Cross Border Payroll & Tax Equalization

by | Jan 5, 2022

Path to PayTech

At times as an Employer, an organization may experience at some point an expansion in the Business.  A new Business opportunity to kick off outside of the border.  It may be within their neighborhood countries or a foreign country.  The employer creates this new Job Description to support and oversee the new Job position.  The potential New Hire for the role may or may not be an Internal or External Hire.  At some point, the Employer identifies the right fit for the role. The position may require that the incumbent may be required to move into the neighborhood or foreign country, whichever may apply.            

As preparations proceed, several factors need to be considered surrounding Tax Equalization.  As an Employer, your goal is to Not put the Employee in a better or worse situation in terms of the Tax obligations that govern the taxation for both the Home/Hosting countries. The tax obligations can differ across countries and some countries may offer very little leeway in the timing of collecting their tax remittances. 

While I am not a Tax Accountant, I have had a high level of exposure in participating in the Tax Equalization calculations.  I have 20+ years of experience in the industry as an HR /Payroll business partner and over 7 years of experience supporting this specific area which has helped me understand some of the key components involving an Expatriate’s Tax requirement.

Cross Border Payroll involves some key components, that consist of the following key factors. 

Key factors include:

     Tax Equalization
     Hypothetical Tax
   ♦  Expatriates – Mobile Employees

Good reference materials can be found in this article that covers most of the above key factors. https://www.google.ca/amp/s/www.gtn.com/blog/what-is-tax-equalization-and-how-does-it-impact-your-mobile-employees-and-company%3fhs_amp=true  

Hypothetical Tax:

In Theory, Tax Equalization is used to arrive at a place where an individual’s income stays the same.  To determine this calculation, there are several steps in the calculation process to establish the tax amount.  A review of the home country’s taxes paid for the individual takes place.  The sum identified plays a role in the amount for the Hypo Tax Liability.  Although it may appear an easy process, other complexities affect one’s net pay when involving an Expatriate.  Some examples include allowances, a company car used in his/her home country.  Employers may need to decide if the employee will or will not receive an allowance while abroad since he/she is unable to use the home country’s subsidies or do they simply add the same subsidies to the Hosting country?

In some cases, both Employee/Employer may be required to pay both Hosting/Home countries Fica Taxes.  It varies across the Reciprocal agreements between countries.  All of this can be very confusing to the Employee/Expat.  Employees rely on their Employer to guide them in the right direction. Employees are often referred to a Specialized Mobile Consultant either within or outside of their Employer.  This will ensure they are pointed in the right direction and preparations are made to successfully welcome this employee to the Hosting country. 

Other factors that are considered in an Expatriate’s remuneration is COLA:

No, it is not a beverage drink. 

What is COLA?

COLA stands for Cost-of-Living Expenses.  Cola is a picture of everyday living expenses that includes your standard tax requirements, such as Social Security, the amount of money needed to cover basic expenses such as housing, food, taxes, and healthcare in a certain place and time period. Not surprisingly, it is used to compare the cost-of-living expenses from one place to another.  Inflation rolls the ball. Whatever that number increase is, so does Social Security, it jumps right up since it works hand in hand with COLA.  This publication link is a good reference.  https://www.investopedia.com/terms/c/cola.asp

Cross Border/Tax Equalization Policies

Most international Employers may have a Tax Equalization/Cross Border policy in place. This is a very important tool as it states what is permittable or non-permittable in an Expat’s Tax Equalization.  It may or may not cover some education on the mechanism of the split tax system, such as, which side is it more beneficial for? Is owning a property permittable or non-permittable in the Hosting Country?   Most commonly there’s always the question, what if the employee decides to leave the company, what happens then?  A Tax Equalization Policy plays a very important key factor.  This publication is a good reference. https://en.wikipedia.org/wiki/Tax_equalization

Relocation Expenses

How about the cost of moving?  At times it is not just the Expat that’s moving, the family moves too.  The cost of moving can be horrendous for the Employee/Expat.  In most cases, there’s a moving allowance provided by the Employer.  For example, would the moving of your furniture versus the cost of fees for a purchase of a home in the hosting country be treated differently?  Most definitely it is treated differently.  Determining what is Taxable versus non-Taxable for the moving cost can get tricky.  This link covers some expectations. https://www.expats-moving-and-relocation-guide.com/category/expat-taxes/

PayTech has worked with a wide range of industries and clients.

Organizations have respectfully relied on PayTech for specialized consultants covering various supporting roles in the Cross Border payroll.  As such, we work closely with the client’s assigned Mobile Consultants to support the Tax Equalizations Policies for Expatriates.  

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