India – Life after FBT
We are about half-way through the first tax year in which employers have known the income reporting, tax withholding, and valuation requirements for employees in India. Last year (2009/2010) was quite a scramble, with retroactive updates and guidance being provided late into 2009.
Valuations
One issue that companies continue to work with is the calculation of FMV, as a Category 1 Merchant Banker valuation is still required for companies not listed on a recognized exchange (Neither NASDAQ nor NYSE are recognized exchanges.). There were several months where it was unclear whether or not Merchant Banker valuations would be required. If your company reported and withheld based on the market value of your stock during the 2009/2010 tax year, you should have adjusted your reporting at this point.
Frequency
When it comes to Merchant Banker valuations, frequency is still a key consideration (and one that will remain so long as these valuations are required). The regulations state that valuations are only required every 180 days, so it is possible to only value your company’s shares two times a year. However, this may not right for your company, especially if the trading value of the shares has decreased significantly since the most recent valuation.
Double Standard
The difference between the Merchant Banker valuation and the trading value of the stock will remain an ongoing issue regardless of how often your company has a valuation performed. If your stock plan administration software does not permit more than one FMV on a trading date, you may have to provide custom employee communications to accommodate the FMV that was used to calculate income.
Australia
Reporting Obligations
Generally speaking, most options and RSU grants in Australia awarded after July 1, 2009 are taxable at vest. There is no withholding obligation for employers, but there is a reporting obligation of Employee Share Scheme (ESS) statements to both the employee and the Australian Tax Office (ATO). They are not unlike the U.S. Section 6039 information statements in theory; presumably they will help employees better understand how to complete their own tax returns and will help the tax authorities determine if income is being properly reported on tax returns, which they will be auditing (See this alert from Deloitte.)
Valuation
For RSUs, the trading value of the shares at vest may be the FMV for income calculation. However, options are considered an “unlisted right” and might require a valuation method (e.g.; Black Scholes) to determine the market value of the shares on date of the taxable event.
30 Day Rule
One tricky piece of determining the FMV on the taxable date in Australia is the 30 day rule. If an employee sells shares from an RSU vest or option exercise within 30 days of the original taxable event date, then the sale date might be considered the taxable event, provided the company is aware of the sale.
Employees
Individual tax returns for the 2009/2010 tax year are due by October 31, 2010. Employees may still be trying to understand the ESS statements provided to them by the company.
Taking Action
Many companies appear to have moved away from granting options in Australia as a result of the reporting obligations. We completed a Quick Survey on this in September; only 20% of respondents were continuing to grant options in Australia, 38% were not granting options to begin with, and a significant 42% were moving to share grants (like RSUs) or some type of cash compensation.
-Rachel
Tags: Australia, Employee Share Scheme, FBT, income, India, option, reporting, RSU, tax, tax return, withholding
India
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:
- Equity compensation will be treated as perquisite income, valued at exercise for options, purchase for ESPP, and at vest for restricted stock.
- Employers will be required to withhold income tax on equity transactions, but social insurance contributions most likely will not be required.
- The further sale of shares will be subject to capital gains tax.
The questions this leaves unanswered are:
- What valuation method will be acceptable; will companies still be required to use a merchant bank valuation?
- Will there be any tax-favorable plans like those that existed prior to FBT on equity compensation?
- 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
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Tags: Australia, Belgium, FBT, Fringe Benefit tax, income tax, India, tax