Tax Allocation – Expatriates to the U.S.
U.S. tax return requires all taxable income to be reported, i.e., not only salary, but also personal income, such as interest, dividend, capital gain, self-employment income to list a few, are aggregated and taxed. For deductions and credits, personal items, such as mortgage interest and real estate taxes, are reported together with non-personal deduction items.
Also, if the tax return is filed on a married-filing-joint basis, income from both spouses should be combined and reported. Further, for the year of expatriation or repatriation, non-U.S. income earned before or after expatriation/repatriation may be taxable in the U.S.
If a company is responsible for paying taxes on expatriates’ salary related to their foreign assignment, it is indispensable for the company to define how much the responsible portion is for each expatriate. In other words, it is necessary for the company to distinguish between personal and non-personal income and to determine the amount of tax cost whether it is borne by the individual or the company. For this purpose, a calculation, known as Tax Allocation, will be performed.
Our firm provides services to set up a company policy for Tax Allocation, to support on implementation and maintenance of the Tax Allocation process as well as to perform Tax Allocation calculation.
Tax Equalization – Expatriates from the U.S.
Japanese government does not tax Japanese employees during their U.S. assignment, whereas U.S. government taxes U.S. citizens and U.S. Greencard holders on their world-wide income regardless of where they live or work. As a result, U.S. citizens and U.S. Greencard holders are subject to double-taxation in their home (U.S.) and host ( e.g.: Japan) countries.
For this reason, the method to determine the amount of tax cost is different between expatriates to the U.S. and from the U.S. when a company is responsible for paying taxes on expatriates’ salary related to their foreign assignment. For expatriates from the U.S., instead of Tax Allocation method, a different method known as Tax Equalization is utilized.
Under Tax Equalization method, the first step is to calculate the amount of taxes owed to U.S. government based on a hypothesis that the individual did not take the foreign assignment. The calculated tax amount is called Hypothetical Tax, and the individual is responsible for this Hypothetical Tax regardless of the actual tax amount calculated at the time of tax return preparation.
The second step is to conduct Tax Equalization calculation. If the sum of actual tax amount, including host county tax, is more than the hypothetical tax, the difference will be handled as a responsibility of the company. If, on the other hand, the sum of actual tax amount is less than the hypothetical tax, then the difference will be treated as a benefit that belongs to the company. As such, Tax Equalization method enables international assignment to be tax neutral for all expatriates, i.e., expatriate’s tax cost stays the same regardless of their assignment location.
Our firm provides services to set up a company policy for Tax Equalization, to support on implementation and maintenance of the Tax Equalization process as well as to perform Hypothetical tax and Tax Equalization calculations.