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Tax Equalization and Expatriate Tax Services
SC&H Group is a leading professional services tax accounting and consulting firm specializing in the delivery of tax planning, tax return preparation, and policy planning services designed to ensure a smooth transition to your overseas relocation strategy. Our tax equalization (TEQ) and protection planning is geared towards both Individuals and Employers and will be custom designed based on specific needs.
Companies with international presence and their offshore employees become subject to many complex tax issues when they relocate or place their employees abroad. Tax equalization and protection policies govern how employees are compensated for certain tax costs while on foreign assignment, and can be used by companies to ascertain the tax liability they maintain in bearing the risk and burden of an expatriate employee program.
SC&H can provide assistance to both the employer and employee:
- Assistance with implementing a TEQ policy in all aspects, from overseeing to drafting and implementation
- Assistance with determining taxation of fringe benefits to employees (both income and payroll taxation)
- Preparation of initial tax projections to provide an estimate of the tax implications of the foreign assignment
- Preparation of the final hypothetical and actual tax calculations and presentation of the TEQ calculation to both employer and employee
- Preparation of the employees’ Federal and State(s) individual income tax returns
Tax Equalization/Protection Policies
These policies govern how employees are compensated for certain tax costs while on foreign assignment. A tax equalization program (TEQ) requires the employee to pay a tax equal in amount to the Federal and State tax the employee would have paid had he remained in the United States during the period of his foreign employment. A tax protection program is designed to reimburse the employee only in the event he pays higher taxes as a result of his foreign assignment. Under a tax equalization policy, the employee will be placed in the same tax position as if he were working in the United States, whereas a tax protection policy could result in a net tax benefit, but not a penalty, to the employee.
In order to determine the net tax cost or benefit to an employee as a result of a foreign assignment, we calculate a “hypothetical” tax based on income and deductions applicable if the employee had remained in the United States. Under a tax equalization program, the employee's hypothetical tax is compared to their actual U.S. and foreign tax liability at the end of the year (including income earned as a result of relocation incentives). If the actual U.S. and foreign taxes are greater than the hypothetical tax, the employee is reimbursed for the difference. However, if the actual taxes are less than the hypothetical tax, the employee is charged with the difference. In both cases, the employee's liability is no more, and no less, than if he had remained in the U.S.
Taxation of Relocation Incentives
Employers commonly provide certain incentives to expatriate employees in connection with their relocation. These incentives generally represent additional taxable income to the employee and may include:
- Tax Equalization/Tax Protection payments
- Cost of Living Adjustments (COLA)
- Expatriation bonus
- Housing allowance
- Car allowance
- Education allowance (private school for children)
- Home leave & emergency trips
- Moving allowance (covers non-deductible moving expenses - i.e. temporary housing, meals, vaccinations, etc.)
- Tax preparation fees
These various fringe benefits should be reported in Box 1 of your Form W-2. They are subject to both income tax and FICA tax.
Note: Moving expenses such as travel/airfare, storage, mover and shipping fees that could be deductible expenses of the employee - reimbursement of these fees by the employer to the employee is not taxable compensation. The reimbursement amounts paid directly to the employee are reported in Box 12 of the Form W-2. If the expenses incurred are paid directly from the employer to the third-party vendor, then these amounts need not be reported on Form W-2.
If you are have any further questions regarding Tax Equalization and Tax Protection Policies, contact us.
