Tax Equalization for Expat Employees
When a US person is sent to work abroad by their employer, sometimes they may have to enter the complex world of tax equalization. From a very baseline perspective, the idea of tax equalization is the concept that when an expat works abroad, they should not be placed in a better or worse position taxwise than they would have been for the same employer in the United States. For US persons, this can become infinitely more complicated due to the fact that the United States follows a worldwide income tax model. In addition, oftentimes employers engage big CPA accounting firms to handle the work, and many times these associates are overworked — and not necessarily motivated to work on individual tax returns in the first place. This often leads to a host of issues we have found when taxpayers approach us, especially in the realm of reporting on international information reporting forms such as FBAR and FATCA. Let’s take an introductory look into tax equalization.
Example of Tax Equalization
Jennifer is a US citizen who is sent to work abroad by her US employer. In the United States, Jennifer earns $600,000 and her net-effective tax liability comes out to about $180,000. Now that Jennifer will be working abroad, there are other issues she has to consider — such as housing, education for her children, and other fringe benefits that are not provided to Jennifer when she works in the United States. Likewise, since she will be a permanent resident in the foreign country there is a tax implication under the foreign country’s tax law that Jennifer must abide by as well. Finally, since the US follows a worldwide income tax model, she is also subject to US tax on her worldwide income.
Potential Additional Tax Burden
There is the potential for Jennifer to have to incur an additional tax burden by working overseas. Therefore, her employer utilizes a tax equalization equation. The accountant will determine what the tax liability would have been in the United States as well as what the tax liability will be abroad, taking into consideration the foreign jurisdiction tax laws as well as the additional fringe benefits which would be considered taxable income, at least on the US tax return. Then, the two different tax calculations are entwined so that the employee is responsible for the home country’s tax liability, which is what her tax would have been – hypothetical tax. The employer is responsible for the difference, which can vary from a technical standpoint depending on the tax implications in the foreign country. At the end of the day, the goal is for the taxpayer to not be required to pay any more or any less than they would have paid had the assignment been performed in the employee’s home country
Foreign Account, Assets & Pension Reporting Issues Abound
With the globalization of the US economy, it is becoming more prevalent for US persons to work overseas. Moreover, the tax code is becoming more complicated on matters involving international reporting — and oftentimes these issues get overlooked during the tax equalization process. This can result in a taxpayer being out of compliance with various US reporting forms such as FBAR and FATCA. Complicating the matter, even more, is the fact that the US has significantly increased enforcement of international reporting — and penalties on matters involving missed foreign reporting can be significant.
If international reporting forms were missed, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in offshore disclosure to assess if one of the offshore compliance programs may benefit them. This should be done sooner than later so they do not miss the opportunity to do so.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
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