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Global Equity
Crystal Gronau & Marlene ZobayanOctober 6, 2016
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Disclaimer
This presentation contains general information only and the respective speakers and their represented firm are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and firm shall not be responsible for any loss sustained by any person who relies on this presentation.
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Objectives
To understand the payroll challenges faced by companies operating global
equity plansParent companyForeign affiliate
To
appreciate the typical non-payroll compliance
requirementsTo understand U.S. payroll challenges for U.S. expatriate and
inpatriate
employees with equity compensation
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What Is Global Equity?
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Stock optionsNon-qualifying
Incentive Stock Options
Restricted stock awards
Restricted stock unitsPerformance sharesEmployee stock purchase plans
Stock bonusesSlide5
U.S. Taxation of Equity
(Generic Plans)
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Incentive Stock Options
Non-Qualifying Stock Option
Restricted
Stock Awards
Restricted Stock Units
Employee
Purchase Plans
At grant
√ - If s83(b)
At vest
√ - Without s83(b)
√ - Vest for social
tax; release for income tax
At exercise / purchase
√
√ - If
not a s423 Plan
At sale
√
√
√
√
√ Slide6
Non-U.S. Taxation of Equity
(Generic Plans)
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Stock Options
Restricted
Stock Awards
Restricted Stock Units
Employee
Purchase Plans
At grant
√ - Some locations
√ - Most locations
At vest
√ - Some locations
√ - Some locations
√
At exercise / purchase
√ - Most locations
√ (Purchase)
At sale
√
√
√
√Slide7
What Are Typical Challenges?
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Central Administration
Limited systems interfaces
Differing compliance requirements by country
Corporate structure & intercompany arrangements
Mobile employees
Tome zone, language, currency
Ever-changing Landscape
Stakeholders
CommunicationSlide8
How to Withhold Tax When Employer is Not the Issuing Company
Potential
withholding methodsDeduct tax through salary
Ask employee for check
Withholding from shares
Withholding from sale proceeds
Proceeds to subsidiary
May require different processes for different plans or sets of employees
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Withholding From Salary
Parent Co.
Employee
Gross proceeds or gross shares
Informs
Employer
of exercise
Withholding from next paycheck
Remits taxes
EmployerSlide10
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Employee Cuts Check
Employee
Gross proceeds
or
gross shares
Informs
Employer
of exercise
Remits taxes
Employee cuts check
Parent Co.
EmployerSlide11
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Withholding From Shares
Employee
Net shares
Informs
Employer
of
exercise & taxes withheld
Remits taxes
Tax withholding rate
Parent Co
.
Employer
Reconcile withholdingSlide12
ASU 2016-09
Allows share withholding up to maximum tax rate in location without triggering adverse accounting
Even if higher than employee’s tax rateThe company MUST be liable for withholdingEffective accounting periods starting on or after December 15, 2016 for public companies
Can adopt early
BUT
IRS (not FASB) mandates withholding ratesFor supplemental income, IRS allows:
Supplemental income rate
W-4 rate
States may have similar requirements
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Withholding
From Sale Proceeds
Net shares or proceeds
Informs Employer of exercise & taxes
withheld
Reconcile withholding
Remits taxes
Parent Co.
Employee
Employer
Advantages:
Employee receives proceeds quickly
Ensures
some withholding
for terminated employees
Disadvantages:
Withholding process done twice
As usually at flat rate, initial taxes withheld may
be too much or too little (employee expectation management)
Tax withholding rateSlide14
Withholding – Proceeds to Subsidiary
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All proceeds
Proceeds less withholding
Remits taxes
Parent Co.
Employee
Employer
Advantages:
Ensures withholding for terminated employees
Correct withholding is
applied
Administratively simple
Disadvantages:
As payrolls are usually monthly outside U.S., employee
may have to wait some time for proceeds
Need to be careful of US
GAAP
Employee has no ability to retain shares/tax disadvantageousSlide15
U.S. Payroll Reporting Requirements
W-2 inclusion
Box 1 taxable income including disqualifying disposition of Incentive Stock Options & ESPP disposition (discount)Box 3 & 5 income subject to social security and Medicare but not incentive stock options or ESPP
Box 12 for non-qualifying stock options
Box 14 optional
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Incentive stock options
Employee stock purchase plan
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Non-U.S. Payroll Reporting Requirements
Timing
of reportingTaxable EventInclusion in payroll reports
Annual reporting, e.g.,
Australia
Ireland (stock options)Japan
U.K.
How will local tax/payroll department get access to data?
Beware of Data Privacy
issues
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Other Global Equity Compliance Requirements
Tax registration & reporting; e.g.
ChinaLuxembourgLegal Requirements
Local securities filing
Contract law
Data privacy
Foreign exchange
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Time Zone, Currency & Language
Difficulties in communication due to
Time zoneLanguageWho is going to answer employee questions?
Currency issues
Are there cash disbursement restrictions?
How will funds be disbursed to employees?
Local
currency: check/wire
Through payroll
Cost to
employee
What exchange rate should be used?
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Assignees – including expatriates,
inpatriates, third-party nationalsLong or short termPermanent transfersBusiness travelers – including commuters
TelecommutersCan be domestic or international
Individuals can have more than one type of mobility
What is a Mobile Employee?
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Sourcing Principles
The general rule is that income is sourced where it is earned or over the “earnings period” Each taxing jurisdiction may have a different view of the earnings period
U.S.Generally where “earned”Equity usually deemed to be earned from grant to vest
Maybe overridden by treaty
State sourcing may vary from Federal
E.g., Ohio stock options
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Sourcing For Equity Compensation
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U.S. Income Tax Sourcing Rules
Since January 1, 2006 Federal sourcing is based on U.S. workdays from grant to vestSome treaties state otherwise:
U.S.: CanadaU.S.: JapanU.S.: U.K.Specific grants may require different sourcing
E.g., an award granted for a project undertaken in a particular location
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U.S. Income Tax Sourcing Rules
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U.S. non-resident
Tax on U.S. sourced portion only
U.S. resident
Tax
entire
award
Allocate
award between U.S. and foreign
source
Foreign
earned income exclusion and FTCs can be taken against foreign source income
Assume
income is 50% U.S. source and 50% foreign sourceSlide24
International
AssigneesTax equalization process requires special treatment
Expatriate pays tax only to same extent they would have paid in the their home countryHypo-tax
Company pays host country and home country actual
taxes
Gross up considerations
Tax impact of
equity compensation varies
widely due to location at:
Grant, vest, exercise and sale
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Inpatriate
Is the inpatriate tax equalized?
Hypo tax compared to actual tax depositsWhat social tax scheme is the employee covered by – home or host?Does the non-U.S. country require tax deposits?
Does the non-U.S. country require
income reporting?
What U.S. payroll compliance is required?
Does the treaty allow a reduction of Federal tax deposits?
Does the state require full or sourced payroll compliance?
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Expatriate
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Is the inpatriate tax equalized?
Hypo tax compared to actual tax deposits
What social tax scheme is the employee covered by – home or host?
Does the non-U.S. country require tax deposits?Does the non-U.S. country require income reporting?What U.S. payroll compliance is required?
Does the treaty allow a reduction of Federal tax deposits?
Did the individual break state residency?
Does
the state require full or sourced payroll compliance?Slide27
Double Tax Treaties
Each double tax treaty is different
U.S has double tax treaties with almost 70 countriesBUT generally an individual is tax exempt if :
The employee is present in the host country for 183 days or less,
In the taxable year concerned or rolling 12 month period
Referred to as 183 day rule
The employee compensation is paid by or on behalf of an employer which is not a resident of the host country,
and
The compensation is not borne by a Permanent Establishment (PE) or fixed base which the employer has in the host country
Economic employer
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Totalization
AgreementsSimilar to double tax treaties but focus is social security
U.S. has totalization agreements with 25 countriesGenerally, individual can be covered in “Home Country” for up to 5 years Requires a document from the social security authorities known as Certificate of Coverage
May mean that income tax and social tax are sourced differently for the same income
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Example
Peter, an employee of ACME Inc. in the U.S. is assigned to work in Germany for 3 years starting July 1, 2014. ACME obtain a Certificate of Coverage to retain Peter in the U.S. social security system during the course of his assignment. In March 2015, Peter receives a bonus of $10,000 related to his performance during 2014. What taxes have to be paid?
U.S. income tax on $10,000 x 50%*
U.S. social tax on $10,000 x 100%
German income tax on $10,000 x 50%
Does the payer matter?
* Assuming a US citizen and the company takes a position that U.S. withholding is not required on foreign sourced income as the individual is subject to foreign withholding
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Shadow payroll for international assignees
Exchange ratesActual or hypo taxFor short term mobile employees from non treaty countries – How do you withhold on and report earnings? Form W-7 – Individual Taxpayer Identification Number
Timing and processing issues
Other Administrative Items
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Tracking and allocating multistate domestic workdays – includes sales team
Permanent transfersBusiness travelers
Other Sourcing Issues
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Taxes withheld on equity transactions have the same withholding deposit rules as a regular payroll
Tax withholding in excess of $100,000Must be deposited the next business day
Payroll Deposit Rule
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Crystal Gronau
Rutlen Associates LLC
cgronau@rutlen.com650-279-5879
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Any Questions?
Marlene Zobayan
Rutlen Associates LLC
mzobayan@rutlen.com
650-868-9282Slide34
Thank you
Please remember to complete your evaluation of this session
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