Everyone else is talking about Brexit (the vote in the UK to leave the EU), why should the NASPP Blog be left out of the conversation? For today’s entry, I discuss what Brexit might mean for your stock plans.
Don’t Panic—Yet
The good news is that the vote is advisory, so it isn’t as if the UK has immediately exited the EU. They are still part of the EU for the short-term. The UK government and the EU have to come to an agreement about how the exit plan will work and various experts have indicated that this could take two years or more.
How Will Stock Plans Be Impacted?
By now, we are all too familiar with the EU Directives that impact stock compensation. While the Directives are complicated enough, in and of themselves, if the UK leaves the EU, things could get a lot more complicated. The UK will have it’s own rules that may or may not be the same as the rules in the Directives. A recent alert by Baker & McKenzie summaries a number of areas in which stock compensation offered to employees in the UK could be affected.
Securities Laws: The EU Prospectus Directive (including both the filing requirement and exemptions) will no longer apply in the UK. This could turn out to be better or worse than the way things are now: the UK could require companies offering stock compensation to file a prospectus (probably worse), could provide an exemption for stock plans (probably the same as now for many companies, depending on the requirements for exemption), or could recognize prospectuses filed in the EU (or even in countries outside of the EU, such as the United States) (the same or better).
Data Privacy: The EU Data Privacy Directive would also no longer apply in the UK. The EU has proposed new rules for this directive, so right now, we don’t know what the final rules will be for any countries in the EU, much less the UK. But once the UK has left the EU, they can determine their own rules; maybe these rules would be similar to the rules that the EU adopts, maybe not. One bit of good news is that Baker & McKenzie notes that “It would be surprising … if the UK would not consider consent to be a valid ground to collect, process and transfer personal data.” Since that is how most companies comply with the EU Data Privacy Directive for their stock plans, little may change here.
Discrimination: There are a number of EU Directives that prohibit discrimination against specified groups of employees. Those Directives would also no longer apply in the UK, but the UK would be free to adopt its own rules on discrimination. Baker & McKenzie notes that they do not expect to see substantial changes here.
Social Insurance, Too
An alert by EY notes that Brexit may also impact the social insurance obligations of mobile employees, their employers’ compliance obligations, and the benefits mobile employees are entitled to. Currently, the EU governs how social insurance applies when employees move between countries in the EU. Unless the UK comes to an agreement with the EU that the EU rules still apply to employees moving between the UK and other EU countries, individual agreements would have to be put in place between the EU and all the EU countries. Some of these agreements exist, but they haven’t been updated since the EU established its rules. Many have expired or don’t address how mobility works in today’s world. This could get ugly.
What About Companies that Don’t Have Stock Plan Participants in the UK?
For those companies, there shouldn’t be any direct impact to their stock plans (other than the impact of stock price volatility resulting from the economic uncertainty caused by Brexit). But, if you are a US-based company with a multi-national stock plan, chances are that you have stock plan participants in the UK. In the NASPP/PwC Global Equity Incentives Survey, the UK is second only to the US in terms of countries where respondents have employees and offer stock compensation.
More to Come
I’m sure there will be more implications to think about as the UK’s exit looms closer. At this year’s NASPP Conference, our perennially popular session, “Around the World in 60 Minutes: Key International Updates” will most certainly have a lot to say about Brexit, as will the session “Making Sense of Europe.” Be sure to attend one or both of these sessions so you are up-to-date on how your stock plan participants in the UK will be affected.
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.
We recently posted the executive summary to the NASPP and PwC 2015 Global Equity Incentives Survey and, later today, we will be presenting highlights of the results in our webcast, “Top Trends in Equity Plans for International Employees.” For today’s blog entry, I highlight five findings that I think are significant:
Globalization Continues: Back when we did the 2012 survey, 20% of respondents said they expected to increase global participation in their stock plan and this trend held steady in 2015, with 19% again expecting to increase participation. In addition 77% of respondents said they expect global participation to remain the same. That leaves only a very small percentage of companies that expect to pull back their global stock plans.
Compliance Reviews Are More Routine: The percentage of respondents who said they conduct annual compliance reviews of their global stock plans increased to 43%, up from 34% in 2012. At the same time, respondents conducting only sporadic reviews dropped to 40%, down from 45%. It can be risky to wait until you hear about a regulatory change to conduct a compliance review; annual reviews help ensure that you know when the laws impacting your global stock plan have changed.
UK Takes the Lead in Challenging Tax Compliance: We asked respondents to indicate which countries they found to be challenging in terms of tax compliance. The UK was first, with 46% of the votes, up from 36% (third place) in 2012. China, however, is hanging in there at second place with 42% of the votes (China was in first place in 2012). France dropped to third place, with 26% of the votes (down from second place and 38% of the votes in 2012).
Mobility Compliance Up: The percentage of respondents tracking mobile employees continues to increase: 87% of respondents track formal assignees (up from 80% in 2012), 62% of respondents track mobile employees who aren’t part of an assignee program (up from 60% in 2012), and a surprising 27% track business travelers (up from 18% in 2012). But the tools for tracking mobile employees still leave something to be desired: 36% of respondents track this in an Excel spreadsheet, up from 29% in 2012. About another third (32%) outsource tracking to a consultant or TPA. The final third use a hodge podge of methods.
Participant Understanding Looks Like a Mountain Rather Than a Bell Curve: Only 34% of respondents felt that their global participants understand a good deal or completely understand their stock plan benefits. That leaves a two-thirds majority for whom participant understanding is at best, somewhat or partial. Global stock plans are a very expensive employee benefit, both in terms of the P&L and administrative cost. It seems a little crazy to invest resources like this in a plan and not also invest in the education to make sure participants understand it.
Be sure to tune in to the webcast later today to learn more highlights from the survey.
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…
In our world of stock compensation, we’re well versed in keeping up with the laws and regulations that govern our universe. Many of us are also in tune with doing what it takes to keep our employee customers informed and happy. Sometimes in the quest to tighten up policies or service the employee, seemingly good practices are utilized, only to learn later on that they weren’t such a hot idea after all. In today’s blog, I’ll explore a few common, well-intentioned practices that may come back to later haunt the stock plan administrator.
3 Practices With Potential Pitfalls
1. Thinking Beneficiary Designations are a Must: Contrary to some stock plan urban myth that says it’s a good idea to allow employees to designate a beneficiary for their stock plan shares, the use of beneficiary forms for stock plan shares is not considered a best practice. Why? Well, this is an area where I could rant a long laundry list of “whys”, but in the interest of space I’ll keep it short. One reason? There’s a good chance that the designated beneficiary may not be the intended beneficiary. These forms are usually completed when someone is new to a stock plan, and then later forgotten. Years go by – marriages, divorces, other life events. It’s quite possible that the name written on the beneficiary form is not the person who would have been the intended recipient. Another reason to ditch these forms: many non-U.S. jurisdictions don’t even consider beneficiary forms to be valid or enforceable. According to a recent white paper published by Baker & McKenzie on this subject (and available in our NASPP Practice Alerts), it’s better just to simply provide for a refund of unused ESPP contributions in the event of death, and other stock plan rights, such as those to stock options, go to the employee’s estate. Another option may be to allow the use of beneficiary designations at the stock plan administrator’s discretion (to allow for one-off situations that may warrant such a designation), but not as the rule.
2. Believing that Unsigned Grant Agreements Can’t be Enforced: Many companies do distribute grant agreements to grant/award recipients, and the vast majority require a signature (including electronic signature or acceptance) on the document. According to the 2011 NASPP/Deloitte Stock Plan Administration survey, 76% of participating companies reported requiring grant acceptance (although 24% of respondents said that they don’t enforce the requirement). In a recent California Court of Appeals case, an unsigned stock option agreement was deemed to be valid. The facts surrounding the case are lengthy and detailed, so that will have to be reserved for a future blog. However, one lesson learned from the decision was that, absent language that indicates acceptance or signature is required or presumed at a certain point, it is possible for an unsigned agreement to be considered an agreement. I’m guessing a good number of companies operate on this belief, at least those that aren’t requiring acceptance or enforcing their acceptance policies. However, there may be a segment of companies that believe that there’s a black and white difference between signed and unsigned agreements, leading to a false sense of security about only having a true agreement if and when it’s actually signed. The recent court case seems to blur that line. If you are concerned about making sure the company and employee are on the same page about what’s being offered and the terms and conditions of the award, it’s a good idea to require acceptance or signatures. In addition, having a policy or requirement is just the first step. Perhaps even more important is consistency in enforcing the policy. No one wants to to lose a valid dispute based on a technicality. At minimum, be aware of the potential for enforcement of unsigned agreements.
3. Mobility Tax Calculation Assumptions: Not all countries have the same mentality when it comes to calculating their share of the tax pie for mobile employees. The tax authorities of many countries are still trying to figure out how to tax mobile employees, and this an ever-evolving area. Some companies find themselves trying to take a one-size-fits all approach to streamline mobility related tax allocations. This simply won’t work – there are too many differences amongst jurisdictions, and if that wasn’t enough, the interpretations and policies keep changing. For example, the Canadian Revenue Agency recently changed its position on the calculation of cross-border stock option benefits, clarifying some aspects of its policy on how stock option income should be allocated. This was a positive change, providing some clear guidance in an area that previously had ambiguity. These types of clarifications or updates are becoming commonplace, and companies do need to accept that the approach to mobile employees still needs to be determined on a jurisdictional or case-by-case basis.
Sometimes it’s not the big changes that matter, but the little shifts in our practices or thinking. It’s quite possible to make a big difference with a simple change in policy or practice. Hopefully in today’s blog you gained a couple of nuggets that may prompt some small shift in approach, netting rewards down the road (and avoiding the haunting I referred to at the beginning of this blog).