Expatriate, Mobility and Shadow Payroll
Expatriate, Mobility and Shadow Payroll tests the mechanics of paying a mobile workforce: who pays, who withholds, who files, and how the company keeps the assignee whole. Expect questions on assignment structures, pay approaches, tax equalisation and shadow payroll entries.
Structures and pay approaches
- Assignment types: short-term (commonly under 12 months, home-based), long-term (one to five years), commuter, permanent transfer, localisation.
- Home-based or balance sheet approach: home net pay is preserved, and host costs are adjusted through allowances for tax, housing, goods and services, and discretionary spending.
- Host-based (local plus): the assignee moves to the host salary plus relocation support.
- Net-to-net: a guaranteed net amount in both home and host countries.
Tax equalisation and hypotax
The employer bears the tax the assignee would have paid at home. Hypothetical tax (hypotax) is deducted on the home payroll, and the company settles actual home and host liabilities. A tax reimbursement or gross-up may be added where the company bears additional tax.
Shadow payroll mechanics
A host-country payroll calculates and reports but does not pay. Host taxable income typically includes host salary, employer-provided benefits, employer-paid taxes (grossed up) and equity income sourced to the host. The home payroll either continues payment with a shadow charge-back or splits payment between countries.
Worked example
An assignee has host salary of 10,000 per month and is in the host country for eight months. Host tax is 30 percent and the company bears it. Reasoning: without gross-up, host taxable income is 80,000 and tax is 24,000. Because the company pays the tax, that payment is itself taxable: 80,000 divided by (1 minus 0.30) = 114,285.70, tax 34,285.70, net 80,000. The shadow payroll records 114,285.70 as host taxable income, while the home payroll records hypotax and the tax reimbursement as separate elements.
Traps
Leaving equity vesting out of the shadow payroll; failing to update hypotax after a salary change; assuming a certificate of coverage removes income tax obligations; and missing trailing liabilities such as vesting or bonus paid after the assignment ends.