Crystal Gronau & Marlene Zobayan Rutlen Associates LLC October 9, 2015, Session 5.

Global EquityCrystal Gronau & Marlene Zobayan

Rutlen Associates LLCOctober 9, 2015, Session 5

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DisclaimerThis 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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To understand the payroll challenges faced by companies operating global stock plans◦ Parent company◦ Foreign affiliate

To appreciate the typical non-payroll compliance requirements

To understand U.S. payroll challenges for U.S. expatriate and inpatriate employees with equity compensation

Objectives

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What Are Typical Challenges? Central administration of stock plans by parent

company Only domestic payroll feeds Compliance requirements (for payroll employer):

◦ Tax withholding & reporting◦ Employer social taxes◦ Legal requirements

Corporate tax deductions Locally qualifying plans Mobile employees Time zone, currency and language issues Staying up to date

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What Is Global Equity? Stock options

◦ Non-qualifying◦ Qualifying

Restricted stock awards Restricted stock units Performance shares Employee stock purchase plans Stock bonuses

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U.S. Taxation of Equity At grant

◦ 83(b) elections At vest

◦ Restricted stock awards At release

◦ Restricted stock units At exercise

◦ Non-qualifying stock options At sale

◦ Incentive stock options◦ Employee stock purchase plans

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Non-U.S. Taxation of Equity At grant

◦ Most countries for restricted stock awards◦ Some countries tax stock options

At vest◦ Most countries for restricted stock units◦ Some countries tax stock options

At exercise◦ Most countries tax stock options

At purchase◦ Most countries for employee stock purchase plans

At sale◦ Brazil, Israel, most locally qualifying plans

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How to Withhold Tax When Employer is Not the Issuing Company Potential Solutions

◦ Deduct 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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Advantages:

Employee receives proceeds quickly

Correct withholding is applied

Employee can retain all the shares

Disadvantages:

No withholding mechanism for terminated employees

Salary may not be sufficient to cover liability

Local employer needs to act quickly

Withholding From Salary

Parent Co.

Employee

Proceeds or SharesInforms company of exercise

Withholding from next paycheck

Remits taxes

Employer

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Employee Cuts Check

Employee

Proceeds or SharesInforms company of exercise

Remits taxes

Employee cuts check

Parent Co.

Employer

Advantages:

Employee can retain all the shares

Disadvantages:

No withholding mechanism for terminated employees (unless required as a condition of exercise/release)

Employer acts as collection agency

Foreign exchange/ wire issues

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Withholding From Shares

Employee

Proceeds or Shares less withholding

Informs company of exercise

Remits taxes

Actual rate Actual

withholding

Parent Co.

Advantages:

Ensures withholding for terminated employees

Correct withholding is applied

Disadvantages:

Early planning is a must!

Withholding has to be at minimum statutory rate to avoid U.S. accounting issues

Administratively burdensome

Company has to find the cash to remit to tax authorities

Employer

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Withholding From Sale Proceeds

Proceeds less flat percentageFlat withholding

percentage

Reconcile withholding

Remits taxes

Parent Co.

EmployeeEmployer

Advantages:

Employee receives proceeds quicklyEnsures some withholding for terminated employees

Disadvantages:

Withholding process done twiceAs usually at flat rate, initial taxes withheld may be too much or too little (employee expectation management)

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Withholding – Proceeds to Subsidiary

All proceeds

Proceeds less withholding

Remits taxes

Parent Co.

EmployeeEmployer

Advantages:

Ensures withholding for terminated employeesCorrect withholding is appliedAdministratively simple

Disadvantages:

As payrolls are usually monthly outside U.S., employee may have to wait some time for proceedsNeed to be careful of US GAAPEmployee has no ability to retain shares/tax disadvantageous

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Payroll Reporting Requirements Timing of reporting

◦ Grant◦ Vest◦ Exercise◦ Sale◦ Annual

How will local tax/payroll department get access to data?◦ Beware of Data Privacy issues

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Other Global Equity Compliance Requirements Legal Requirements

◦ Local securities filing◦ Contract law◦ Data privacy

Foreign exchange

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Time Zone, Currency & Language Difficulties in communication due to

◦ Time zone◦ Language◦ Who 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?

Assignees – including expatriates, inpatriates, third-party nationals◦ Long or short term

Permanent transfers Business travelers – including commuters Telecommuters

Can 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

Japan

Singapore

U.S.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Employee is granted an award which vests on the 4th anniversary. Employee relocates

2 years after grant and exercises 3 years later. Chart shown the percentage sourced

to jurisdiction of grant

US Sourcing Rules Since January 1, 2006 Federal sourcing is

based on US workdays from grant to vest Some treaties state otherwise:

◦ US: Canada◦ US: Japan◦ US: UK

Specific grants may require different sourcing◦ E.g., an award granted for a project undertaken in

a particular location

US Sourcing Rules US resident

◦ Tax entire award◦ Allocate award between US and foreign source◦ Foreign earned income exclusion and FTCs can be

taken against foreign source income US non-resident

◦ Tax US sourced portion only

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Tax equalization process requires special treatment◦ Expatriate pays tax only to same extent they

would have paid in the their home country Hypo-tax

◦ Company pays host country and home country actual taxes

Tax impact of exercising stock options varies widely due to location at:◦ Grant, vest, exercise and sale

International Assignees

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Inpatriate What countries require reporting Is the inpatriate tax equalized

◦ Hypo tax compared to actual tax deposits What social tax scheme is the employee

covered by – home or host Do you withhold taxes at the minimum

statutory tax rates or sell to cover anticipated actual tax liabilities

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Expatriate What countries require reporting Is the expatriate tax equalized

◦ Hypo tax compared to actual tax deposits What social tax scheme is the employee

covered by – home or host Do you withhold taxes at the minimum

statutory tax rates or sell to cover anticipated actual tax liabilities

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Double Tax Treaties Each double tax treaty is different U.S has double tax treaties with almost 70

countries BUT 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 Agreements Similar to double tax treaties but focus is

social security U.S. has totalization agreements with 25

countries Generally, 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

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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

Shadow payroll for international assignees◦ Exchange rates◦ Actual or hypo tax

For 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

Tracking and allocating multistate domestic workdays – includes sales team◦ Permanent transfers◦ Business travelers

Other Sourcing Issues

Taxes withheld on equity transactions have the same withholding deposit rules as a regular payroll

Tax withholding in excess of $100,000◦ Must be deposited the next business day

Payroll Deposit Rule

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Staying Up To Date

Withholding rates change annually Constant international law changes

◦ Withholding requirements◦ Reporting requirements◦ Legal requirements

Consultant update newsletters

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Crystal GronauRutlen Associates [email protected]

Any Questions?

Marlene ZobayanRutlen Associates [email protected]

Thank you and please remember to complete your

evaluation for this session