 In this topic, we are going to discuss about a very important aspect of international compensation which is taxation management. Taxation becomes a very complicated topic in international compensation because when you are paying in only one country you have to adhere to the laws of taxation of only one country. But when you are paying an employee who belongs to a parent country and is working in a host country, you are being subject to the tax law of two countries at the same time. So it is possible that sometimes you have to pay the tax of the parent country as well as that of the host country. And therefore this is a situation which needs to be dealt with, which needs to be managed by the organization in one way or the other. So there are various different approaches which are used to manage this situation that how the employee is going to pay the tax from the compensation or from the salary that he receives as his compensation. So let's take a look at the different approaches of taxation management in international compensation. The first approach which is used widely is that of tax equalization. Tax equalization is an approach in which the firm withholds an amount equal to the home country tax obligation of the expatriate and pay all the taxes in the host country. Now what happens in this is that no matter how much tax the host country applies on the employee's salary, the employee is only going to pay that amount of tax which he would be paying in the parent country. So if a person is working in America, America is his parent country and the multinational is also an American multinational. So if he is working in America in the American multinational and paying as much tax as he would pay on that particular salary, if he is transferred somewhere else in another country, for example in a European country, let's say in the UK, and if the tax rate in the UK is more than America, then there will be no effect on his salary. The amount of tax he gives in America, the company will deduct the same amount of tax from his salary and the difference of the rest of the tax, or if he has to pay a little, then his benefit will be for the company and if he has to pay more, then his cost will be paid by the company. So the employee will have no difference that he is going to another country where the tax rate is higher or lower. So this is the approach which is the approach of tax equalization. In this situation, if the employee is going to a country where there are high tax rates, then the employee will benefit in this situation. But if he is going to a country where there are lower tax rates, if he was paying more tax in his parent country, paying a higher percentage, and now he is going to a country where there are lower tax rates, then the organization will benefit from this. But because of this, there will be no difference that he is going to a country where the tax rates are higher or lower. So this is the tax equalization approach. Now coming to the second approach, this is called the tax protection approach. In tax protection approach, what happens is that the employee pays up to the amount of taxes he or she would pay on the compensation in the host country. In such a situation, the employee is entitled to any windfall received if total taxes are less in the foreign country than the home country. So in this tax protection, the difference is that if the employee goes to a low rate country where the tax has to be paid a little, for example, hypothetically it is said that if in America he gets 1 lakh salary and he has to pay 40% tax on it, then 40,000 rupees will be cut off from his salary. For example, if he comes to Pakistan and he takes 1 lakh salary, and he has 20% tax data in Pakistan, then he has to pay 20,000. So in the tax equalization approach, his salary will deduct 40,000. But in the tax protection approach, the extra 20,000 remaining will be paid. So if there is a situation in which the windfall is created because of less tax rates, then the employee is given that benefit in case of this particular windfall. So this is tax protection approach in which the employee gets the benefit of going to a lower tax country. So this is another approach of taxation management. Now the third approach is ad hoc approach. And ad hoc approach is that each expatriate is handled differently depending upon the individual package agreed to with the M&E. So one is that overall organization-wide, each tax approach is used on the basis of tax equalization. Or salary is given on the basis of tax protection. But somewhere ad hoc is given on the basis of tax equalization, on the basis of tax compensation. So depending on the importance of the employee in that organization and depending upon the structure and administrative system of the organization, ad hoc be a jahebo system approach jahebo taxation. Then finally, the fourth one is the less severe approach to taxation. Less severe means let it be as it is. Less severe means that the organization, the company does nothing to does nothing to help or protect or facilitate or do anything regarding the tax obligation of the person of the expatriate. The person who is going on the international assignment is supposed to take care of filing the returns, including the tax burden and paying off the taxes on his own, both in the host country as well as in the parent country. So the employee is supposed to manage the taxation of both the countries on his own. This is the less severe approach. It is employees are on their own in conforming to the host country and home country taxation laws and practices. So this is the fourth type of approach. Tax equalization is the most widely used approach in international compensation. Why? Because there are several benefits of tax equalization approach. Tax equalization approach ensures four things mostly and these four things are number one, equity, number two, mobility, number three, compliance and number four, partnership. Now let's take a look. It ensures equity because a person who is going from one country to the other does not get affected by the fact that which country has a higher tax rate or a lower tax rate. There are certain countries with charge up to 50% of the earning and compensation. There are some countries which charge up to 10 to 15% or 20%. So if the tax equalization approach is not employed, this would become a deciding factor for the employee that how much tax we have to pay for the salary. So instead of that, let's see what career opportunity is, what developmental opportunity is or what the particular strategic value of the job is, let's see how much tax we have to pay. If we have to pay 50% tax there, we have to pay 20% in the parent country. They will say no, we don't have to go because 50% there. So maintaining equity is a very important aspect of the tax equalization approach. The employee doesn't care how much tax he has to pay in which country. This is why equity ensures it facilitates mobility. Why? Because mobility is enhanced, because changes in the assignment country produce no significant tax benefit or disadvantage for the assignee. So this does not become a deciding factor whether a person would want to go to that particular country or not. Compliance is ensured because the organization takes the responsibility of adhering to the tax laws of the parent country as well as the host country. So the employee doesn't care whether he has filed a tax return or not. For example, if he doesn't file a tax return in the host country, if he doesn't file a tax return properly, he will be mismanaged. What will be the problem? The reputation of the organization won't come up. If there is a problem, if there is a case, the reputation of the organization won't come up. So these things don't want to be afforded. So they make sure that they comply with the host country standards as well as the parent country standards and taxation is managed by the organization itself. And finally, it creates a partnership. Partnership is formed between the company and the employee with the company paying all the worldwide taxes, actual taxes and the employee paying only the hypothetical tax. So it's something which forms a partnership that they are doing it together. They are managing it together. It's not that the employee feels that I'm totally on my own. I'm losing something or the organization is not taking the responsibility for my liabilities. So in this case, a kind of partnership is developed between the organization and a kind of association is developed between the organization and the employee. So these are the major benefits of the tax equalization approach because of which it is one of the most widely used taxation management approaches in international compensation.