Tax equalisation refers to neutralisation of tax impact on an employee, resulting from

his/her assignment from home country to the host country.

Globalization of the economies has changed the way business is conducted and in the
process introduced new concepts, tax equalisation being one of them. ‘Tax equalisation’
comes into play in case of international assignment of employees. It refers to
neutralisation of tax impact on the employee, resulting from his/her assignment from
home country to the host country.

Say, where an employee based in Singapore is seconded to India; by virtue of his

employment in India he would be taxable in India.

The tax rates (for individual) in India being higher than the corresponding tax rates in
Singapore, the employee would be affected financially (considering the same level of
compensation). Owing to such tax differential, the secondment to India may not seem
beneficial to the employee. Tax equalisation offsets such differential in tax rates, thus
making international assignments tax-neutral.

Numerical example

To put it numerically, say the employee’s annual salary is Singapore dollar 500,000, on
which his tax incidence in Singapore is S$100,000 (at 20 per cent). On his assignment to
India, considering the same salary, he would be liable to tax at the rate of 30 per cent and
his tax liability would be S$150,000. However, under tax equalisation, the employee will
continue to bear only S$100,000 and the incremental tax liability of S$50,000 would be
met by the company.

This would also hold good in case of an assignment from a country with a high tax rate,
to a country with a lower tax rate, say, an assignment from the Netherlands to India.

Here, under tax equalisation, the employee seconded to India, would continue to bear
taxes at the same rate, as he would have borne had he continued in Netherlands. Thus,
with tax equalisation in place the employee’s tax liability is maintained at the tax level of
the employee’s home country and any differential on account of the tax rates, positive or
negative, is on the account of the employer.

This is in contrast to a related concept of ‘tax protection’, under which the employee is
shielded from any incremental tax liability while he can enjoy the savings, if any, on
account of reduced rate of tax in the host country.

However, this is not to say that under tax equalisation, a company gets to pocket the tax
savings by assigning an employee from a high tax country to a low tax country; as tax
equalisation is just one part of the assignment, other incidental costs associated with
assignment — additional benefits provided to the employees in the host country by the
employer (say, housing, car, travel, professional tax advice) and the tax treatment of
those, generally exceed savings, if any, on account of differential tax rates.
Thus, while ‘tax equalisation’ policy maintains a status quo for the employee, it entails
additional costs for the employer, hence careful planning is required while structuring the
tax equalisation policy to ensure a win-win situation for both the employer and the
employees.

Hypothetical tax

The implementation of tax equalisation policy, in turn brings in the concepts of

‘hypothetical tax’ and ‘tax perquisite’. Hypothetical tax refers to the home country tax of
the employee, which is withheld from his salary during the tenure of his assignment in
the host country. These taxes are not actual taxes, rather represent the taxes which the
employee would have borne had he continued in his home country, hence the name
‘hypothetical’.

The actual host country taxes are borne by the employer and the difference between the
hypothetical tax and such actual tax refers to ‘tax perquisite’.

Given the high costs involved, the complexities of implementing the policy and the
administrative effort on the part of the employer, tax equalisation still is a welcome
concept as it promotes employee mobility by insulating them against differential tax costs
across countries, thus ensuring the movement of requisite talent globally.