Tax equalization very much relates to the arena of international assignments.It all starts when a company takes the decision of sending employees abroad from his headquarters homelocation and / or from any location / subsidiary to any other location / subsidiary.
If the organization is not having a policy to cover international assignments and the tax related issues ,the employee will note that his salary and effective purchasing power are depleted, in comparison with his former home place.
One cause of salary and purchasing power reduction is -no doubt- the taxation effects.The assignee will still be responsible for paying the home country taxes.Depending on the length of the assignment, he might need to even pay the state taxes. After the transfer is effective, he will be responsible for filing and subsequent payment of taxes in the destination country.
One alternative solution normally utilized by many global companies is the implementation of a "Tax Equalization" policy.
The principles behind a "tax equalization policy" is that the employee will not need to suffer neither a financial hardship nor experimenting a financial windfall, all being the result of the tax consequences of an international assignment.
The employee should pay no more or no less tax than he would have paid had he never left his former home. Hence, the company should be paying all related worldwide effective taxes for the assignee. Such policy will put the assignee in a tax neutral position during the assignment. Mobility is promoted because several assignment locations are producing no tax benefits or detriment to the assignee. Compliance with both home and international location tax laws is a must.Under this policy, the company will be paying all worldwide actual taxes and the employee only paying his usual home country taxes.
In order to implement the tax equalization procedures, the company will have to withhold a hypothetical tax from the assignee when the international assignment starts.
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