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Tax Reimbursement for Foreign Assignees
Those expatriates sent on a typical foreign assignment or intra-company transfer by their current employer often have several advantages. Though the era of the full-blown “expat package” with assorted benefits may be over, many still profit from financial incentives and other perks (e.g. support for spouses to find a job, help to send your kids to an international school).
Tax refunds for expats are another potential incentive. However, providing them is a purely voluntary offer on part of the employer, so you unfortunately don’t have a right to it. Still, you might check if your company already has such a policy or ask them for refund options in your particular case. Before you talk to your boss or your HR department, though, you should know what the usual options for tax reimbursement are.
First of all, these reimbursement policies obviously refer to your employment income only. Regarding other tax benefits – or disadvantages – connected to moving abroad, you might want to consult a tax advisor. Perhaps your employer can refer you to one who specializes in international tax law.
Thanks to company-based tax reimbursements, you should not suffer any fiscal disadvantages from accepting a foreign assignment. In less fancy words: Your tax burden (on your salary, bonuses, etc.) should not be higher abroad than it would have been at home.
If your employer does have a tax refund policy for expats, it is sometimes simply a lump-sum payment that may or may not cover the whole amount of additional taxes that you have to pay. Such an allowance is usually agreed upon in advance.
It’s obviously better than nothing, but most companies prefer a more tailored, though more time-consuming approach. The two options for such a tailored approach are called tax protection and tax equalization.
Tax protection works as follows: The employer reimburses the expat for all taxes that are higher than a hypothetical burden called “stay-at-home taxation”. Therefore, no fiscal disadvantages will arise for the expat employee.
However, if their actual financial burden abroad should turn out to be lower than the hypothetical stay-at-home tax, they will profit as well. They don’t have to refund their employer for the difference, so it’s always a win-win option for assignees.
In practice, an employee pays all the taxes on his or her employment income during their stay abroad, both to local and foreign tax authorities. Once a year, the company calculates the “stay-at-home” tax burden and compares it to the actual amount of income taxes paid. If the stay-at-home tax is lower than this sum, the assignee gets back a refund from the company.
Unsurprisingly, employers often prefer another kind of tax refund for their international staff. If they apply the so-called principle of equalization, foreign assignees will not suffer any fiscal disadvantages, either. However, neither will they benefit from lower taxation abroad.
In this case, it is the employer who pays all taxes on behalf of their employee, both in the country of origin and in their new country of residence. In return, the employer keeps a monthly withholding tax from the expat’s salary. The amount of this PAYE tax is based on the hypothetical tax burden calculated in advance. Annually, the company’s tax consultant adjusts the hypothetical stay-at-home tax for the past fiscal year. They also compare it to what the finance department has already paid for the employee.
If the actual amount of income tax spent is higher than what would have been due for a local employee back home, the expat will get money from the company. But if it is actually lower, the profit margin remains with the company and the employee receives no refund. Oftentimes, these differences are then used by the HR department to pay for relocation-related costs.