Article on hypothetical taxation

Article on hypothetical taxation

150 150 Sudha Bhushan
  1. Are you an Expat? Have you been Tax Equalized?  “Expatriate” or “Expat” is a person residing in a country temporarily or permanently which is different from his/her home country i.e. the country in which he/she is a resident. Usually this term is used in case of technicians and professionals sent by their companies to their associated enterprises or foreign subsidiaries. Expatriates often work in a country or they are deputed to another country wherein the tax brackets, credits, deductions immensely differ from their home country. This creates a dicey situation for an Expat. Either the expat shall end up paying more taxes or take the benefit of the tax situation by paying comparatively lower taxes. “Tax equalisation” is a measure used to neutralize the impact of taxation on an expatriate worker in respect of his/her assignment in a country where he is not a resident. This basically encourages the workers to work for their employer wherever they may be sent, having an assurance that they are not disadvantaged due to the tax policy of the host country. for eg. Under tax equalisation, if an employee who is a resident of India and working in India is sent to America for employment, would continue to bear taxes at the same rate, as he would have borne had he continued in his /her employment in India. A tax equalisation policy is formulated by employer. Under this policy hypothetical tax is calculated. Hypothetical tax is calculated before assignments, based on the amount of income earned by assignees, irrespective of their place of work, which usually comprises salary and bonuses. For purposes of tax equalization, employers may calculate hypothetical tax for employees using the rates of the home country, host country, the country where the employer’s head office is located and the country of an employee’s permanent residence or citizenship. This means that assignees pay hypothetical tax directly to their employer instead of paying it in the home country or host country. The employer, in turn, uses these funds to pay the assignees’ tax liabilities in their home and host countries. The word Hypothetical Taxation
  2. “Hypothetical” is used as the salary income of the expatriate is taxed at the rate as if the foreign assignment never occurred. For example, if a worker working in Africa which is his/her home country is sent to India on an assignment by the employer then according to the concept of hypothetical taxation he is liable to pay tax on a hypothetical rate i.e. on the rate prevailing in his/her home country Africa. This concept completely negates the fact that such a person has been sent for an assignment to India. Whereas the difference between the actual tax of the host country and the hypothetical tax paid is known as “Tax Perquisite” and its taken care of by the employer. So next time your employer sends you outside your country ask HR to tax equalise you. If you are not already.
  3. About Taxpert : Taxpert Professionals is a conglomeration of multi-diverged professionals known for providing concentrated services in relation to taxation and corporate laws in a seamless manner. Taxpert professionals believe in the creation of value through advising and assisting the business. At Taxpert the pool of professionals from different spectrum like tax, accountancy, legal, costing, management facilitate the conversion of knowledge into beneficial transaction. About Expatriate Taxation: Moving to a foreign country often proves challenging. Coming to terms with a new tax system is one of the more significant factors contributing to this challenge. It is important to understand about changes to the personal income tax and implications on social security contributions as a result of such a move and to understand the steps that are advisable to be taken before leaving the home country both by the company as well as the employee. Expatriate Taxation is a tricky affair. Not only for the employee but also for the employer. Finer as well as bold points to be taken into account by the employer as well by the employee. For further information write to us. About CA. Sudha G. Bhushan Sudha is qualified Chartered Accountant and a Company Secretary with more than a decade of experience in the Foreign Exchange Management Act, RBI, Transfer pricing and International taxation matters. She is a noted speaker and author. Her articles are regularly published in the Journals of several institutes and at various other forums and has authored the following books: Practical aspects of FDI in India published by Institute of Company secretaries of India Due Diligence under Foreign Exchange Management Act, 1999 published by CCH. Comprehensive Guide to Foreign Exchange Management in two volumes published by CCH. Practical Guide to Foreign Exchange Management published by CCH, a Walter Kluwers company. Handbook on FEMA, Publication of Institute of Chartered Accountants of India A scholar throughout her life she has been awarded many awards and recognitions including “Women Empowerment through CA Profession” by Northern India Regional Council (NIRC) of Institute of Chartered Accountants of India (ICAI). Backed by experience in International firms she has extensive experience of handling international transactions. She advises corporate as well as government authorities in lot of intricate transactions. Rendering tax and regulatory advisory services, she has overseen and played a crucial role in the execution of complex international transactions involving issues revolving around tax, repatriation, minimization of tax exposure, Foreign Investment (Inbound and outbound) etc. She is on the Board of many esteemed listed companies as Independent director. She is member of Committee of International Taxation of WIRC, ICAI, Member of Editorial Committee of WIRC of ICAI and Committee of women empowerment of ICAI. She can be contacted at sudha@taxpertpro.com || 09769033172