California Payroll Conference

California Payroll Conference

Global EquityCrystal Gronau & Marlene ZobayanRutlen Associates LLCCalifornia Payroll Conference

September 11 and 12, 2014

1DisclaimerThis 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.

22To understand the payroll challenges faced by companies operating global stock plansParent companyForeign affiliateTo appreciate the typical non-payroll compliance requirementsTo understand U.S. payroll challenges for U.S. expatriate and inpatriate employeesObjectives3What Are Typical Challenges?Central administration of stock plans by parent companyOnly domestic payroll feedsCompliance requirements (for payroll employer):Tax withholding & reportingEmployer social taxesLegal requirementsCorporate tax deductionsLocally qualifying plansMobile employeesTime zone, currency and language issuesStaying up to date4What Is Global Equity?5Stock optionsNon-qualifyingQualifyingRestricted stock awardsRestricted stock unitsPerformance sharesEmployee stock purchase plansStock bonusesU.S. Taxation of Equity6At grant83(b) electionsAt vestRestricted stock awardsAt releaseRestricted stock unitsAt exerciseNon-qualifying stock optionsAt saleIncentive stock optionsEmployee stock purchase plansNon-U.S. Taxation of EquityAt grantMost countries for restricted stock awardsSome countries tax stock optionsAt vestMost countries for restricted stock unitsSome countries tax stock optionsAt exerciseMost countries tax stock optionsAt purchaseMost countries for employee stock purchase plansAt saleBrazil, Israel, most locally qualifying plans7How to Withhold Tax When Employer is Not the Issuing CompanyPotential SolutionsDeduct tax through salaryAsk employee for checkWithholding from sharesWithholding from sale proceedsProceeds to subsidiaryMay require different processes for different plans or sets of employees

8Withholding From Salary Parent Co.or BrokerEmployerEmployeeProceeds or SharesInforms company of exerciseWithholding from next paycheckRemits taxesAdvantages: Employee receives proceeds quicklyCorrect withholding is appliedDisadvantages:No withholding mechanism for terminated employeesSalary may not be sufficient to cover liabilityLocal employer needs to act quickly9Employee Cuts CheckEmployerEmployeeProceeds or SharesInforms company of exerciseRemits taxesAdvantages: Employee receives proceeds quicklyDisadvantages:No withholding mechanism for terminated employeesAdditional administration for local employerEmployee cuts check10 Parent Co. or BrokerWithholding From SharesAdvantages: Ensures withholding for terminated employeesCorrect withholding is appliedDisadvantages:Employee may have to wait some time for proceedsWithholding has to be at minimum statutory rate to avoid US accounting issuesAdministratively burdensomeEmployerEmployeeProceeds or Shares less withholdingInforms company of exerciseRemits taxesActual rateActual withholding11 Parent Co.or BrokerFlat Rate Withholding From Sale ProceedsEmployerEmployeeProceeds less flat percentageFlat withholding percentageReconcile withholdingRemits taxesAdvantages: Employee receives proceeds quicklyEnsures some withholding for terminated employeesDisadvantages:Withholding process done twiceBroker withholding may be too much or too little (employee expectation management)12 Parent Co.or BrokerActual Rate Withholding From Sale ProceedsEmployerEmployeeProceeds less withholdingInforms company of exerciseRemits taxesAdvantages: Ensures withholding for terminated employeesCorrect withholding is appliedDisadvantages:Employee may have to wait some time for proceedsAdministratively burdensomeActual rateActual withholding13 Parent Co.or BrokerWithholding Proceeds to SubsidiaryEmployerEmployeeAll proceedsProceeds less withholdingRemits taxesAdvantages: Ensures withholding for terminated employeesCorrect withholding is appliedDisadvantages:Employee may have to wait some time for proceedsNeed to be careful of US GAAP14 Parent Co.or BrokerPayroll Reporting RequirementsTiming of reportingGrantVestExerciseSaleAnnualHow will local tax/payroll department get access to data?Beware of Data Privacy issues15Other Global Equity Compliance RequirementsLegal RequirementsLocal securities filingContract lawData privacyForeign exchange16Time Zone, Currency & LanguageDifficulties in communication due toTime zoneLanguageWho is going to answer employee questions?Currency issuesAre there cash disbursement restrictions?How will funds be disbursed to employees?Local currency: check/wireThrough payrollCost to employeeWhat exchange rate should be used?

17Tax equalization process requires special treatmentExpatriate pays tax only to same extent they would have paid in the their home countryHypo-taxCompany pays host country and home country actual taxesTax impact of exercising stock options varies widely due to location at:Grant, vest, exercise and sale18International AssigneesSourcing PrinciplesThe 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 earnedEquity usually deemed to be earned from grant to vestMaybe overridden by treatyState sourcing may vary from FederalE.g., Ohio stock options

19Sourcing For Equity Compensation20US Sourcing RulesSince January 1, 2006 Federal sourcing is based on US workdays from grant to vestSome treaties state otherwise:US : CanadaUS: JapanUS: UKSpecific grants may require different sourcingE.g., an award granted for a project undertaken in a particular locationUS Sourcing RulesUS residentTax entire awardAllocate award between US and foreign sourceForeign earned income exclusion and FTCs can be taken against foreign source incomeUS non-residentTax US sourced portion only

Inpatriate 23What countries require reportingIs the inpatriate tax equalizedWhat social tax scheme is the employee covered by home or hostDo you withhold taxes at the minimum statutory tax rates or sell to cover anticipated actual tax liabilities

Expatriate24What countries require reportingIs the inpatriate tax equalizedWhat social tax scheme is the employee covered by home or hostDo you withhold taxes at the minimum statutory tax rates or sell to cover anticipated actual tax liabilities

Double Tax TreatiesEach double tax treaty is differentU.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 periodReferred to as 183 day ruleThe employee compensation is paid by or on behalf of an employer which is not a resident of the host country, andThe compensation is not borne by a Permanent Establishment (PE) or fixed base which the employer has in the host countryEconomic employer

25Totalization AgreementsSimilar to double tax treaties but focus is social securityU.S. has totalization agreements with 24 countriesGenerally, individual can be covered in Home Country for up to 5 years May mean that income tax and social tax are sourced differently for the same income

26ExamplePeter, an employee of ACME Inc. in the U.S. is assigned to work in Germany for 3 years starting July 1, 2013. ACME obtain a Certificate of Coverage to retain Peter in the U.S. social security system during the course of his assignment. In March 2014, Peter receives a bonus of $10,000 related to his performance during 2013. 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

27Staying Up To DateWithholding rates change annuallyConstant international law changesWithholding requirementsReporting requirementsLegal requirementsConsultant update newsletters 28Any Questions?Crystal GronauRutlen Associates [email protected] ZobayanRutlen Associates [email protected] you for your attention

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