The NASPP Blog

It can take a considerable amount of effort, not to mention legal advice, to correctly report income and withhold taxes on your globally mobile employees. In the spirit of keeping this short, I’m going to talk about some of the issues around double taxation and employee mobility in the context of a U.S. company and a U.S. citizen.

Double Taxation

All income made by a U.S. citizen is taxable in the U.S., regardless of where the income was earned. Additionally, the company has the withholding and reporting obligations with regards to income and income tax. This means that a conservative approach to withholding on income from equity compensation for your U.S. employees who are working abroad would be to withhold U.S. income tax on the entire amount. The local tax authority in the country in which your mobile employee resides may also require reporting and withholding on that same income, creating double taxation for the employee. This issue was addressed in 2004 by the Organisation for Economic Co-Operation and Development (OECD) in their paper on the taxation of mobile employees. In this paper, the OECD calls for tax treaties that help alleviate the burden of double taxation by sourcing the income based on where it was earned. Although the paper, and other recommendations by the OECD, is non-binding to any country, it has influenced the way equity compensation income is addressed in tax treaties.

Tax Treaties

Fortunately, many countries have treaties in place that provide a protocol for income tax obligations on income that may be sourced to more than one country. In fact, the U.S. has entered into income tax treaties with over 60 countries. You can find them all on the IRS website HERE. These treaties are typically for the individual and do not necessarily relate to your company’s obligation as an employer to report and/or withhold. They often permit the individual to receive a foreign tax credit on income that was earned outside of the U.S. and is also taxed in the other country. Some employers, at the recommendation or approval of their own tax advisors, apply these tax credits proactively to equity compensation income that was “earned” outside the U.S., using a pro-rata arrangement to allocate income that was earned while the employee was still in the U.S.

Totalization Agreements

Income tax is not the only tax that companies need to consider when dealing with globally mobile employees. Social taxes also apply, and may be handled differently than income tax arrangements. Double taxation is also an issue with social taxes like the U.S. social security tax and Medicare; this is called dual coverage since social taxes are typically designed to cover an individual or their families in retirement, illness, disability, or death. The issue of dual coverage is costly for both your mobile employees and your company, since most countries have an employer-paid portion of social taxes. To address this issue, the U.S. has entered into “Totalization agreements”. These agreements allow the individual and the company to source the entire amount of equity income to one country or the other, per the agreement (you can’t choose which country to contribute social taxes to). You can find all the countries with which the U.S. Social Security Administration (SSA) has Totalization agreements on the SSA site HERE. If your company is planning to rely on a Totalization agreement for some or all of your mobile employees, you will need to ensure that each employee has a certificate of coverage issued from the country in which the employee will be paying social taxes. In the U.S., the certificate of coverage can be requested from the SSA by your company on behalf of the employee.

Multiple Sourcing Periods

What all this means is that if your company decided to proactively apply both the income tax treaties and the Totalization agreements, there may be several ways in which income is allocated. Even though this is advantageous to your mobile employees because they will not need to pay now and true-up their tax obligation when they file their income tax returns, it does mean that you will need to communicate very clearly with your employees and your Payroll department. Essentially, your company will need to report a different amount of income in Box 1 of the W-2 than is in Box 3 and Box 5 (see our Tax Withholding and Reporting portal for more on U.S. tax withholding). Additionally, if you are sourcing the income pro-rata, the sourcing may be applied differently in the U.S. than in the other country. In the U.S., it’s generally accepted that the sourcing is from grant to vest for options, but in some countries it may be grant to exercise.

Key Resources

There are, of course, many additional considerations for tax withholding for your mobile employees. You can find additional resources in the NASPP Global Stock Plans portal, in our Document Library, and on the Discussion Forum (search for the keyword “mobile”). You can also see what other companies are doing by reviewing our 2006 and 2008 International Stock Plan Design and Administration Surveys, co-sponsored by Deloitte. Until the full 2008 survey is available on our site, you can catch the highlights in the archive of our recent webcast, Top Trends in Stock Plans for Overseas Employees.

You should already be registered for our 17th Annual NASPP Conference. If you haven’t, act now – the early bird rates end this Friday. If global mobility is a topic you want to hear more about, be sure to sign up for the workshop “Traveling with Equity” at the Conference!