employees using the rates of the home country, host country, the country where the employer’s head office is located and the country of an employee’s permanent residence or citizenship. This means that assignees pay hypothetical tax directly to their employer instead of paying it in the home country or host country. The employer, in turn, uses these funds to pay the assignees’ tax liabilities in their home and host countries. The word “Hypothetical” is used as the salary income of the expatriate is taxed at the rate as if the foreign assignment never occurred.

For example, if a worker working in Africa which is his/her home country is sent to India on an assignment by the employer then according to the concept of hypothetical taxation he is liable to pay tax on a hypothetical rate i.e. on the rate prevailing in his/her home country Africa. This concept completely negates the fact that such a person has been sent for an assignment to India. Whereas the difference between the actual tax of the host country and the hypothetical tax paid is known as “Tax Perquisite” and its taken care of by the employer.

So next time your employer sends you outside your country ask HR to tax equalise you. If you are not already.

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