TAX

EQUALIZATION
 Concept of Tax Equalization
Tax equalization is a measure used to neutralize the impact of taxation on an expatriate worker in respect of
his/her assignment in a country where he is not a resident. This basically encourages the workers to work for
their employer wherever they may be sent, having an assurance that they are not disadvantaged due to the tax
policy of the host country.

Under tax equalization, the employee who is a resident of one country (home country) and working in that
country is sent to other country for employment, would continue to bear taxes at the same rate, as he would have
borne had he continued in his /her employment in his home country. Thus, with tax equalization in place the
employee's tax liability is maintained at the tax level of the employee's home country and any differential on
account of the tax rates, positive or negative, is on the account of the employer.

Tax equalization maintains the status quo of the expatriate whereas burdens the employer, therefore careful
planning is required to frame a beneficial tax equalization policy.

As discussed earlier, the main aim of tax equalization policy is that the individual should not be affected by the
new tax policies nor take an advantage of it
What are the common issues faced?
Though the policy seems to be sorted on the face of it, it turns darker as you dive deep inside it.
Complex issues like:
Whether all the allowances available in the home country should be included in tax calculation even if
neither of them can be applicable in the Host country?
How is spousal/civil partners income treated?
How is investment income and capital gains treated?
Who benefits from split-year tax treatment?
What happens when share options are exercised or restrictions are lifted? If the individual leaves and joins another company,
which does not have tax equalization, how do you prepare the calculation?
Do you discourage individuals from acquiring property in the host country?
Whats the logic behind the deduction of home country taxes if the individual does not have a continuing home country liability
or is going to a country with a nil tax rate?
Who owns the tax credits that may arise from the payment of foreign taxes?
How much does a company want to get involved with an individuals personal financial affairs?
A practical approach to Tax Equalization
Once the amount of Tax equalization has been determined, it is deducted from their salary and is treated as a
contribution to the tax liability of the Individual. A company either works out an amount of hypothetical taxation
at every stage or determine an approximate hypothetical tax liability and reconcile it at the end of the year. The
latter approach is widely used amongst the multinationals.
Nobody Talks about the Real Taxes
The obligation of the Individual is to pay hypothetical tax to the company and the companys obligation is to
settle the tax liability of the Individual in the home country as well as the host country. It is however not necessary
that the Individual shall have a home country tax liability as it depends upon number of factors like length of the
assignment, domestic legislation and the continuing ties to the country. In the host country the company pays
taxes that arise on all taxable income including assignment related allowances and payments. The assignee does
still, of course, need to comply with individual filing requirements and legally the tax liability generally remains
the responsibility of the individual.
An Equalization Policy
It is necessary for multinationals to frame a tax equalization policy. This being a concept of International taxation,
there are no specific rules for such a framework. The multinationals are free to decide whether they want to
frame a common tax policy or simply deal with such situation on a case by case basis. Both these policies have
their own set of drawbacks. In case by case basis is each individual shall negotiate to seek a better package, which
turns up to be a tedious task for companys officials whereas an Ad hoc framework shall work only for smaller
population of expatriates.
About Taxpert Professionals:
Taxpert Professionals is a conglomeration of multi-diverged professionals known for providing concentrated services in relation to taxation and
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About CA. Sudha G. Bhushan:

Sudha is qualified Chartered Accountant and a Company Secretary with more than a decade of experience in the Foreign Exchange Management
Act, RBI, Transfer pricing and International taxation matters. She is a noted speaker and author.
Her articles are regularly published in the Journals of several institutes and at various other forums and has authored the following books:
Practical aspects of FDI in India published by Institute of Company secretaries of India.
Due Diligence under Foreign Exchange Management Act, 1999 published by CCH.
Comprehensive Guide to Foreign Exchange Management in two volumes published by CCH.
Practical Guide to Foreign Exchange Management published by CCH, a Walter Kluwers company.
Handbook on FEMA, Publication of Institute of Chartered Accountants of India.

A scholar throughout her life she has been awarded many awards and recognitions including Women Empowerment through CA Profession
by Northern India Regional Council (NIRC) of Institute of Chartered Accountants of India (ICAI). Backed by experience in International firms
she has extensive experience of handling international transactions. She advises corporate as well as government authorities in lot of intricate
transactions. Rendering tax and regulatory advisory services, she has overseen and played a crucial role in the execution of complex international
transactions involving issues revolving around tax, repatriation, minimization of tax exposure, Foreign Investment (Inbound and outbound) etc.
She is on the Board of many esteemed listed companies as Independent director. She is member of Committee of International Taxation of
WIRC, ICAI, Member of Editorial Committee of WIRC of ICAI and Committee of women empowerment of ICAI.

She can be contacted at sudha@taxpertpro.com || 09769033172