The NASPP Blog

When the Finance Bill 2007 extended India’s Fringe Benefit Tax (FBT) to include equity compensation, companies scrambled to respond. The Finance Bill uprooted tax-favorable plans, changed the valuation method, and required employers to pay the tax. Companies had to determine how to accommodate the new tax (many passed the tax through to employees) and make the estimated tax payments.

Now, all that may be turned upside down. India’s Finance Minister has proposed to abolish the FBT beginning retroactively as of April 1, 2009; and not just for equity compensation, but for all FBT items.

What we do know this means is:

1. Equity compensation will be treated as perquisite income, valued at exercise for options, purchase for ESPP, and at vest for restricted stock.
2. Employers will be required to withhold income tax on equity transactions, but social insurance contributions most likely will not be required.
3. The further sale of shares will be subject to capital gains tax.

The questions this leaves unanswered are:

1. What valuation method will be acceptable; will companies still be required to use a merchant bank valuation?
2. Will there be any tax-favorable plans like those that existed prior to FBT on equity compensation?
3. Since the abolition of FBT is retroactive to April 1, 2009, how should transactions that have taken place since then be handled?

What also remains to be seen is whether or this will ultimately be easier or more difficult to administer than FBT. Employers who have already accommodated the FBT will once more need to confirm that grant agreements are adequate and make tax payments to the government. Employers who were not passing the FBT through to employees will now need to implement tax withholding on equity compensation. However, if the proposal eliminates the need to use merchant bank valuations, streamlining valuations to be more consistent with other country methodology, it would certainly make things easier! Stay tuned for more updates as clarifications become available.

Australia

The abolition of FBT in India may be a welcomed change, but the proposed updates to taxation of equity compensation in Australia have been met with overwhelming opposition. This upset proposal in the 2009/2010 Australian Federal Budget was to tax options at grant. Recently, we have heard that the proposal has been modified to allow a deferral of taxes until there is no longer a risk of forfeiture and there are no longer disposal restrictions attached to the shares. This, like the FBT change, will be a retroactive change to taxation of equity grants.

Belgium

Belgium, in an effort to provide some relief in these difficult economic times, has proposed an opportunity for companies to extend the term of underwater options for up to five years without incurring additional individual income taxes due for the option-holder. Outside of this opportunity, extending the term of an option would constitute the grant of a new option; options are taxable at grant in Belgium. Options eligible for this treatment must have a grant date from January 1, 2003 through August 31, 2009. U.S. companies willing to take the expense hit for such an extension should keep an eye out for the final version of the Belgian Economic Recovery Act.

Stay Current

If any of these changes come as a surprise to you, then you are not taking advantage of our country-specific alerts! Our alerts are contributed by members of the NASPP Global Stock Plans Portal Task Force, which includes the industry’s top consultants, attorneys, accountant and other practitioners. Subscribe today to make sure you are notified of future developments in India, Australia (and up to 59 other countries). This service is free to NASPP members!