This past summer, the NASPP and Solium co-sponsored a quick survey on global stock plan administration. We asked companies about the technological challenges they experience when it comes to administering global stock plans, focusing on 12 primary challenges related to tax compliance, financial reporting, and other administrative matters. Close to 70% of respondents indicated that they struggle with four or more of the challenges identified and several noted that they struggle with nine or more of the challenges.
For today’s blog entry, I highlight five things I learned from the survey:
1. There are still a lot of manual processes out there.
Two-thirds of respondents say they spend too much time on manual processes. This is a high-risk proposition: it is difficult to implement adequate controls over processes and calculations performed in a spreadsheet. This seems especially concerning given that the SEC is in the process of adopting rules requiring recovery of compensation for all material misstatements, even if due to inadvertent error (see “SEC Proposes Clawback Rules,” July 7, 2015). One incorrect calculation discovered too late could result in recoupment of bonuses and other incentive compensation paid to executive officers.
2. Tax compliance is a top concern for companies.
This really isn’t a surprise—let’s face it, tax laws outside the United States are a hot mess. Every country does something different. Some countries change their laws every few years (I’m looking at you, Australia and France) and grandfather in old awards. Some countries have different rules for social insurance taxes vs. income taxes. Add in mobile employees and, well, you have a lot of work for tax lawyers.
3. Regulatory compliance is also a challenge.
56% of respondents cite keeping up with regulatory changes as a top challenge and 45% cite regulatory requirements in other countries. Regulatory compliance goes beyond tax laws to include things like securities laws, data privacy (a hot topic these days, see “Data Privacy Upheaval,” December 3, 2015), labor laws, currency restrictions and a host of other issues. It’s hard to stay on top of it all.
4. It’s the participants that suffer.
Ultimately, in the struggle to administer a global stock plan, something has to give and that something is usually the participant. Only 50% of respondents offer a qualified plan in countries where they could; the hurdle of regulatory compliance gets in the way. And 75% of respondents said that they would focus more on employee education if they could just spend less time on basic administration.
5. Expectations are low.
When we asked companies what is on their wish list for their administrative system, I was surprised at how low some items ranked (it was a “check all that apply” question, I thought everyone would want just about everything). For example, despite the fact that 71% of respondents reported tax-compliance for mobile employees as a top challenge, only 64% wanted a system that could calculate tax liabilities for mobile participants. It left us wondering if companies need to dream bigger for their administrative platforms.
Check out the White Paper and Survey
If you haven’t had a chance to read it yet, check out the white paper on the survey results and download the full results from the Solium website.
NASPP: What is the most critical thing NASPP Conference attendees need to know about equity awards held by globally mobile employees?
Stuart: Tax authorities across the globe are becoming more and more sophisticated when it comes to understanding the most common equity vehicles available to globally mobile employees. Significant negative outcomes can occur, including financial statement impact, if the right process is not put in place.
NASPP: What common mistake do companies make and how can they avoid it?
Stuart: A common mistake organizations make when dealing with equity provided to expatriate employees is to forget about the employee once they have come off of assignment. Post-repatriation equity income should be reviewed for any host country tax implications.
NASPP: What is the silver lining to all of this?
Stuart: The equity process for expatriates is manageable and surprises can be avoided.
NASPP: Tell us three things people don’t know about you.
Stuart:
I once appeared on the show “Candid Camera” doing hopscotch on a sidewalk in downtown San Jose. I received $25 for that appearance.
I scuba dived in Tahiti, following a divemaster who was towing 1/2 of a marlin while sharks attacked it.
I played trombone for the UCLA Marching Band and was lucky enough to march in two Rose Bowl Parades and play at the follow on Rose Bowl games.
As my readers know, because we’ve covered this topic ad nauseam here in the NASPP Blog (e.g., see entries on December 13, 2012, December 6, 2012, August 10, 2010, and May 6, 2010) when employees holding stock awards travel from state to state, it may be necessary to allocate the taxable income they recognize upon settlement of their awards to the various states where they provided services during the life of the awards. This can apply not only to employees that relocate or that live in one state and work in another, but also to employees on assignment and even business travelers. Many states require employees that work as little as one day in the state to pay income tax in that state. To further complicate matters, the formulas used to allocate the income can vary from state to state.
With some states (most notably NY and CA, but there are others as well) implementing audit initiatives and actively pursuing enforcement in this area, this issue has moved to the forefront in terms of things that keep stock plan administrators awake at night.
Relief?
Given the complexity of the acronym, it’s hard to believe the Mobile Workforce State Income Tax Simplification Act (MWSITSA? mew-sit-sa? really?) is about simplification but there it is, the word “simplification,” right there in the title. The Act would accomplish this by prohibiting states from taxing non-residents that work in the state for less than 30 days during the calendar year. Moreover, the determination of whether or not the company has to withhold taxes could be based on employees’ expectations of how many days they’ll work in states other than their state of residence (in the absence of fraud, collusion to evade taxes, or some sort of daily attendance tracking system).
A memo from PwC in the NASPP’s State Taxes Portal provides a great summary of the Act (the memo refers to an earlier version of the bill but I believe it is substantially the same as the current version.)
Not So Much?
This would be a big help in terms of business travelers, but there would still be employees on temporary assignment and employees that relocate to contend with. And, even with business travelers, I can imagine plenty of situations where this bill wouldn’t help (e.g., a salesman with an out-of-state territory or a regional division head that spends a lot of time traveling to headquarters in another state). And the bill doesn’t seem to do anything about standardizing the formula for allocating income among jurisdictions.
My impression is that, so far, most companies’ compliance efforts have focused on relocations and assignments and that no one has been doing much in terms of compliance for business travelers anyway. But at least if the Act became law, you could cross business travelers off your list of long-term projects–well, as least some of them.
Which brings us to the $10 million question–will the Act get passed. I think there’s a good chance that legislation of this sort will be enacted some time during, say, my lifetime (note that I expect that I’ve got at least three or four decades ahead of me). But I’m not holding out a lot of hope for the short term. The good news is that a version of this bill was introduced into the House last year and passed. Unfortunately it stalled out in the Senate and now we’re in a new session of Congress so it has to start all over again. Govtrack.us gives it a 40% chance of making it out of committee but only a 6% prognosis of actually being enacted. At least there’s hope for our grandchildren…
Today we feature another guest blog entry, this time from Marlene Zobayan of Rutlen Associates, who will present on the panel “The Buck Stops Here (Unless, of Course, It Stops Somewhere Else)” at the 19th Annual NASPP Conference in November. The panel will use a case-study approach to define an effective strategy for addressing the taxation of globally mobile employees. Marlene’s co-panelists are Jim McBride of AST Equity Plan Solutions, Kate Forsyth of Deloitte, and Kimberly Kovacs of OptionEase.
The Buck Stops Here (Unless, of Course, It Stops Somewhere Else) by Marlene Zobayan, Rutlen Associates
These days, no discussion on the taxation of equity compensation seems complete without addressing the topic of mobile employees. For any one company, the numbers of mobile employees are usually small compared to the entire workforce, yet the administrative work caused by this small group of employees far exceed those of the fixed population.
The difficulties fall into three categories:
There is the administration burden of identifying and tracking who the mobile employees are.
Then there is calculating the correct taxes to apply. Of course, jurisdictions differ widely on what they determine to be their taxable portion resulting in a complicated tax calculation for each set of facts.
Finally there is the difficulty of getting the payroll and administration systems to administer what has been calculated, especially where the amount of income being taxed does not sum to 100%.
For the more advanced company, the impact of mobile employees carries through to the corporate tax deductions, which impacts deferred tax assets and ultimately the accounting expense of the equity compensation.
Although the technologies supporting these categories have come a long way, often manual intervention is still required to make sure the systems properly handle mobile employees.
To demonstrate these issues, the panel will focus on three specific examples of mobile employees who all receive similar equity grants. The examples follow common real-life mobility patterns, if there is such a thing. The audience will see how a mobile employee’s circumstances impact the taxation, employer withholding and reporting compliance, accounting, expense allocation and corporate deduction based on the countries involved and the type of mobility, e.g., whether someone is a temporary assignee, permanent transfer or a business traveler.
Today I am really looking attending the NASPP’s Silicon Valley Chapter All-Day in Santa Clara. If you are joining us, be sure and say hello to me! If you are missing out on the action today, don’t let your opportunity for the 19th Annual NASPP Conference early bird rates also slip through your fingers. Tomorrow is your last chance to get in on the special discount on registration.
Six Years of Savings
San Francisco did end up approving short-term relief from city tax on equity compensation through December 2017. But, there are a couple catches. First, the exemption from the city’s 1.5% payroll expense tax on stock options only applies to companies immediately following an IPO. Second, the relief only kicks in after the $750,000 in taxes has been paid. According to this article from the San Francisco Examiner, only a dozen or so companies are poised to actually be impacted by this tax break. Still, there is talk about what changes to city taxes might be proposed for the 2012 ballot. So, for now, public companies in San Francisco must still pay the payroll expense tax on equity compensation–unless they are eligible for other payroll tax exemptions.
You Can Run, but You Can’t Hide
Speaking of paying taxes, I also caught this article from CFO.com. We’ve been hearing that both the IRS and states are and will continue to focus on taxes due on equity compensation. This article indicates that states may be looking specifically at domestically mobile employees and several will soon be enacting legislation to provide specific formulas for calculating the portion of income deemed to be earned in-state.
This is both good news and bad news. Obviously, there is the administrative burden of achieving compliance with respect to mobile employees. If states are taking a closer look at the sourcing of income from equity compensation, companies need to be moving faster toward full compliance. The good news is that one of the hurdles to achieving real compliance is defining exactly what compliance means in certain jurisdictions and it looks like more states will be making that clear. The problem does still remain, however, that states are not legislating the same formula–an issue also present in global mobility compliance. Our expert panelists covered all the complexities of domestic mobility in the recent NASPP webcast, State Mobility: Don’t Be Grounded by Your Mobile Employees. If you weren’t able to join in the live webcast, the transcript and materials are both available for review.
What happens when an employee moves to another state while holding an equity award (e.g., stock option, restricted stock, restricted stock unit, etc.)? In many cases both states, (the state the employee moved from and the state the employee moved to) will tax all or part of the income related to the award.
Historically companies have not tracked employees moving from state to state. Companies have merely reported the equity compensation in the state of residency when the taxable event occurs (e.g., exercise of an option or vest of a restricted stock/restricted stock unit). Rutlen Associates recently conducted a survey of how companies track employee movement and report equity awards for employees that move from state to state. (Approximately 150 companies participated in the survey.) The survey results indicated about 20% of survey respondents meet the withholding and reporting requirements for reporting equity awards for mobile employees. Compliance varies depending on the type of mobile employee. Compliance is higher for employees on temporary assignment and employees permanently transferring to a new state. Compliance for business travelers is significantly lower.
In the Rutlen Associates’ survey the reasons for noncompliance vary:
50% could not allocate the income to more than one state because of limited system functionality and/or manual resources.
38% determined the amounts were insignificant.
35% didn’t know the compliance requirements for each state.
27% didn’t have information about employee movement.
Information about employee location/movement is more readily available for permanent transfers than temporary assignments and business travelers. Frequently the change of address when an employee permanently moves to a new state provides better documentation of employee movement.
Despite the challenges associated with compliance, more companies are reassessing the way they track and report state-to-state moves. Increased attention from the tax authorities in various states is encouraging companies to reevaluate their processes. Many states, especially New York and California, are focusing on enforcement of the withholding and reporting requirements for individuals moving into and out of the state. For example, New York is targeting high-level executives. During a recent audit New York State revenue agents reviewed payroll and expense reports for all executives–even executives with no ties to New York. Any company doing business in New York may be selected for this additional scrutiny. For many companies the potential tax assessment may not be significant, but the administrative cost of complying with the requested documents may be onerous.
Many software vendors are adding functionality in the stock plan database to track the historic location of the employee and employee mobility. Of course, adding functionality to track employee movement is a double-edged sword. The improved functionality makes compliance easier–knowing which employees are moving and the move date is the first step to complying with the reporting and withholding requirements. Once you have information on employee movement, however, the tax authorities are less likely to tolerate noncompliance and more likely to assess penalties for ignoring the compliance requirements.
The moral of this story is that it is an excellent time to reevaluate your handling of the issues surrounding state mobility.
This is the third and final installment in my short mobile employee glossary. I’m going to include the same disclaimer as with the other two: This short glossary is intended only to help you understand what you are hearing or reading when it comes to global mobility. Always consult your company’s tax advisor when making decisions about tax withholding and reporting.
In this entry, I am going to touch on some definitions that are specific to the United Kingdom. First, however, there are a few general terms that I missed in my first blog.
Certificate of Coverage: This is a document issued by the home country social security administration authority under the Totalization agreement (see below) that serves as proof that the employee and employer are exempt from Social Security taxes in the host country.
Hypothetical Tax: This is the aproximate income tax that an employee would have incurred assuming continued employment in the home country. It is used for calculations in situations where cross-border employees are tax equalized (see below).
Long-Term Assignment: Generally an assignment period greater than one year.
Short-Term Assignment: Generally an assignment period of one year or less.
Tax Equalized: Some companies implement a tax equalization policy for employees who are sent overseas on assignment. A tax equalization policy is based on the premise that an employee accepting an overseas assignment may incur additional home and host country taxes because of the international assignment. A tax equalization policy works to ensure that an employee will neither suffer a financial hardship nor realize a financial windfall as a result of the tax consequences of an overseas assignment. Tax equalized employees typically pay only the hypothetical tax (see above), while the company covers any additional required income tax withholding (grossed-up so that it does not result in additional income tax payable by the employee).
Totalization Agreement: To help address the issue of double taxation for social tax purposes, many countries have entered into bilateral Social Security (or Totalization) agreements. These agreements coordinate the payment of social taxes as well as the receipt of benefits for cross-border employees. Although the details of each Totalization agreement are unique, they all assign social taxes to one country and exempt both the cross-border employee and the employer from paying social taxes in the other country. For a list of countries with which the United States has Totalization agreements, along with links to each agreement, visit the Social Security Administration site HERE.
The following terms are specific to the United Kingdom:
HMRC: Her Majesty’s Revenue & Customs (HMRC) is similar to the IRS in the United States. The HMRC collects direct and indirect taxes as well as pays and administers certain income tax benefits and credits in the UK. You can find more at http://www.hmrc.gov.uk/index.htm.
Resident: Unlike the IRS, the HMRC does not provide a specific definition for resident. The issue of “intent” is important when determining residency in the UK. Very generally speaking, a resident is someone who is present in the UK during the tax year (which is April 6 to April 5) and intends to remain in the UK for some time. Although it does not cover all the ways in which an individual may be considered a resident in the UK, the general rule is that employees are tax resident in the U.K. if they:
spend 183 days or more in the UK during any tax year, or,
spend or intend to spend an average of 91 or more days per tax year in the UK over a period of three years, or,
arrive in the UK intending to spend two years or more in the UK.
Ordinarily Resident: Employees who are resident in the UK “year after year” are ordinarily resident. The HMRC does not provide a specific definition for individuals who will be treated as ordinarily resident. Employees who leave the UK to work abroad may lose their status as ordinarily resident after one full tax year (from April 6 to April 5), providing their return visits do not exceed the maximum allowable days. Employees who move to the UK may be considered ordinarily resident from the day they arrive if they intend to remain a minimum of three years in the UK. Otherwise, they may be considered ordinarily resident after a period of time. Employees who stay in the UK for four years will most likely be considered ordinarily resident regardless of their intentions.
Not Ordinarily Resident: Employees who are resident in the UK, but do not fall in the category of ordinarily resident are resident, not ordinarily resident.
Domicile: Employees may be resident of multiple countries, but may only be domiciled in one country. There are many parameters that come together to determine where an employee is domiciled. But, generally speaking, domicile is the country of permanent residence. UK employees who work in another country are “domiciled abroad”.
Last week, I introduced some common terms that are used when talking about global mobility and cross-border taxation. This week, I’d like to offer some terms that are specific to the Unites States.
These are only intended to be a simple glossary reference to help you understand documents, opinions, or presentations on global mobility. Both bringing employees to the U.S. and determining the most appropriate income reporting and tax withholding obligations are complex and any decisions made by you and your company must be based on the particular circumstances of each situation. I have provided links to government sources for some definitions below, but I will not be updating this blog entry should either the links or the definitions change in the future. Always refer to your company’s tax advisors when determining income reporting and tax withholding obligations!
Citizen: There are basically two types of citizens in the U.S.: those that are citizens by birth and those who became citizens through naturalization.
Permanent Resident: Employees who come to the U.S. typically do so by obtaining a work visa. Although the term “resident” loosely applies to anyone living in the U.S., a permanent resident is one who has obtained a Green Card. Legal U.S. residents may apply for citizenship.
Non Resident Alien: Employees who work in the U.S. are nonresident aliens for any period of time that they work in the U.S. and are not considered resident aliens.
Resident Alien: There are two tests to determine if employees are considered resident aliens in the U.S. First, if an employee receives a Green Card, they will be considered a resident alien for the entire calendar year. The second method is called the “substantial presence test.” For more information, see Topic 851 on the IRS site. Employees who are considered resident aliens because of the substantial presence test may qualify for dual-status in that calendar year.
Substantial Presence Test: The IRS states that an individual will be a U.S. tax resident in any year if he or she has spent at least 31 days in that year and 183 days over the past three tax years in the U.S., calculated using the following formula:
All the days he or she has been present in the current year, and
1/3 of the days he or she was present in the first year preceding year, and
1/6 of the days he or she was present in the second preceding year.
You can find example applications of the substantial presence test in the IRS website HERE.
I’d like to give a special thank you to Valerie Diamond of Baker McKenzie for her assistance with this post! When I need help with international issues, I always turn to one of the members of our Global Stock Plans Portal Task Force. If you have questions, feel free to post them to our Global Stock Plans Discussion Forum, or contact any of the Task Force members directly!
At our NASPP Sacramento Chapter meeting last Thursday, Jean Wong of Sun Microsystems said that in order to talk about global stock plan administration, you really do have to address the issue of global mobility. Global mobility truly is an issue that can impact all of your company’s stock plans. You may see it mentioned in presentations, articles, discussion forums, and even in opinions from your tax advisors. In fact, if you are looking for the latest information on global mobility, don’t miss the Traveling with Equity session at our Conference this year!
Whatever the context, there are some basic terms that are commonly used when discussing global mobility. I thought I’d take a moment to provide a short general glossary. Keep in mind that these terms may be used differently by some companies, and that many companies use their own nomenclature to describe situations and individuals internally. I tried to give the most general definition to the terms below; there may be situations where these terms are used in other ways. This short glossary is intended only to help you understand what you are hearing or reading when it comes to global mobility. Always consult your company’s tax advisor when making decisions about tax withholding and reporting.
Cross-Border Employee: Cross-border employees are either mobile employees (see below), or employees who live in one tax jurisdiction, but work in another.
Domestic Employee: Domestic employees live and work in one country and are citizens or residents of that country.
Expatriate: Expatriates are individuals who live and work outside their home country. Typically, “expatriate” is a term used by the home country for an individual who has left the country to work internationally. The host country would refer to the same individual as a foreign expatriate.
Foreign Expatriate: Foreign expatriates are employees who have left their home country to live and work in another country. Typically, this term is used by the host country for an individual who has come to the country to work domestically. It is also used by the U.S. to refer to expatriates whose home and host countries are both a country other than the U.S.
Foreign National: Foreign nationals are employees who live and work internationally, but remain in their country of citizenship or residency.
Home Country: This is the country where the employee is based. Typically, it is the country of citizenship or residency. There are situations where an employee is on assignment long enough that a new home country is established.
Host Country: This is the country in which the employee is working other than their home country. Some employees have multiple host countries during their employment with one company.
Mobile Employee: Mobile employees are those that work for the company in more than one tax jurisdiction over the period of employment with the company. These may be domestically mobile or globally/internationally mobile employees.
I’d like to give a special thanks to Lauren Downes for this idea! Stay tuned next week for common terms used specifically in the United States.
The NASPP Brings You the Experts
When we say we’re putting together a panel of experts to answer member questions, we’re serious about the experts. Valerie Diamond of Baker & McKenzie and Jon Burg of Radford–half the panel in our recent “Ask the Experts: Modifications of Equity Awards” webcast–were quoted extensively this week in the article “Options Exchanges Help to Generate Legal Work,” published in The Recorder and on Law.com. And, Thomas Welk, also one of the webcast panelists, discusses simultaneous acceptance of grants issued in a option exchange in this month’s SOS Xtra (published by Stock & Option Solutions).