Meaning
Compensation frameworks designed for international assignees ensure that the employee neither gains nor loses financially from the tax implications of a foreign assignment. A tax equalisation policy requires the employer to deduct a hypothetical tax from the employee’s salary, representing what they would have paid had they remained in their home country. This system maintains equity among peers working in different global locations.
Financial Administration
The employer pays all actual home and host country taxes on behalf of the assignee. Under a tax equalisation policy, the company bears the risk of high foreign tax rates and benefits if the host country tax is lower than the home country rate. This arrangement simplifies the financial transition for the mobile employee.
It removes the burden of filing complex multi-jurisdictional returns alone.
Assignment Cost
Global mobility departments must calculate the hypothetical tax before the assignment begins to estimate the total cost of the relocation. Adhering to a tax equalisation policy adds administrative expenses due to the need for specialist tax advisors. This cost is necessary to ensure compliance with both tax jurisdictions.
Operational Continuity
Standardizing the tax experience of expatriates reduces resistance to international relocation. The implementation of this policy prevents situations where employees refuse critical roles because of tax rates in the destination country.
