1. Crystal Gronau & Marlene Zobayan October 6, 2016
Global Equity
Crystal Gronau & Marlene Zobayan
October 6, 2016

2. 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.

3. Objectives
To understand the payroll challenges faced by companies operating global equity 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

4. What Is Global Equity? Stock options Restricted stock awards
Non-qualifying
Incentive Stock Options
Restricted stock awards
Restricted stock units
Performance shares
Employee stock purchase plans
Stock bonuses

5. U.S. Taxation of Equity (Generic Plans)
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

6. Non-U.S. Taxation of Equity (Generic Plans)
Stock Options
Restricted Stock Awards
Restricted Stock Units
Employee Purchase Plans
At grant
√ - Some locations
√ - Most locations
At vest √
At exercise / purchase
√ (Purchase)
At sale

7. What Are Typical Challenges?
Central Administration
Limited systems interfaces
Differing compliance requirements by country
Corporate structure & intercompany arrangements
Mobile employees
Tome zone, language, currency
Communication
Stakeholders
Ever-changing Landscape

8. How to Withhold Tax When Employer is Not the Issuing Company
Potential withholding methods
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

9. Withholding From Salary
Parent Co.
Informs Employer of exercise
Gross proceeds or gross shares
Employer
Employee
Withholding from next paycheck
Employee can retain all the shares
Correct withholding is applied
Employee receives proceeds quickly
Advantages:
Local employer needs to act quickly
Salary may not be sufficient to cover liability
No withholding mechanism for terminated employees
Disadvantages:
Remits taxes

10. Employee Cuts Check Parent Co. Employer Employee
Informs Employer of exercise
Gross proceeds or gross shares
Employer
Employee
Employee can retain all the shares
Advantages:
Foreign exchange/ wire issues
Employer acts as collection agency
No withholding mechanism for terminated employees (unless required as a condition of exercise/release)
Disadvantages:
Employee cuts check
Remits taxes

11. Withholding From Shares
Parent Co.
Informs Employer of exercise & taxes withheld
Net shares
Tax withholding rate
Employee
Employer
Correct withholding is applied
Ensures withholding for terminated employees
Advantages:
Administratively burdensome
Company has to find the cash to remit to tax authorities
- Note changes based on ASU
Withholding has to be at minimum statutory rate to avoid U.S. accounting issues
Early planning is a must!
Disadvantages:
Reconcile withholding
Remits taxes

12. ASU
Allows share withholding up to maximum tax rate in location without triggering adverse accounting
Even if higher than employee’s tax rate
The company MUST be liable for withholding
Effective accounting periods starting on or after December 15, 2016 for public companies
Can adopt early
BUT
IRS (not FASB) mandates withholding rates
For supplemental income, IRS allows:
Supplemental income rate
W-4 rate
States may have similar requirements

13. Withholding From Sale Proceeds
Parent Co.
Net shares or proceeds
Informs Employer of exercise & taxes withheld
Reconcile withholding
Remits taxes
Tax withholding rate
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)

14. Withholding – Proceeds to Subsidiary
Parent Co.
All proceeds
Proceeds less withholding
Remits taxes
Employer
Employee
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 disadvantageous

15. 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
6039
Incentive stock options
Employee stock purchase plan

16. Non-U.S. Payroll Reporting Requirements
Timing of reporting
Taxable Event
Inclusion 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

17. Other Global Equity Compliance Requirements
Tax registration & reporting; e.g.
China
Luxembourg
Legal Requirements
Local securities filing
Contract law
Data privacy
Foreign exchange

18. 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?

19. 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

20. 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

21. Sourcing For Equity Compensation

22. U.S. Income Tax Sourcing Rules
Since January 1, 2006 Federal sourcing is based on U.S. workdays from grant to vest
Some treaties state otherwise:
U.S.: Canada
U.S.: Japan
U.S.: U.K.
Specific grants may require different sourcing
E.g., an award granted for a project undertaken in a particular location

23. U.S. Income Tax Sourcing Rules
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
Income
Source
U.S.
Foreign
U.S. non-resident
Tax on U.S. sourced portion only
Assume income is 50% U.S. source and 50% foreign source

24. 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
Gross up considerations
Tax impact of equity compensation varies widely due to location at:
Grant, vest, exercise and sale

25. Inpatriate 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?
Does the state require full or sourced payroll compliance?

26. Expatriate 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?

27. 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

28. 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
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

29. Example
Peter, an employee of ACME Inc. in the U.S. is assigned to work in Germany for 3 years starting July 1, 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 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

30. 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

31. Other Sourcing Issues
Tracking and allocating multistate domestic workdays – includes sales team
Permanent transfers
Business travelers

32. 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

33. Any Questions?
Crystal Gronau Rutlen Associates LLC
Marlene Zobayan Rutlen Associates LLC

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