It’s a slow news day here at the NASPP. I don’t have anything pressing to blog about so I thought it would be a good time for a poll. Below are a few questions that were recently posted to the NASPP Q&A Discussion Forum that are largely unanswered at the moment. If they apply to you, please take a moment to indicate your answers so we can help these folks out. Thanks for indulging me!
If you can’t see the poll below, click here to participate in it. As always, if you are a contractor that works with multiple clients, please answer for just one of your clients (preferably one that won’t otherwise complete this poll).
One of the aspects of stock plan management that I’ve always found particularly challenging is keeping on top of “global” developments. We keep ourselves plenty busy trying to stay abreast of U.S. requirements for administering our stock plans, and when you layer in a foreign jurisdiction, or two, or a dozen, or more, now you’ve got a handful. The work has multiplied.
This week brought a few changes or updates on the global horizon, and in today’s blog I’ll summarize them in case you’re interested.
A SAFE Update in China
For Companies offering equity compensation to employees who are PRC nationals in China (and I know that there are many of you that do), approval from the State Administration of Foreign Exchange (“SAFE”) has been required since 2007 (via Circular 78). The process for obtaining SAFE approval has been long and cumbersome for many companies. For those companies who have, are contemplating, or are in process of seeking to gain such approval, some good news has emerged: in February, Circular 78 was replaced with a new Circular 7, effective immediately. Circular 7 seems to simplify the process of obtaining SAFE approval for equity compensation plans, including provisions that reduce the documentation required, expand the entities and people covered in the application, and cover more award types. There are some great alerts with more details on this topic in our Global Stock Plans portal. Be sure to check them out – included is information on action items that may be necessary even if you already have previously obtained SAFE approval in China.
Expanded Reporting in France for Qualified Plans
For those of you with French-qualified stock plans, new reporting requirements went into effect on January 31, 2012. Included is expanded reporting for stock option exercises. The bottom line: for stock options exercised on or after January 31, 2012, the new requirements apply. For details, visit our Global Stock Plans portal.
Adoption of IFRS: Urban Legend?
The talk about the possibility of the U.S. adopting IFRS as its accounting standard has started to sound like an urban legend in my book. Okay, well not really, but it was fun to describe it that way. It does seem like there is a lot of talk about “when” the SEC may have a timeline or more guidance on if and when IFRS will be implemented (and usually it remains just “talk”, since no SEC decision on the matter has been made). According to the Journal of Accountancy, the SEC’s Chief Accountant, James Kroeker, indicated at a conference in February that the SEC is on track to issue a decision in the next few months. A precise deadline has not been publicized and it seems that won’t happen until the SEC gets much closer to completing their report on the issue. This is something to keep an eye on over the next 6 months or so. Stay tuned.
Those are the highlights on the global front this week. As I mentioned above, there are resources in our Global Stock Plans portal that go further into these updates – well worth a few minutes of time.
When it comes to compliance on your globally mobile employees, one of the most challenging aspects of achieving or maintaining compliance on tax withholding and reporting for your globally mobile employees is keeping pace with changes to applicable legislation and standards. Today, I highlight the top three recent changes that might impact your global mobility compliance.
France
Effective April 1, 2011, withholding on nonresident income from French-qualified awards will be required by employers. Fortunately, this is only applicable to the French-sourced portion of the income, but it is a change from the current withholding requirements. Like other tax withholding issues in France, there is always the thread of jail time or individual financial penalties for failure to comply. You can find more information about this legislation in the Pricewaterhouse Coopers article, Recent Legislative Updates.
China
As noted in this Ernst & Young alert, China will begin requiring employers to make of social security insurance contributions for all employees, including foreigners working in the PRC in July of 2011. Associated with this requirement is a host of administration concerns including actually enrolling nonresident employees with the appropriate social insurance agency, completing monthly contribution reporting, and issuing applicable termination certificates. To put some teeth in the requirement, there will also be a greater liability for noncompliance including fines of up to 300% of the missed payments.
United Kingdom
Thankfully, there is some relatively good news from the United Kingdom. Included in the new budget is the potential for some relief for mobile employees. Although not in the form of a tax break or even easier withholding processes, the UK Treasury has finally determined that it is time for a statutory definition of residence. Currently, residency in the UK is particularly ambiguous and based mostly on interpretations of case law and HMRC practice because the essential concepts of residence, ordinarily residence, and domicile are not clearly defined in UK tax law. As Deloitte highlighted in this alert from March of last year, the landmark case of Robert Ganes-Cooper created confusion for individuals and companies after it was determined that Mr. Ganes-Cooper was a tax resident. (You can also check out both Mr. Ganes-Cooper’s version of the facts and the HMRC’s statement on the case.) Although Mr. Ganes-Cooper satisfied the requirements outlined in the IR20 (The IR20 was replaced by HMRC6 in 2009), he didn’t actually leave the UK for tax purposes, which means he is still a resident and that the IR20 is not applicable.
This isn’t the first time that there has been a call for a clear definition regarding residency. In fact, both the IR20 and subsequent HRMC6 were intended to provide a clear test. The Treasury is hoping to create a new residency test in 2011 and will begin a consultation process on the subject in June of 2011. I am curious to see what ambiguity can be cleared up by the new test once it is available.
If your company provides equity compensation to employees in China, then you are likely grappling with the complexity of obtaining and maintaining compliance with your company’s SAFE filing. One important ongoing issue is the requirement that proceeds from the sale of shares be repatriated. China isn’t the only country that has a repatriation requirement. However, it does, to my knowledge, have the most rigorous enforcement of it.
China puts the onerous on the company to repatriate proceeds from the sale of shares acquired through equity compensation programs. In order to maintain compliance, companies need to tackle creating a process for ensuring repatriation.
Immediate Sale
One way to ensure that proceeds from sales are sent back to China is to force an immediate sale of shares at the original acquisition (e.g., at option exercise or RSU vest). By doing this, the company does not need to worry about tracking shares after they are acquired by the employee. Depending on the functionality provided by your designated broker, this approach may also make quarterly reporting easier, which I’ll address below. However, forcing the immediate sale of shares denies Chinese employees the ability to capitalize on any future increase in the value of those shares. Arguably, the value of this arrangement is no more advantageous to the employee than cash compensation that is tied to share value. In addition, the terms of outstanding grants may not give the company the flexibility to require the immediate sale.
Tracking Shares
Many brokers now have the ability to place a hold on proceeds from sales made through specific employee accounts and remit those funds back to a corporate account. This makes it possible for China plan participants to hold shares and sell them at a date of their choosing and still comply with the repatriation requirement. Of course, you will need to confirm that employees can’t transfer the shares out of the employee account at any time, even after termination. You’ll also want to fully understand how employees are identified as subject to the hold and have appropriate safeguards in place to make certain those identification markers are accurate.
Converting to RMB
Regardless of the method in which proceeds from sales are repatriated to China, funds are sent to the company’s bank account in China in U.S. dollars and must be converted to RMB. Your company must decide if this conversion is done by the company or by the employees individually. If the company is transacting the exchange through the dedicated bank account, the RMB can be distributed to the employee through individual bank accounts or through payroll. However, the company may need to receive approval from the local SAFE office for each conversion and there may be limitations on the number of times that the currency may be exchanged each year. If the company will be disbursing U.S. dollars, then employees must have a U.S. dollar account.
Quarterly Reporting
Regardless of your approach, SAFE offices require information about the source of the incoming funds, including the original acquisition date of the shares, to be reported on a quarterly basis. Some brokers have the functionality to provide this data to clients already. At a minimum, you will need to know the total proceeds net of broker fees associated with each employee and the number of shares sold, in which case you must create a policy and procedure on associating the sales with specific acquisitions (e.g. option exercises or RSU vests). Talk with your broker to understand what information can be provided at this time.