Tax Equalization is an agreement whereby the Company offers the Expatriates a certain tax protection that is intended to maintain the same tax burden as if they had not moved from their country of origin.
- Gross Compensation: In this scheme, any compensation paid by the company is defined in gross terms (i.e. before taxes), being the Expat the risk taker of lower or higher taxes to be paid during the assignment.
- Tax Equalization: in this case, the company offers the expatriate a certain tax protection that is intended to maintain the same tax burden (in relation to their employment with the company) as if they had not moved from their country of origin. The advantage of this alternative is that it allows the company and the Expat to negotiate neglecting the tax differences between countries.
- Fixed Gross Salary in Spain: 100 pesetas
- Tax rate in Spain : 50%
- Net Fixed Salary in Spain: 50 pesetas
- Fixed Gross Salary Total : 200 pesetas (100 + 100)
- Tax rate in Sweden : 50 %
- Fixed Net Salary in Sweden: 100 pesetas = 200 * (1-50 %)
- Fixed Gross Salary Total : 200 pesetas ( 100 + 100 )
- Tax rate in Singapore: 0 %
- Net Fixed Salary in Singapore: 200 pesetas
- If the policy does not take into account the difference in taxes between the countries of destination, lower tax destinations are encouraged while high tax countries are discouraged.
- Expats need to understand the taxation in the country of destination to estimate, in net terms, the conditions of their transfer
- Changes in the tax systems are absorbed by the expatriate, and have no effect on the company.
- The policy is neutral with respect to the taxation in the different countries
- Expats feel protected and tend to worry less about their taxes in the country of destination.
- Changes in the tax laws are absorbed by the company
I have prepared a presentation that tries to explain this complex concept in simple terms. You can find it in Slideshare.