What is meaning of HYPO tax? explain in details
Thanks in advance
Divya Sethi
(ca student)
(459 Points)
Replied 14 October 2014
There are a large number of MNC's operating in India which are in common practice that their employees are transferred from one country to other countries for serving offices situated in various countries. Since the rate of tax on salary income differs from country to country, therefore, whenever an employee is relocated, his prime tax liability would also be different.
In such a situation, the employer normally gives an assurance to the employee that the employee will continue to receive the same salary that he would have received had he not been relocated to another country.
So this Tax equalisation came into existence wherby MNC's ensure that their employees who are on international assignment do not suffer combined taxes on income (in home and host country) in excess of what they would have paid had they continued to reside in the home country.
Under this Policy only, the employer calculates the hypo tax and excludes the same from the employee's pay. The hypo tax is the amount of the tax liability that the employee would have continued to bear in his home country had he not been seconded to another country.
Hope the concept is clear now.
@VaibhavJ
(Believe!! Live your dreams!)
(33516 Points)
Replied 14 October 2014
@ divya, very well explained..
Hypotax is, by definition, hypothetical, its method of calculation is not enshrined in tax law and must instead be determined by company policy.
Expatriates often work in foreign countries where the tax rates, brackets, credits, deductions, and many other items are different than in their home country. This can create drastic swings in their tax position causing an expatriate to pay much more in taxes or create a boon through lower tax rates and/or foreign tax credits. Many multinational companies use tax equalization agreements to alleviate these tax issues.
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