What is tax protection?

Tax protection is when employees are reimbursed by their company for their taxes up to a certain amount. Instead of calculating actual tax obligations, companies use a list of tax assumptions and estimate a hypothetical tax rate employees must pay.

In tax protection, the employee is responsible for complying with home country and foreign tax legislation (i.e. correctly paying all local and international taxes).
If the taxes paid are more than the hypothetical amount the worker would have paid at home, the company must reimburse the worker. If the amount in paid tax is less than the hypothetical stay-at-home amount, the worker does not receive any remittance.

How does tax protection work?

In tax protection, the employee is responsible for complying with home country and foreign tax legislation (i.e. correctly paying all local and international taxes). Often, international assignees pay taxes in both their home and host locations. For example, US citizens working abroad are still subject to federal tax laws. This double taxation could financially burden employees.
Under a tax protection policy, employers must reimburse international employees for taxes that exceed what they’d have paid if they remained in their home country.

Typically, the employee must file tax reports and pay due taxes for the financial year. At the end of the year, the employer compares the total taxes paid against a hypothetical stay-home tax and offsets the balance.

If the taxes paid are more than the hypothetical amount the worker would have paid at home, the company must reimburse the worker. If the amount in paid tax is less than the hypothetical stay-at-home amount, the worker does not receive any remittance.

Why is tax protection important?

Tax protection allows people to work abroad, while potentially saving employers and workers money. If an employee works in a foreign country with higher taxes, tax protection means they pay less money and have lower tax obligations. If they work in a country with lower taxes, the employer can pay less in taxes for the worker.

Advantages and disadvantages of tax protection

Advantages:

• The worker can pay lower tax rates
  A lower tax rate incentivizes workers to take overseas assignments and fill a business need
  No financial surprises

Disadvantages

• May hinder mobility to higher-tax countries
• The employer can lose out on savings when workers keep the windfall
• The worker may have cash flow difficulties
• There’s a compliance risk if the worker under-reports taxable income

How is tax protection different from tax equalization?

Tax protection and tax equalization both protect international employees from double taxation.
A tax equalization policy equalizes the paid tax so that the employee pays the same tax they’d have paid in their home country, with the employer taking on the tax burden. The employer pays the employee’s tax costs, including extra charges. The employee remits payments to the employer at the end of the pay period, but never more or less than their hypothetical tax.
If an international assignee is sent to a low-income tax-rate region, a tax protection policy allows them to keep the difference.

A tax equalization policy can benefit the employer, who’d still collect the employee’s (higher) hypothetical taxes.

Does tax protection impact total compensation?

Yes. Tax protection policies protect employees from additional taxes, but they’re based on a hypothetical calculation.

The hypotax may not cover all the taxes in the new location, which can impact the employee’s take home earnings. Workers can talk to their employer about the difference.