Smart Expatriation is the blending of many years of experience, a global network of expert partners and a profound understanding of international assignments and assignees. With these solid foundations and our know-how, we have created our own methodology for calculating international earnings.
Today, our global experience, combined with an efficient technological contribution, enables us to provide a complex online algorithm offering new solutions to assignees and any individual with an assignment project.
Smart Expatriation offers you the ability to determine what your equivalent gross salary should be in your host country in order to be able to maintain your standard of living and your savings capacity. Smart Expatriation also allows you to know the full budget of assignment for the company (or employer cost). To do this, we consider the pay differentials between your home country and host country:
- Income taxes,
- Employee/employer compulsory social contributions,
- Cost of living,
- Housing costs.
This page explains our methodology.
General method for calculating international earnings
We designed our simulator in such a way that we would be able to integrate different approaches for determining international earnings: Home Country or Home-based Anchor, Host Country or Host-based Anchor and all possible variants.
The home country anchor method consists of calculating the salary, net of all taxes and social contributions in the home country and guaranteeing that net salary. Then, based on company policies, allowances are added in order to compensate for certain differentials (cost of living, housing, etc.) and to compensate benefits (assignment bonus, hardship allowance, etc.)
The host country anchor method consists of determining the earnings based on local wage levels or local wage scales.
Gross earnings in the host country can also be determined using the "U" calculation method. The objective of this method is to define a gross salary in the host country that is equivalent to the home country, taking into account the cost of living, housing, and tax and social contribution differentials. This is a widely practiced logic by companies today because it ensures the same standard of living abroad for their assignees. We use this method to calculate your earnings.
The "U" calculation principle is simple:
- We calculate your current savings amount based on your gross or net earnings in the home country. The logic is to keep the same savings potential in your host country. This is what we call "the descent" in the home country.
- We then apply the cost of living differential on your spending budget and housing costs in order to ensure that you have that same purchasing power. This allows us to recalculate an equivalent net salary in your host country.
- An iterative calculation is performed from that net wage to estimate the amount of payroll deductions in the host country based on the new net pay calculated. This is what we call a "gross-up".
The diagram belows explains this process:
In the following sections, we will explain, step-by-step, the methodology for calculating each component of your earnings in both countries.
You can also view a sample report to see the calculation steps in more detail:
View our free sample report
- Personal income tax calculation
- Social contributions calculation
- Social/family benefits
- Cost of living
Personal income tax caculation
We calculate personal income tax in the home country and host country.
Personal income tax is calculated based on the following assumptions:
- the incomes taken into account are those of an employee and not an independent contractor,
- movable or immovable income is not taken into account,
- wealth and property taxes are not included,
- Taxes are calculated on the basis of a full fiscal year for a tax resident of the host country and home country.
Tax optimizations do not appear in the results of the tax calculation. Tax optimization requires a detailed study of income and individual status in order to be applied. Tax exemption rules (reduction of taxable income or reduction) are only taken into account when they are indisputable and related to your personal situation: country and city of tax residence, family members accompanying you during your assignment.
In some countries, the tax rates vary depending on your tax status (nationality, immigration status, etc.). You can select the tax status for your situation in the Comprehensive Plan. We use a default status for all other plans: national resident of the home country and resident alien in the host country.
To customize the simulation (Advanced and Comprehensive Plans), we offer you the freedom to enter your own amount of tax in the home country, using your tax returns, for example, when providing this information.
We update tax data at least once per year and indicate the update date in our reports.
Social contributions calculation
In both countries, we calculate the mandatory employer/employee social contributions.
We follow the same assumptions for the tax calculation.
Depending on the country, contribution rates can vary depending on the business status and the industry. We use an average contribution rate if the variations are not significant. When the changes are too significant and require a thorough study of your situation in order to determine the applicable rate, we use the lowest rate.
As with tax, contribution rates can be different depending on your tax status.
With the Advanced and Comprehensive Plans, you can enter your own social contribution amounts in the home country. We integrate the amounts recorded in the tax calculation.
With the Comprehensive formula, you have the possibility, if there is a social security agreement between the two countries, to choose the posting option: compulsory social security contributions maintained in home and absence of contributions in the host country.
We update the social contributions at least once per year and indicate the update date in our reports.
The Smart Expatriation calculator automatically calculates the amount of social/family benefits in the home country and the host country. This calculation is only available in the Comprehensive Plan.
The allowance amount varies depending on the number of dependent children accompanying you during the assignment. The dependent child definition can vary by country; it is usually a minor child without financial resources.
We treat social/family benefits as savings in the home country. The amount will thus be taken into account in your host country. If you do not want to include them, you can enter zero as a value in that field.
You can enter your own net tax allowance and social contribution amounts in the home country and the host country.
The calculations are made according to the rates in force in the country. These are updated annually.
Cost of living
The spendable income
The spendable income is the portion of the net salary that a household will spend to purchase goods and services. It can be likened to the consumer basket of goods. It is on this portion of the salary to which the cost of living index is applied in order to calculate your budget for equivalent goods and services in the host country.
The major items included in the consumption portion of income are:
- Food at home
- Beverages and Alcohol
- Telephone, energy (water, electricity, gas)
- Clothing and footwear
- Sports and Recreation
- Other (furniture, appliances, insurance, etc.)
Housing costs, schooling related costs, and the savings portion are not included.
Before applying the cost of living index differential, we estimate your spending budget in your home country. A summary diagram is shown below to better explain the process:
|Your earnings in the home country|
|2||Employee social contributions|
|3||Personal income taxes|
Some organizations use a single percentage for defining the goods and services portion regardless of the household type. Should we expect that a high-income single person spends the same percentage of his salary on the consumption of goods and services as a low-income family with four children?
According to our research, which is based on various studies* and field surveys from assignees, a major factor for variation in the consumption portion of goods and services in the household budget is the family size and the level of earnings, especially the net pay after social contribution and tax deductions.
The larger the family sharing a modest income, the higher the consumption of goods and services is compared to the net pay, and consequently the family's low savings capacity.
Based on these findings, we modeled the evaluation of the spendable income according to family size and the level of earnings. The estimate is expressed as a percentage of net earnings. We must consider this result as the median of consumer behavior and not as the actual individual calculation of consumption which can vary based on behaviors that are more or less oriented toward consumption or savings.
For added flexibility, the Comprehensive Plan offers the possibility of entering your own amount or percentage of the spendable income.
The cost of living indices
What is the source of this data ?
In calculating a reliable index, that is to say, one that most closely matches the local reality, we determined a list of criteria:
- Ability to determine a basket of simple and measurable goods and services regardless of the country,
- Number of cities covered in the world,
- Significant number of price quotations by city,
- Adaptation of the index to the assignee's consumption type.
According to these criteria, we selected the Numbeo website as it has the largest collection of voluntary prices from around the world. This is an important guarantee for the relevance and credibility of statistical data.
It should be noted that the consumer price referenced on Numbeo includes VAT and services tax.
What method is used to calculate the cost of living indices ?
In order to know your purchasing power abroad, a comparison of the difference between the prices of goods and services in your home country and host country must be performed. It is from the Numbeo field data that the cost of living differential is calculated.
We apply a weight to each of the items of expenditure. These are based on a survey of assignees, the objective of which was to define a basket of consumption that is representative of their habits abroad:
- Restaurants : 11%
- Food at home : 20%
- Beverages and Alcohol : 4%
- Transportation : 15%
- Telephone, energy (water, electricity, gas) : 9%
- Clothing and footwear : 12%
- Sports and recreation : 13%
- Other (expenses during return trips to the home country, vacations, online shopping, etc.) : 16%
Simply put, we reduce the price of your home country to a 100 base in order to determine the differential index of the cost of living in your host country.
Our studies have shown that most assignees do not use their entire expense budget in their host country. This applies to purchases made during return trips to the home country where consumption patterns will be local or the purchase of products on e-commerce sites. This represents about 16% of their expenditure, to which the cost of living differential will not be applied.
Our analysis of the data demonstrates that Numbeo contributors provide essential information on the prices of goods and services in their country of residence. Their consumption pattern is closely aligned with the local market and not adapted to the consumption patterns of assignees who generally buy more expensive products (imported products, delicatessen, etc.)
In order to obtain prices that are close to those available to the assignees, we extracted prices with percentiles higher than the median and added a weighting according to the local standard of living.
As such, we are able to calculate two types of indices:
- Expat Index : reflects the consumption pattern of an assignee.
- Local Index : reflects the average consumption pattern of the residents of the host country.
The Comprehensive Plan allows you to set your own cost of living indices and to choose between a Local or Expat Index. For other plans, we use the Expat Index as the default index.
Each cost of living index is linked to the exchange rate in force at the date of application. Exchange rate fluctuations have a direct effect on the comparison between two similar products in two different countries.
Consider a product that is worth $2 in the United States and €2 in Germany.
When EUR1.00 = 1USD.30, the product price in Germany is $2.6.
The cost of living index between the 2 products for an American would therefore indicate 130, that is to say, a consumer will have to pay 30% more to buy this product in Germany.
Imagine that the exchange rate fluctuates and changes to EUR1.00 = USD1.50.
Assuming prices remain constant, the cost of our product in Germany is now estimated at $3. The cost of living index between the two products will show 150.
The effort required by the American assignee to consume the same product will be higher; he will pay 50% more compared to 30% more simply because of exchange rate fluctuations between the two currencies.
For the reasons mentioned above, the exchange rates collected by Smart Expatriation are frozen on the day of recording the cost of living.
It is therefore normal that the exchange rate used to calculate the cost of living index and the rate that will be used for all other calculations of your compensation will be different.
Frequency of surveys
To take account of changes in prices and exchange rates, we take a survey of the prices and update our indices every 6 months, on March 1st and September 1st of the current year.
New cities are added as often as possible so as to improve our global coverage. Exceptionally, the price surveys may still be underway for these new cities.
Housing costs in the home country
More than other expenditure items, housing costs can be highly variable depending on the household situation. Below are just some examples that show the change in that value:
- Young single person living at home with his parent and enjoying free housing,
- Homeowner with no mortgage interest,
- First-time buyers with a mortgage loan,
- Tenant of a private dwelling,
- Tenant of social housing,
- Location and quality of housing,
- Leasehold or property taxes.
Depending on your situation, the housing costs portion of income can vary between 0% and 50%. For this reason, you are completely free to complete the value of this expenditure in the Advanced and Comprehensive Plans.
However, and for reasons of fairness among assignee employees, some companies choose to use a percentage equal to the average housing income
In 2010 INSEE in France established the percentage of income allocated for housing to be 18.5%. This figure is very close to the Eurostat evaluation which calculated the percentage of net income allocated for housing at 17.9%.
In order to establish our calculations for housing costs, we use Eurostat** data for European countries. These figures have the advantage of being updated and differentiated by country. For European countries that do not have current data, we use the European average, which is 22.2% of net income.
For the United States, we will use the study published by the US Department of Labor that evaluates the share of expenditure spent on housing (excluding water, gas, electricity, and other utilities). It is relatively constant and in 2010 amounted to 20.4%.
For other countries, an average rate of 22% is applied.
If you consider that housing in the host country is fully borne by the company, it means that there is no equalization on the housing budget item and therefore a zero value must be entered in the housing costs cell for the home country.
Housing costs in the host country
Who can determine the cost of a home abroad?
Choosing a home abroad is based on different criteria. For example, the proximity to schools is a determining factor for a family with children. In most countries, the assignee will often have little choice on where to enroll their children because of the language spoken and the curriculum taught. Security, proximity to the place of work, quality of housing and transportation are major criteria in selecting your home abroad.
Relocation companies, whose job is to advise and to find housing that meets the specific needs of assignees, are best placed to assess housing costs depending on the location and type of accommodation sought.
We draw on our global network of relocation companies to collect data on housing costs. The information sources for housing costs in host countries are referenced in our partners.
What types of data are collected?
The data are available by city and by type of housing (apartment/house, furnished/unfurnished accommodation, number of rooms). We distinguish two types of accommodation:
- Medium: includes renovated units (not new) in neighborhoods known for their popularity among assignees.
- Premium: includes new housing and/or luxury properties, located in neighborhoods that are very popular with assignees.
For each category, we identify the median price and the price in the 25th and 75th percentile. It would seem preferable to base our calculations on the middle and low or high range because some homes whose costs are extreme can impact the data without being representative of the market.
In our calculations, the cost of housing used for the host country is focused on the median cost of an unfurnished apartment in the average category. We use your family situation as the basis for the size of the dwelling:
- One room for a single person or a couple,
- One room per child.
In the detailed report available in the Comprehensive Plan, we provide all the housing costs for your host city, guidance on the rental market, and lease terms: availability of properties by market, ease of accommodation search, rental lease features and financial terms (deposit, agency fees, etc.)
It may be that in some cities, certain properties are poorly represented (e.g. furnished houses). For reasons of reliability, we do not specify data in the detailed report and we report instead on representative types of housing in the city.
You can only enter your own housing costs in the host country in the Comprehensive Plan.
*Survey from US Department of State from US Department of labor, Expenditures and Characteristics, Consumer Expenditure Survey.