Understanding the taxation of international and expatriate assignments

Economy

Suits The C-Suite — By Jose Rey R. Manuel

Date issued: April 17, 2017

(Second of two parts)

In last week’s article, we discussed how or why taxpayers working on international assignments have to consider the impact of different tax jurisdictions on their individual tax obligations. We also explained how most companies implement a tax equalization (TEQ) arrangement for the employees so that they end up paying more or less the same taxes as if they remained in their home country. This is to ensure that the taxpayers do not face undue financial hardship or receive a financial windfall due to the relocation benefits they may receive.

We also covered hypothetical or “hypo” tax deductions and state taxation (for US expatriates). We will now continue with the other tax areas that have impact on taxation for expatriates.

SOCIAL SECURITY TAX AND TOTALIZATION AGREEMENT
Individuals working outside their home country are generally not subject to social security tax unless they are also performing services for their employer in the home country. If this is the case, they may be subject to both home and foreign (host) social security taxes. In such a case, countries usually enter into “totalization” agreements for a better coordination of their respective social security systems with similar systems in the other countries to exempt foreign assigned employees from double social security taxation.

Typically, the employer must apply for a certificate of coverage from the country where the employee will remain covered. If granted, this certificate is presented to the appropriate officials of the country in which the employee seeks exemption to prove that there is a continuing coverage. Whatever is the final arrangement, bear in mind that social security taxes will likewise be factored in the tax reimbursement scheme or TEQ.

TAXATION IN FOREIGN COUNTRY
If an individual is physically working or deriving income within the borders of another country, income tax will…

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