Adapting a Policy of Tax Equalization — A Practical Experienceby.doc

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Adapting a Policy of Tax Equalization — A Practical Experienceby.doc

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Adapting a Policy of Tax Equalization — A Practical Experienceby

Adapting a Policy of Tax Equalization — A Practical Experienceby Bill Kavanaugh and Alison Shipitofsky, KPMG LLP, New York(KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.) The accepted wisdom in terms of crafting a compensation approach for international assignees is that tax equalization is the right thing to do. Having said that, tax equalization is not a “fits-all-sizes” policy for every organization or every situation. Survey results tend to show, however, that many organizations prefer tax equalization as a tax reimbursement approach. Results from KPMG LLP’s (KPMG) Web-based International Human Resources survey ( HYPERLINK \t _blank ) on International Assignment Programs and Policies show that tax equalization is both the most common and competitive practice, regardless of industry or assignee population. According to the survey, 70 percent of the participants tax equalize their assignees and only 11 percent tax protect. In spite of this fact, it may not always be clear to organizations why tax equalization may be a better policy for them.This article will highlight the process of adapting tax equalization through the experience of one company’s (we will call it XYZ Co.) recent change in policy to tax equalization.Before beginning, it is necessary to define the two tax reimbursement approaches:Tax Protection: An assignee pays no more than he or she would have paid had he or she stayed at home (but if the actual burden is less, the assignee retains the windfall). Tax Equalization: An assignee pays no more or no less than he or she would have paid had he or she stayed at home. (The windfall, if any, goes to the employer.) The Decision to SwitchWhy should an organization care if the assignee ultimately benefits by enjoying a low (or perhaps non-existent) tax burden while on assignment? Why shouldnt the employee be able to keep such benefits anyway? Those two questions are at the heart of the tax reimbursement issue. At th