Avoiding disadvantages means creating trust
When employees are assigned abroad on international assignments, special challenges arise in the area of compensation. Whether it is an additional tax burden or unequal treatment between different employees, it is not always possible to completely avoid disadvantages caused by foreign assignments. In order not to weaken the trust of employees, a well-developed tax equalization program is an important component for a successful employee assignment.
Disadvantages lurk in different places and are not always obvious
If employees work abroad, their income is generally subject to taxation in the host country. Depending on the country in which the employees are assigned, this may already result in tax disadvantages if taxation in the country of assignment is at a higher rate than would have been the case in the home country. In this respect, the employee would have less net income available than without the assignment.
In addition to this almost obvious disadvantage, however, there are several other frequently occurring constellations of disadvantages:
In order to make the assignment abroad attractive to employees despite these disadvantages, it is up to the employer to ensure that any disadvantages that arise are compensated.
What makes a good tax equalization program
The assignment of employees abroad should primarily create one thing for both the employee and the company – added value. Therefore, tax risks on both sides should not play a role when deciding whether to send employees or not. A good Tax Equilization System should therefore fulfill three main functions:
Different companies need different models
The above requirements for a good tax equalization model are always the same. What varies, however, are the companies. Each has a different philosophy, different business goals, a different strategy, and so on. There are a lot of influencing factors that need to be taken into account when designing a tax equalization policy. Therefore, it is not surprising that there is not THE ONE model.
Nevertheless, in practice there are four basic techniques that can make up a tax equalization program tailored to the individual company:
The right mixture makes it
Each of the aforementioned building blocks can, of course, be used on its own as a model of tax equalization or disadvantage avoidance, but this is hardly ever found in practice and also makes little sense. For an optimally designed tax equalization strategy that is tailored to the requirements of the company and its employees, the individual models should be sensibly combined or adapted with each other in order to make the best possible use of their different advantages and to compensate for their respective disadvantages.
Therefore, a review of your tax equalization policy may be worthwhile. Feel free to contact me.
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Copyright 2021 by Proprius - Global Mobility Consulting Michael Buder
