In the article Expat Tax Equalisation: How Does It Work? We explained the theory behind this common expat pay arrangement. Of course, the theory is all well and good. An individual bears tax to the same level they would have borne on the non-expatriate elements of their salary as if they had stayed at home. The employer bears the actual cost of the tax in the host country, whatever that might be.

The ‘rub’ is often when an individual moves from a high tax country to a low tax country – i.e. from, for example, the UK to Hong Kong, or Holland to Hong Kong. An individual continues to pay a level of hypothetical tax equivalent to what he would have paid in the home country (the higher tax country) whereas the company actually has a burden to tax at a lower rate in the host country.

Under these circumstances, the company can be better off than the individual as a result of this arrangement.

However, the reverse is also true. If an individual is seconded from a low tax country to a high tax country (such as from Hong Kong to the US or from the UK to Norway, for example), the individual retains the liability to tax equal to what they would have paid in the home country, whereas the employer faces a much more significant burden to tax in the host country.

By agreeing to enter into a tax equalisation scheme, expats effectively remove themselves from any entitlement to an actual tax refund i.e. if more than sufficient local tax was withheld through the payroll to cover the actual tax liability. By the same token they are not responsible for paying any additional tax demands in the host country.

At the end of the year, the company should engage a tax adviser to make a calculation of the amount of home country tax and social security which would have been paid on the non-expatriate elements of the salary, and compare this to the level of hypothetical tax actually withheld from the individual’s salary. This can sometimes result in discrepancies, either in favour of the individual or in favour of the company.

If it is calculated that an individual has had too much hypothetical tax withheld through the payroll, they will be due a refund from the company. Alternatively, if too little hypothetical tax has been withheld through the payroll a further settlement would be due to the company.

Source: The Fry Group, financial advisers to expatriates

See the related articles:

• Expat Tax Equalisation: How Does It Work?
• Expat Tax Equalisation: But Is It Fair?