Many companies are in the throes of year-end related activities. If your fiscal year ended on December 31, then you have the double duty of year-end financial reporting tasks combined with U.S. tax reporting requirements. Typically when I think about “year-end” and all the associated to-dos, things like W-2s, 1099s and participant communications are the first things that come to mind. In thinking further, I realize my perspective is a bit narrow. It’s a big world out there, and, for companies with employees outside of the U.S., there are additional reporting tasks associated with all the various non-U.S. jurisdictions that must be completed. In today’s blog I highlight some thoughts and tips for complying with year-end reporting requirements in non U.S. jurisdictions.
Thanks to a recent article published by Jones Day, available in our Global Stock Plans portal, I’ve been able to refresh my understanding on several key aspects of global year-end reporting compliance. I’ll focus on some general tips that came to my mind; country specific detail is available in the article and I’ll leave it to the law experts to share those tidbits.
It’s a Big World Out There
Yes, it’s true, the U.S. is not the only jurisdiction that requires year-end tax reporting related to stock plan transactions. I find that working in the U.S., it’s natural for us to be more intimately in the know when it comes to U.S. tax reporting compliance. However, as we know, there are many other locations that have similar reporting requirements. It’s important to understand which countries have existing legislation or measures and then formulate a plan to comply. Will a local resource be tasked with compliance? Will this be outsourced to a third party? Will corporate representatives facilitate such reporting?
Not All Tax Years Are Created Equal
One challenging aspect of managing stock compensation globally is the individuality of each global jurisdiction and their securities, tax, labor and other laws and requirements. These challenges remain consistent in the year-end reporting process as well. Not all tax years end on December 31. In fact, it’s common to see tax years ending in April, June and other parts of the year. For example, Australia’s tax year ends on June 30th. India’s tax year ends on March 31st. In some ways varied year-end dates may lessen the calendar year end burden placed upon stock administrators, payroll personnel, and others who work in managing global operations. However, it can be tricky to keep track of the multiple dates, deadlines and corresponding requirements. If you have employees with reportable transactions in multiple countries, you may want to create a global tax reporting calendar for the purpose of tracking important deadlines and requirements.
When You Assume…
There’s an expression about making assumptions, but in order to keep things professional I can’t write it here. If you’ve heard it, you know what I mean (and if you haven’t, I’ll be happy to share it with you offline). Anyhow, assumptions can lead to failures, and those of the compliance kind we certainly want to avoid. I’ve seen it happen many times – an assumption is made that local payroll is handling stock compensation related tax reporting. The problem? Payroll didn’t know they were supposed to do it, or, in some cases that there was even a requirement to report. Other possible vulnerabilities can be found in withholding rates (some locales have different rates for different situations, such as for current and terminated employees). While in many cases, local resources may know more about their own reporting requirements than those in the corporate office, it’s unwise to assume that everything will happen autonomously at the local level as intended. Even if you plan to have local resources handle the bulk of tax reporting and other year end compliance tasks, plug yourself in. Get involved and understand exactly what is being reported, for whom, and by when. This may involve internal business partners and external advisers with expertise in this area, and cross-communication is important.
Back to Work
I know we could talk for days about the extent and complexity of managing global stock plans, but alas it’s time to get back to work. I wish everyone a smooth year-end process, whenever that “year-end” may be.
Managing a global equity compensation program entails helping your non-U.S. employees overcome the significant barriers to understanding and accessing their stock compensation. Non-U.S. employees may have to absorb information in a language they aren’t comfortable with and embark on a business relationship with a U.S. broker in addition to the more universal challenge of conceptualizing compensation that does not come in the form of a simple paycheck.
One of the issues that only your non-U.S. participants will face is keeping their W-8BEN current with their broker. I say keeping it current because most, if not all, brokers have incorporated the submission of an initial W-8BEN into the account activation process.
Backup Withholding
Brokers are required to ask for a SSN–or taxpayer ID–when individuals open a new account. If the SSN is missing or incomplete, brokers must process backup withholding, which is 28% through 2012, on any transaction. However, a W-8BEN is a form that establishes an individual (or organization, really) is both not a U.S. resident or citizen and not subject to tax on income that would otherwise be taxable in the United States. Most importantly for your non-U.S. employees, the W-8BEN confirms that shares sold through their U.S. brokerage account are exempt from backup withholding.
Once and Again
Once a person has a U.S. taxpayer ID or SSN, it’s permanent. Being exempt from backup withholding, on the other hand, is not a static status. Therefore, a W-8BEN expires at the end of the third calendar year after it was completed and a new one must be signed in order to continue to be exempt from backup withholding. No matter how the W-8BEN is completed, this can be confusing. A broker can remind employees of an impending expiration, but not to force them to complete it.
Backup Plan
If you have non-U.S. employees, it’s important to coordinate with your broker on how to handle expiring W-8BENs. Your broker can help you identify and target employees with communications. You can even set up a post-transaction verification process to try and catch employees with expired W-8BENs before backup withholding is actually remitted to the IRS. However, you should still have a backup plan for how your company will handle situations where backup withholding has passed the point of no return. Once tax withholding has been remitted to the IRS, the only person who can get the funds back is the individual. Having a protocol in place for how much hand-holding the company will do.
Back Again
In order for your employee to recover backup withholding, she or he must file a tax return, which means a SSN or tax ID is required. Your employee may complete a Form W-7 and submit it along with the tax return, which would most likely be the Form 1040NR-EZ if the backup withholding is the only reason your employee is filing.
If you have more questions about managing a global stock plan, find the answers you need in the NASPP’s Global Stock Plans portal.
California is serious about privacy–so serious that it’s an “inalienable right” in the California constitution. This should give consumers–and employees–in California an extra bit of confidence that their own personal information won’t fall into the wrong hands. It does, however, create some rather frustrating experiences when a California resident actually wants his or her personal information to be transferred out of the state. For example, if you are a resident of California you may find yourself at an out-of-state bank branch talking to a perfectly nice teller who insists you don’t have an account until you admit you are from California at which point he will say, “Oh…California. Why didn’t you say so?” In this respect, California may have more in common with the EU or Japan than with the rest of the United States.
Aside from the quirky anecdotes that data privacy laws provide, there are serious considerations for companies with international (or California) subsidiaries. HR, payroll and equity compensation practices must ensure that the very essential, but also very private, employee data is transmitted without violating applicable laws. Payroll considerations can be accomplished with relative simplicity compared to equity compensation by virtue of local payroll processing. The distinct difference for HR and stock plan management is that most companies want to house relevant information in one central location or database.
Consent
Just like my fun bank experience, this is an instance when employees should want to have their information transmitted–after all, it’s going to create a tangible asset for them. But, operating on the idea that you have a right to access the necessary information to create and manage grants for your employees isn’t enough. In many locations, employees must actually consent to have their personal information sent to you and also sent on to the broker who will ultimately facilitate transactions for them.
Compliance
The burden for ensuring your company policies compliant with data protection laws hopefully falls on your legal team. However, ensuring that equity compensation practices adhere to the policies is an ongoing consideration for stock plan management teams. Here are three important areas to consider when it comes to data privacy:
Incoming data -exactly what information about employees you collect and house in your stock plan administration database and how you access that information
Outgoing data – each instance where individual private information must be transmitted out of the stock plan administration database
Communications practices – when and how you are sending personal information back to your employees
Once you have established that your current practices are compliant, keep data protection in mind any time you are going to engage in a one-off situation involving the transmission of personal information. If you are in a merger situation, have opened a new office, or are partnering with another department to perform a data audit, these are all examples of situations where taking a moment to confirm that you are maintaining compliance with data privacy laws is a good idea.
Resources
The NASPP’s Global Stock Plans portal has several matrices that include data privacy issues companies should consider internationally. They can be found along the left column of the portal. We also have an update from Latham & Watkins on data privacy and protection in Germany, the UK, and Spain prompted by the draft Federal Data Privacy Act being considered in Germany. The Act could place more tringent qualifications on obtaining employee consent to collect and distribute personal information.
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.
Companies, regulators, and even employees are changing the way they look at equity compensation. We’ve seen new equity vehicles, changes to taxation of equity compensation, a more global and more mobile participant population, and more rigid attention being paid to compliance when it comes to tax withholding and reporting. Companies are finding that they need to consider a broader scope of implications when granting and managing stock plans. In the spirit of casting a broader net on managing equity compensation, here are two ways to protect your company by building flexibility into your grant agreements.
Global Grant Agreement
At industry events over the past few years, I have heard more advisors and companies recommending the use of a global grant document. The way this works is to create a general grant document with appendices that cover the country-specific language. The most important reason to use a global grant document is that it helps cover the issue of mobile employees. If an employee is granted in one country and moves to another country with country-specific requirements, then you have the protection of having provided those limitations, definitions, or tax withholding requirements already laid out in the original grant agreement. This can afford the company some protection to maintain compliance and also give the employee the opportunity to better understand the impact the move will have on his or her grant. As an added bonus, having a global grant agreement can reduce the administrative burden of designating the appropriate grant package to participants. If you would like to see what this kind of grant document might look like, check out this example posted to our NASPP Document Library.
Exercise and/or Tax Payment Methods
Giving employees the ability to choose which exercise price and tax withholding method will be applied to their transactions isn’t as attractive as it may sound at first. This flexibility can be confusing to employees and may create a large administrative burden. However, your plan and grant agreements both include language that affords the company the flexibility to apply as many payment methods as possible. You can incorporate language that permits all available payment methods in the documents and use policy to clarify which will be actually be available to employees. This helps to permit the company to respond to new regulations, restrictions, or other unforeseen circumstances. Include the flexibility to withhold tax even for jurisdictions in which you do not currently need to withhold in case the company’s obligation to withhold taxes changes later.
Don’t miss our webcast today on tax reporting for stock compensation. Today’s session is one of our popular “Ask the Experts” series. Our panel of experts will cover everything you need to know to fulfill U. S. tax reporting requirements for all forms of stock compensation and address specific questions submitted by NASPP members. Don’t miss out! Join in at 4: 00 p.m. Eastern.
We have a lot of great new content on our NASPP site! I want to take the opportunity this week to let you know about some of the new features.
First, we have a new Quick Survey out on Global Stock Plans. Don’t forget to take a moment and complete this survey! It’s your opportunity to find out how other companies are dealing with some of the more difficult issues with global stock plans.
New Portals:
The NASPP portals provide a way to find consolidated information on the issues that matter most in stock plan management. Today, we have 26 portals listed; expect to see more in the future! You can access the NASPP portals from the list on the lower left side of the homepage, or through the drop-down menu on the navigation bar at the top of the site. The newest additions to our list of portals are:
Incentive Stock Options: Need a quick reference on the grant requirements for ISOs? Want to find the latest on Section 6039 Information Statements? The Incentive Stock Options portal not only has the comprehensive NASPP article on ISOs, it has final ISO regulations, articles, surveys, and sample documents.
Say on Pay: The Treasury, Congress, and the SEC have all proposed some form of say on pay requirements for companies. Our new Say on Pay Portal contains the proposed regulations along with memos and analysis on each. You can also find sample proxy statements from companies that have already taken steps to add a shareholder vote on compensation practices.
Surveys & Studies: I’m sure you all know that the NASPP publishes all Quick Survey, Stock Plan Design and Administration Survey, and Salary Survey results in the Surveys section of the Member Area drop-down menu on the navigation bar. But, did you know that we also have available comprehensive surveys and studies conducted by some of the best names in the industry? We’ve put them all together for you in our new Surveys & Studies portal. We’ve arranged this portal in a three-tab format so that you can find the study or survey you’re looking for by topic, year produced, or by the company publishing the information.
Updated Portals:
In addition to adding new portals, we’ve also gone back and reorganized some of our existing ones so that new developments and content are easier to find. Check out the updated 409A/Deferred Compensation portals and Executive Compensation Disclosures portal!
New content:
Our latest alerts on stock plan management practices, legislative and regulatory development, and global stock plans are always available on the NASPP homepage as well the corresponding portal. These are a few of the most recent additions:
There have been a lot of changes in global stock plan management. Don’t get left behind; sign up to have the latest alerts from specific countries send directly to your e-mail. In the past month alone, we’ve posted multiple alerts on Australia, the European Union, Portugal, Ireland, India and China. Don’t forget that you can search our global stock plan alert archives by country.
We’re not done, yet! You won’t want to miss out on what we have in store for next year. Renew your NASPP membership for 2010. If you aren’t an NASPP member, take advantage of our special offer and join today!