Generally under tax equalization it is expected that an employee should pay no more or less in income taxes than they would have had they remained in their home country. Any tax obligations (home and/or host country) in excess of the employee´s stay-at-home tax must be reimbursed to the employee or paid by the employer, on the employee´s behalf. These excess payments are considered a taxable benefit to the employee and must be included in their reportable income.

The one-year rollover method of tax reimbursement is the most commonly used and accepted method of reporting assignment related tax payments in an employee´s income. Other methods that may be used are current (year) gross-up and the loan bonus methods.

Under the one-year rollover method tax payments are made in the current year. But these amounts are treated as loans to the employee (similar to an advance for moving expenses) and do not become part of the employee´s income until the next year when the tax equalization calculation for the year is finalized.

Why would the one-year rollover method be used?

The benefit of using the one-year rollover method is in the deferral of reporting the tax reimbursement payments. Also, in some assignment locations use of this method may reduce the tax costs for the final assignment year when tax rates on the tax reimbursements may be assessed at a lower nonresident rate, or may not be taxed at all.

Examples of countries where the one-year rollover method may be accepted are as follows:

Australia, Belgium, Canada, Czech Republic, Chile, France, Hong Kong, Hungary, Indonesia, Japan, Malaysia, Netherlands, Philippines, Poland, Switzerland, Singapore, Taiwan, and the United States

Note - While the one-year rollover method may be one of the more commonly used methods for reporting tax reimbursements, it is not be accepted by all taxing jurisdictions. However, if it is an acceptable method, the documentation requirements (including the use of advance agreements with employees) can vary depending upon the given host location.

If considering whether implementation of the one-year rollover method is appropriate for a company´s tax reimbursement policy, seek guidance from a tax service provider to determine not only its viability (in a given location), but also its structure and implementation.