Expatriate compensation: 3 steps to understand the U Curve approach
The purpose of the U curve approach is to provide the assignee with a gross income insuring the same standard of living in his host location.
The first step consists of calculating the base salary, net of all taxes and social contributions in the home country and calculating the current savings amount. The saving portion is obtained by deducting a home housing norm (if part of your international mobility policy) and a spendable income from the net salary.
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.
The spendable income is automatically adjusted by the cost of living differential and the host housing cost is integrated to define the equivalent net amount in the host location. The cost of living allowance is deducted from the net income if the cost of living index is negative. With our tool, you are completely free to decide whether to apply a negative cost of living allowance or not.
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 the family situation as the basis for the size of the dwelling: 1 room for a single person or a couple and 1 room per child.
A gross-up calculation is performed from the equivalent net salary to determine the amount of taxes and social contributions that needs to be paid locally.
The reason for gross-up is to assist the assignee with additional taxes when relocation benefits are subject to withholding and payroll tax. When following a home based-approach (guaranteed net), the gross-up allows you to calculate the total cost to company that you can expect during the assignment.