In any typical international assignment, the employee is paid his home country salary and plus specific assignment related allowances / perquisites. The employer deducts tax on the employee’s home country salary as per home country tax structure. This tax is called Hypothetical tax. This tax is not actual tax and is therefore not remitted to Govt. exchequer.
The tax liability in host country is calculated on aggregate of home salary (after deducting hypo tax), assignment allowances and perquisites. This amount needs to be remitted to Host country’s Govt. exchequer. This amount will be partially funded by the Hypo tax recovered by the employer from the employee. In some cases the actual tax amount will be lower than Hypo tax. The benefit will be enjoyed by the employer.
In most countries (including India) tax liability of employee borne by employer will be treated as employee’s income. This calls for grossing up while calculating host country tax liability.
- See more at: http://taxguru.in/income-tax/deduction-hypothetical-tax-fair.html#sthash.BLNfN0js.dpuf
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