The need for individual tax planning, particularly for executives of companies with international operations, is not readily available.

 

Companies that send employees overseas typically assist them with added costs they may incur. These costs may include but are not limited to housing, cost-of-living differentials, and English language school tuition. Such benefit payments generally are considered US taxable income to the employee and may increase his or her individual US tax burden.

 

Transferred employees may incur additional tax burdens if the work assignment is to a country with substantially higher tax rates than those in the United States (e.g. Most European countries).

 

The question arises as to who will be responsible for these additional tax burdens: the employee or the employer?

 

A tax equalization program is a voluntary system by which both the employer and the employee pay their respective shares of the employee’s global tax burden. The program, in essence, provides that the employee will pay neither more nor less tax while on assignment than if he or she had remained at home.

 

ADVANTAGES

 

A tax equalization program provides a company with three major advantages:

 

1.  Simplicity. The employee generally will not suffer a tax “penalty” as a result of the international assignment.

2.  Fairness. Employees sent to different tax jurisdictions will be treated equally (in terms of taxes).

3.  Tax Savings. Certain employees will have the opportunity to offset a portion of the costs of the extra benefit payments they received while on assignment. (This opportunity depends on the state in which the employee lived before the assignment and how that state taxes international income.)

 

DISADVANTAGES

 

At the same time, these programs have some major drawbacks:

 

•  Increased Cost. The cost to the employer can go up, especially if the employee is sent to a country with a much higher tax rate. Cost exposure for the employer may increase if the employee incurs a high level of “personal” taxable income (for example, from stock options) while on the assignment. This can be limited by capping the amount of “personal” income the program covers.

• Tax Complexity In general, a U.S. employee working abroad should not be placed on the payroll of the foreign affiliate at which they are working. By staying on the U.S. company’s payroll, the employee remains eligible to participate in its benefit plans and continues to accrue benefits under Social Security. However, keeping an employee on its U.S. payroll can expose the company to corporate income tax in the host country if it does not already have a taxable presence there or if a tax treaty does not cover the situation.

 

. GTS can prepare, consult on and explain  info@globaltax.solutuions or+(703) 717-5000 at Global Tax Solutions (GTS)If you or your firm is facing such an obstacle, please contact relevant, value added suggestions that can save significant tax dollars for both the employer and the employee.