Equalisation Programmes

  • What is a Tax Equalisation Programme?
  • What is a Tax Protection Programme?

  • What is a Tax GrossUp or GrossDown?

  • Why would a company calculate a GrossDown?

WHAT IS A TAX EQUALISATION PROGRAMME?

It is unlikely that your employees would want to work in another country to earn less, after tax, than they would in the United States. You should know how much extra salary you should offer to compensate for this loss of earning power. In order to entice US residents to work abroad, you will likely need to set up some form of tax equalisation policy, to partially or entirely offset the higher taxes. We can help determine appropriate equalisation policies, such as:

  • Which costs will be equalised (e.g. income tax, sales tax, property tax, cost of living)?
  • Which parts of income will be eligible for equalisation (i.e. all or part of employment income, bonuses, allowances, investment or other outside income, spouse’s income)?
  • Timing of equalisation payments.
  • How to handle the benefit of excess foreign tax credits generated in a current year but used in a future year
  • Calculation of equalisation (projection and actual)

If the employee’s tax is greater in the foreign country than in the US, the employee gets a grossed-up payment for the difference. If the employee’s tax is less in the foreign country, the difference is due to the employer. The employee never pays more tax than what s/he would have paid had s/he remained in the US.

WHAT IS A TAX PROTECTION PROGRAMME?

This is just like the Tax Equalisation Programme but it only pays out to the employee if going away will result in a higher tax to the employee and thus they need more pay. If going away results in a lower overall tax to the employee, the taxpayer does not have to pay the tax savings back to you.

WHAT IS A TAX GROSSUP OR GROSSDOWN?

A tax grossup or grossdown is a mathematical calculation that computes the tax impact of reporting assignment related items to an employee. Generally, it is the final step in the tax equalisation process – when the employee exits the tax equalisation program. The purpose of the calculation is to protect the employee from either realizing a windfall or incurring an economic loss as a result of including assignment related items in the annual income reporting process. It can also be used on an interim basis to reduce a substantial annual liability to or from the employee.

For international employees, an example of an additional income or deduction item might be the final host country tax payments made by the employer on the employee’s behalf. When this item is reported in the employee’s income without a tax grossup, the employee may have an economic loss as a result of the increased income related to their assignment.

When reviewing what tax rate(s) to use for a tax grossup or grossdown, the company will want to review the employee’s marginal tax bracket before the grossup, net operating loss, alternative minimum tax credits, and foreign tax credit carryforwards. All of these items will ultimately impact the actual tax increase or decrease reported on the employee’s tax return as a result of the assignment related item.

The final tax grossup or grossdown calculation is a circular calculation, meaning that you must account for the tax on tax impact of including the payment in the employee’s wages. When this circular calculation is prepared, all of the above mentioned elements are considered in determining the amount of income and social taxes that may be due on the assignment-related payments.

Generally, once the tax amounts are computed, the employer submits the payments to the taxing authorities on the employee’s behalf. The employee does not receive any of the tax amounts directly. The results are that the employee should not have to make any out-of-pocket payments for the ‘trailing’ payments included in the taxable wages.

WHY WOULD A COMPANY CALCULATE A GROSSDOWN?

Under tax equalisation, the grossup calculation is intended to protect an employee from negative financial implications. A grossdown calculation ensures that the employer recoups the tax benefits (from earlier payments made by the company) from foreign tax credit carryforwards, tax refunds and tax settlement payments due the company. These kinds of payments reduce the employee’s actual taxable wages and tax liabild tax liability, but not the employee’s hypothetical income.

In practice, grossdown calculations may not be utilized. This is because the concept of a grossdown is difficult for the employee to understand which makes it difficult to collect such a payment from the employee. The company may elect to let this tax windfall go to the employee. If this is your case, be sure to communicate this windfall to the employee. However, if your company uses grossdown calculations as part of its tax equalisation policy, you should make sure that this fact is documented in the policy document.