Global Equity

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Global Equity

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

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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 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

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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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Withholding From Salary
Parent Co.
Informs company of exercise
Proceeds or Shares
Employee
Employer
Withholding from next paycheck
Remits taxes
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Employee Cuts Check
Parent Co.
Informs company of exercise
Proceeds or Shares
Employee
Employer
Employee cuts check
Remits taxes
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Withholding From Shares
Parent Co.
Informs company of exercise
Proceeds or Shares less withholding
Actual rate
Employee
Actual withholding
Employer
Remits taxes
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Withholding From Sale Proceeds
Parent Co.
Employee
Employer
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Withholding Proceeds to Subsidiary
Parent Co.
Employer
Employee
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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?

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What is a Mobile Employee?

• 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

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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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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

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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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International Assignees

• 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

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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

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Other Administrative Items

• 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

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Other Sourcing Issues

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

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Payroll Deposit Rule

• 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

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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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Any Questions?

• Crystal Gronau
• Rutlen Associates LLC
• cgronau_at_rutlen.com
• 650-279-5879

• Marlene Zobayan
• Rutlen Associates LLC
• mzobayan_at_rutlen.com
• 650-868-9282

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Thank you and please remember to complete your
evaluation for this session