In the context of expatriate compensation, what is "hypothetical income tax"?

Hypothetical tax, or "hypo tax," is a core component of a tax equalization policy for expatriates. The employer deducts an amount from the expatriate's salary that approximates the income tax they would have paid had they remained in their home country. This ensures the employee's tax burden is neutral, regardless of the host country's tax rates. The company then pays the employee's actual income taxes in both the home and host countries. This approach protects the employee from higher tax liabilities while preventing them from receiving a windfall in a lower-tax location.

A. This is incorrect. Hypo tax is an internal calculation and deduction by the employer, not a method for transferring funds to tax authorities.
C. This describes the actual tax liability in the host country, which the organization pays on the employee's behalf, not the hypothetical tax.
D. This is incorrect. Under tax equalization, the expatriate pays the hypothetical tax to their employer, not actual taxes to the host government.

1. McNulty, Y., & Inkson, K. (2013). Managing Expatriates: A Return on Investment Approach. Business Expert Press. (See Chapter 5: Expatriate Remuneration, which details the mechanics of tax equalization and hypothetical tax deductions).

2. WorldatWork. (2017). The WorldatWork Handbook of Compensation, Benefits & Total Rewards. (See section on International/Expatriate Compensation, which explains tax equalization and the role of the hypothetical tax calculation).

3. Bonache, J. (2005). Job satisfaction among expatriates, repatriates and domestic employees: The perceived impact of international assignments on work-related variables. Personnel Review, 34(1), 110-124. https://doi.org/10.1108/00483480510571914 (The article discusses compensation complexities, including tax equalization, as a critical factor in expatriate management).