Global Work Glossary
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Table of Contents
How does tax protection work?
How is tax protection different from tax equalization?
How do you calculate hypothetical tax?
How does tax protection benefit employees on international assignments?
Does tax protection impact total compensation?
What challenges could you face implementing a tax protection policy?
Can tax protection impact employee loyalty?
What role does HR play in tax protection?
Should you consider tax treaties when implementing tax protection policies?
What other compliance issues affect tax protection?
Can you use technology to manage your tax protection policy?
Standardize your mobility processes with Deel
What is tax protection
Tax protection is a policy that reimburses employees for the excess taxes they incur during an international assignment. It makes sure that international assignees don't shoulder extra tax liability beyond what they'd have paid in their home country.
International assignments can expose employees to double taxation. Learn how a tax protection policy can protect employee compensation and increase loyalty.
Including taxes, experts estimate that deploying an employee outside your home country costs 2 to 2.5 times more than a local assignment. Tax equalization and tax protection are the two most common tax policies companies implement to control the cost of international assignments.
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How does tax protection work?
Often, your international assinees are subject to taxes in both their home and host locations.
For example, US citizens on international assignments are still subject to federal tax laws. When you deploy an employee overseas, they must pay taxes applicable in both their home and host country. This double taxation may exert a heavier financial burden on the employee.
Under a tax protection policy, employers must reimburse international assignees for any taxes paid over what they'd have paid if they remained in their home country. No remittance is necessary if the tax paid is less than the home country's taxes.
Typically, the employee is responsible for filing tax reports and paying due taxes for the financial year. At the end of the year, the employer weighs the total taxes paid against a hypothetical stay-home tax and offsets the balance. This puts the burden of compliance on the employee.
If the tax paid by the employee is less than their hypothetical stay-home tax, they keep the difference. This can sometimes result in a tax windfall for employees deployed to low-income tax regions.
See also: The value of expat employees for your global team
How is tax protection different from tax equalization?
Tax protection and tax equalization are similar, but they protect international employees from double taxation in different ways. The goal of a tax equalization policy is to put the employee in a tax-neutral position.
A tax equalization policy equalizes the tax paid so that the employee pays the same tax they'd have paid in their home country. Here, the employer takes on the tax burden. They pay the employee’s tax costs, including any extra charges. The employee then remits payments to the employer at the end of the pay period, per the policy’s terms, and never more or less than their hypothetical stay-home tax.
If an international assignee is deployed to a low-income tax-rate region, a tax protection policy may benefit them as they get to keep the difference. Meanwhile, a tax equalization policy may benefit the employer, who'd still collect the employees (higher) hypothetical stay-home taxes.
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How do you calculate hypothetical tax?
Also known as hypotax, hypothetical tax is the tax amount an international assignee would pay if they lived and worked in their home country. It's hypothetical because employers, not the tax authorities, calculate it.
No laws define how to calculate hypotax. Companies often base their assumptions on the prevailing tax rates and other factors like tax obligations in new tax regimes.
If the organization has a large enough workforce, you may turn these assumptions into company policy. You can then apply the policy to all international assignees, with some changes for family sizes.
Different approaches exist to calculate hypotax, including basing your assumptions on:
- The deductions made on home-based employees similar in role and experience to the international assignee
- Fixed percentage deductions made on home-based employees across all income levels
- An average of the assignee’s deductions several years before the assignment
Taxation experts, whether in-house or outsourced, will usually analyze tax authority and organization data to create an itemized list of deduction assumptions. You can use this to create a standard hypotax calculation.
See also: How is Deel reinventing the immigration journey
How does tax protection benefit employees on international assignments?
A tax protection plan provides a safety net for international assignees against unforeseen tax obligations. Because it is compensatory, employees who encounter unique social security and tax costs are assured (to some extent) of getting their money back at the end of the year.
Tax protection policies can also result in windfall gains for employees. If an employee is assigned to a low-income tax rate region and their hypotax is higher than their due tax, they get to keep the difference. This extra incentive can make the inconvenience of moving far from home more bearable.
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Does tax protection impact total compensation?
Yes. While tax protection policies protect employees from additional taxes, they are ultimately based on a hypothetical calculation. The hypotax may not cover all the taxation costs of the workers new assignment, which can cause disparities in their compensation. Employees can address this with their employer.
As far as compensation is concerned, employers with a tax protection policy reimburse assignees for any extra taxation costs above their hypotax. Hence, their total compensation should remain the same with a well-calculated hypotax in place.
If you need help managing payroll, HR, and compliance for your global team, turn to Deel’s forever people platform. Deel has helped companies like Revolut hire, relocate, pay and manage employees in every country they have expanded to, offering hands-on support throughout.
“Thanks to Deel, we get to hire local talent in any country where we want to expand long before we set up the entity there. Effectively, this gives us a head start.” – Luka Besling, HR Manager at Revolut.
What challenges could you face implementing a tax protection policy?
One problematic aspect of tax protection is that it can be financially cumbersome for employees. International assignees forced to pay taxes throughout the year may experience significant cash flow problems. This is especially true if they are assigned to a high-income tax region.
Because of this, some employees may be reluctant to take on some assignments. This could limit your ability to expand your global team.
For employees who do take on these assignments, there may be an incentive to under-report tax obligations. This opens you up to compliance problems. If the employee, who's solely responsible for tax compliance, fails to comply, your organization could suffer negative publicity.
Some employers address this through a hybrid tax protection-equalization policy. With a tax equalization policy, you can protect your employees’ cash flow and gain more oversight over compliance. Meanwhile, a tax protection policy can protect your employees from unforeseen taxes.
See also: Employee visa application guide for enterprises
Can tax protection impact employee loyalty?
Cash flow problems can cause some assignees to become disillusioned with their employer. On the other hand, the windfall gains of some assignees may raise inequality concerns among colleagues in high-income tax regions. HR departments must address and adjust tax protection policies to offer the same protections for all assignees across the board.
See also: How to get the best global talent for your startup with EOR visa sponsorship
What role does HR play in tax protection?
Because tax protection policies involve straightforward remittances, they are generally easier to manage.
HR departments must still oversee their execution, nonetheless. Your job as an HR manager includes:
- Establishing the best tax policy strategy for your company
- Determining what types of taxable income the policy covers
- Creating hypotax formulas
- Hiring and managing the services of external tax experts
- Maintaining compliance across home and host tax regimes
- Executing tax reimbursements
Overall, you must make sure that tax protection policies are reasonable, fair, equitable to all assignees, easy to execute, easy to understand, and cost-effective for the organization.
Should you consider tax treaties when implementing tax protection policies?
Yes. When formulating short-term and long-term international assignment policies, whether the home and host countries have a tax treaty impacts an employees and organization’s tax obligations.
There are over 3,000 income tax treaties across different countries and jurisdictions. Learn more about their impact on tax obligations here.
What other compliance issues affect tax protection?
Companies that send employees overseas often incur additional tax liabilities on the assignees' global compensation. Different countries have different reporting requirements for these payments. If you misreport assignee compensation, you may face fines or criminal penalties.
Can you use technology to manage your tax protection policy?
Yes, and you should. Compliance requirements vary across tax regions, making managing tax policies a cumbersome task. The balance sheet approach, which may work for smaller teams, may prove ineffective for large or growing global teams. Global HR platforms like Deel can help you automatically adjust, manage, and execute your tax and payroll duties.
Standardize your mobility processes with Deel
Tax compliance is one of the most complicated aspects of global mobility. A good tax protection policy can protect your international assignees from additional tax burdens. However, it falls to you to maintain compliance and execute these policies fairly.
Whether you need to hire internationally, relocate members of your global team, or implement efficient mobility policies, Deel’s global platform can help you streamline your operations across 150+ countries.
To see how Deel can support your company's global operations, book a demo.
