Work assignments across borders are common, but it can be a problem to recruit personnel with the right qualifications for positions abroad. One reason may be the uncertainty related to tax rates in a foreign country. Tax issues could cause doubts for employees offered international assignments.
The solution is hypotax
Tax rates diverse in different countries, but it is not only the tax rates that vary. Expenses, assignment-related payments and fringe benefits covered by the employer may also be exposed differently to tax liability depending on the internal tax law in each country.
Unsurprisingly, tax issues often trigger concerns for the employee. Positions in high-tax locations may be difficult to fill, while positions in low-tax jurisdictions often get oversubscribed. The solution to the problem is named hypothetical tax or hypotax.
Also read: Annual wage report in Norway
The home-based approach
There are different types of hypotax. In this article we will consider the most common type; the home-based approach. The home-based approach intends to keep the tax level for international assignments equal to the tax level in the employees’ home country. This ensures that the employees will receive the same net pay when accepting an assignment abroad, as they would have received in their home country after taxation.
To promote mobility and ensure equal treatment between employees globally, our experience is that most multinational companies are using a home-based approach.
Also read: Taxes in Norway - employee taxation
Calculation of home-based hypotax
To calculate hypotax, the starting point is normally the employee’s take home pay in the home country. This amount is grossed up based on the host country’s tax rules to determine the gross pay. Compared to ordinary gross salary, we have a situation where the net payment to the employee after deduction of home-based income tax will be the known and constant figure. The gross salary in the host country is back solved from the salary exclusive of home country income tax.
It is important to remember that National Insurance is not considered as income tax and is treated separately.
Prevent double taxation
Income from abroad is, in most cases, fully taxable to the country of residence. A tax credit is most likely allowed according to a tax treaty between the home country and the host country to prevent double taxation.
If there is no tax treaty, most countries have regulations in their tax law to prevent double taxation, e.g. that the tax liability to the home country will cease when working abroad.
Also read: A brief guide to your Norwegian tax return
The employer’s responsibility
Regardless of the tax situation in the home country, the employer will deduct a hypothetical tax from the employee’s salary and the employee ends up with a take home pay equal to what was the case prior to signing up for an assignment abroad. Tax changes due to a different tax level in the host country will be covered by the employer.
What is considered taxable income in the home country can differ from the taxable income in the host country. It is the responsibility of the employer to make sure that all salary and benefits are included when calculating the tax in the host country. If an employee receives payments in kind that is not subject to tax in the home country but is taxable according to the tax law in the host country, the employer must consider the payment in kind as part of the amount liable for gross up.
It is important to remember that an agreement between the employer and the employee related to coverage of tax is not determined by law. It is a private agreement.
The tax administration does not consider private agreements when processing the tax settlement. The tax administration only considers the tax laws and any bilateral agreements affecting the tax calculation. The tax law states that it is the employee that is responsible for personal income tax. It is therefore important that the contract between employer and employee is accurate.
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Article first published in November 2019, latest update August 2021.