The NASPP Blog

June 9, 2009

Deducting Costs for Stock Compensation for Overseas Employees

Appeals Court Reverses Decision on Tax Deductions for Stock Options Held by Overseas Employees

A recent federal appeals court decision on how US companies can allocate tax deductions for stock options granted to overseas employees could have broad implications.

The case involves Xilinx and goes all the way back to the company’s 1996-1999 fiscal years. During those years, Xilinx claimed tax deductions on its US tax return for options held by employees in its Irish subsidiary. Xilinx’s decision to do so was in the context of a broader research and development cost-sharing arrangement with the subsidiary. Although other R&D costs (and, presumably, tax deductions) were shared between the two entities, the full extent of the tax deductions for stock options held by the Irish employees were claimed in the US–where corporate tax rates are higher, making the tax deductions more valuable.

The IRS challenged this arrangement and lost in 2005–see “Court Sides with Xilinx in Tax Dispute” (EETimes.com, September 2, 2005). But what you never hear about on TV is that there’s always an appeal. In this case, the IRS has won the appeal–see “Chip Maker Xilinx Loses Tax Ruling” (Wall Street Journal, May 29, 2009). Under the new ruling, Xilinx should have shared the tax deductions with the Irish subsidiary, rather than claiming them all in the US.  This will increase Xilinx’s taxable US income during the years in question and will reduce the taxable income for its Irish subsidiary.  With corporate tax rates higher here in the US, this means that Xilinx pays more tax in the US and overall.  It also means more tax revenue in for the US government during a time when every penny counts–causing speculation that we may see the IRS pursuing more cases of this nature.  No word yet on whether Xilinx will try to appeal the appeal.

If your company has cost-sharing arrangements in place with foreign subsidiaries and these arrangements govern the allocation of tax deductions for stock compensation to the various corporate entities, now might be a good time to review these arrangements with your tax advisors.

Catch up on all the developments impacting stock compensation held by non-US employees at the 17th Annual NASPP Conference, including the sessions “Key International Developments and Action Plans” and “The Economic Meltdown–The Impact on Global Stock Plans“.

17th Annual NASPP Conference Program Announced!
I’m excited to announce the full program of the 17th Annual NASPP Conference. I think we’ve put together one of our strongest programs ever, with numerous sessions reflecting current economic realities and the impact on your stock plans. Last chance early bird pricing until June 26–don’t wait, this pricing won’t be extended.

NASPP Conference Session of the Week
To help you decide which of the myriad of Conference sessions you should attend, each week I will highlight a session I think will be particularly valuable. This week’s session is “What To Do When the Well Runs Dry: Grant Guidelines in a Volatile Market.” The market decline has caused burn rates to spiral out of control and plan share reserves to quickly dry up. This session will discuss key strategies for keeping grant values meaningful while managing your burn rate and making sure you still have shares left to grant next year.

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

– Barbara