Have questions? Ask us!

Tax Equalization for Foreign Assignments

For expats working abroad, one of the chief concerns is payment of taxes and avoiding any financial disadvantages stemming from the assignment.  By using tax equalization to the home country, the expat worker is assured of paying a tax rate as if they were still working at home, regardless of the tax rate in the host country.  Tax equalization formulas are used to protect both the worker and employer from any significant costs due to the assignment.

When an employer uses tax equalization calculations for an employee assigned abroad, the employer takes responsibility for paying the correct amount of home and host country taxes.  The employee pays a ‘hypothetical tax’ that is based on the tax rate as if they were working in the home country, excluding allowances and benefits associated with the assignment.  This tax equalization to the home country will ensure a fair tax rate for the employee during the assignment.

Where Is Tax Equalization Useful?

Tax equalization can benefit the employee and employer in various situations:

  • Allows for an equitable and stable tax rate during the assignment, especially where there are significant differences in tax rates between countries
  • Enhances mobility, with no changes in taxation in the event of employee transfer between countries, or return to the home country
  • Ease of compliance with home and host country tax laws where there is no tax treaty in place
Subscribe to get more insights like this.

How Does Tax Equalization Work for Americans?

American expats can benefit from the policy with their employer, to offset any chance of a tax disadvantage when working abroad.  This agreement will detail the formula to be used as part of the assignment. The employer would have the responsibility to withhold US taxes according to the compensation package and applicable tax rates. In the event that foreign taxes must also be withheld, there are foreign tax credits available, as well as tax treaties between the US and many countries to offer relief from double taxation.

How to Deal With Tax Equalization When Using a GEO Service?

A company that uses a GEO service to employ a worker in the host country would still implement a formula to withhold taxes in the home country. The GEO, as local employer of record, would withhold all host country taxes to comply with local laws and make those payments.

The primary distinction is that the GEO handles the host country tax withholding rather than the company, which allows for ease of administration and local compliance.  Any tax credits or offsets would be handled by the company in the home country tax return, or under an applicable tax treaty.

Facts About Tax Equalization

  • It is part of an agreement with the employee for an international assignment, to prevent tax payment dislocations for both employer and employee
  • It offers a tax neutral formula, which neither penalizes nor rewards the employee for differences in tax rates between countries
  • It is ideal for mobile employees who may work in multiple countries while on assignment
  • The company is responsible for making the home country tax calculations and withholding, excluding the allowances and benefits related to the assignment such as housing and relocation.
Get in touch to find out more about how an Employer of Record solution can help your company

Related Articles

Join 5000+ employers managing overseas employees

Subscribe for tips on hiring and managing international workers!