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.
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).
Perusing our NASPP Q&A Discussion Forum, it’s interesting to see the various trends in terms of hot topics and where companies seem to be struggling the most in administering their stock programs. We don’t keep official statistics about the types of questions asked, but one constant trend I see is the dominance of questions around taxes, taxes, taxes. In today’s blog I identify some of the key areas of uncertainty for issuers and helpful resources to address them.
Too Much Mobility
Let’s face it: it’s more common for a company to be spread across the country or the globe than not these days. With expanded presence comes mobile employees, and multiple jurisdictions that would love to get their hands on tax revenues. For a long time the term “mobility tracking” often conjured images of remote, distant countries around the globe. While that clearly is an area of challenge and still an ever hot topic in administering equity plans, we’re definitely seeing lots of questions around domestic mobility (state-to-state within the U.S.). Some of the more common inquiries stem around employees moving from one state to another and the question of which state rules to follow in terms of withholding, and who gets those dollars. The answer is not necessarily black and white, and can largely depend upon the individual states involved (and their regulations), where the employee was located when a key event occurred, such as vesting or exercise. Some key tips to remember are:
You only have to withhold in a particular state if you have an office there. No office, no withholding required, at least for stock compensation. So if your mobile employees are also remote employees, this may simplify the process of figuring out where to send tax dollars.
When in doubt, call on the local payroll contacts in the state in question. If you’re working in the corporate office in California, your California payroll folks may not be fully aware of the nuances involved in withholding taxes in Pennsylvania. However, if you also have an office in Pennsylvania and local payroll contacts, it’s definitely worth a consultation with them on mobility issues.
Leverage your third-party payroll provider for assistance. While they may not be mobility experts, they should be well versed in the withholding requirements for each state. Knowing the basics can go a long way towards figuring out next steps.
Consult with an expert. If you have a large mobile population, or significant tax dollars involved, it may be worth consulting with a third party expert who is familiar with the ins and outs of mobility tracking. There are several firms who will even handle the calculations for you, as events occur.
Access available information, such as the articles in our State Taxes or Global Stock Plans Portals. If you’re an NASPP member, access is free, so why not use those as a starting place?
As with any compliance issue, there is always the risk/reward analysis. Things like the number of states involved, the aggressiveness of the states in pursing tax revenue, the number of employees and tax amounts are all considerations in determining a withholding practice for mobile employees.
Terminations and Other Situations
One thing to remember is that one size does not fit all then it comes to taxation. It’s easy to assume that jurisdictions (domestic and global) may have similar practices or requirements when it comes to certain situations, such as termination, but that’s not always the case. In the U.S. we don’t distinguish between a terminated employee or an active employee for stock related withholding purposes. In fact, even terminated employees receive a W-2 documenting their stock compensation income, even if they haven’t worked for the company in the calendar year of the taxable stock event. Then, you go outside the U.S., to a country like the U.K., where tax withholding does change for terminated employees. In the U.K. the rate is reduced to a flat rate that is less than standard withholding rate for active employees. So employes with terminations in that jurisdiction need to be attentive to ensuring tax withholding rates are changed for terminated employees. I’ve seen companies “forget” this, and have to go through the painful process of processing refunds to terminated employees. Judging from the number of questions about withholding in the U.K. for terminated employees, this is still an area where companies need a sanity check. Here are a couple of tips for monitoring tax compliance when scenarios change:
If you have a third party expert, use them. Don’t skimp when it comes to compliance. I like to say a penny spent today is a dollar saved down the road; investing in compliance should pay off – the penalties for non-compliance would likely be far greater. One thing you’ll want to double check with your expert is how changes in circumstances will affect withholding. I recommend a standard set of questions that you use to explore the requirements with your provider that includes identifying any nuances for terminations, divorce, death and other scenarios.
Build a solid process to monitor circumstantial changes on a real time basis. It’s easier to give back money for over-withholding than it is to seek out money for under-withholding, especially if you’re dealing with former employees. Still, it’s even better to get it right from the beginning. This will undoubtedly require careful coordination with other internal business partners, like H.R. and local contacts.
Bounce it off of someone else. Although each company should do their own due diligence when it comes to tax compliance, leveraging the experience of other practitioners can be a great resource. Don’t be afraid to turn to your peers – at an NASPP chapter meeting, via the NASPP Q&A Discussion Forums, in educational settings and through other industry events. As a whole we all become more educated the more information we share.
Taxation has been a topic of much discussion for as long as I can remember, and likely will remain that way into the distant future. There are just too many jurisdictions, volumes of requirements, and then frequent changes. This is a recipe for an active discussion forum for a long time to come. Keep those questions coming: the more we collaborate together, the more we continue to progress in building a well oiled tax compliance machine.
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.
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.
Domestic mobility can be as complex as international mobility, but it certainly gets less press. With state governments dealing with budgetary difficulties, state tax authorities will be looking to capture as much “lost” tax revenue as possible. There are many situations where an individual may be required to report income and pay taxes in one or more states other than their state of residence, and stock option income is no exception. Most states follow federal income tax treatment for equity compensation, but only some specifically address how equity compensation should be sourced when mobility is an issue. For this reason, it really is best to get tax advice before creating a policy on domestic mobility.
Identifying Mobile Employees
There are three main situations that can lead to equity compensation being sourced to more than one state. The first, and probably easiest, is a permanent move made by an employee or former employee. When an employee or former employee moves from one state to another, you generally only need to assess the income sourcing once and then apply it to equity compensation going forward. Next on the list are employees that work outside their state of residence. This is most likely in the New England states where commuting across state lines can be quite common. Finally, there are employees who perform services for the company in more than one state. These situations can be the most challenging for stock plan mangers not only in determining compliance, but also in simply obtaining the travel information. Unlike with moves or permanent transfers, the details surrounding business trips or temporary assignments may not be evident in standard employee demographic details and must be communicated to the stock plan management team separately.
Sourcing Issues
When it comes to equity compensation, the key to handling domestic mobility is identifying when your company has an obligation to report or withhold on income from stock plan transactions in more than one state, or in a state other than your employee’s state of residence. Once that is established, the next step is to understand how each state sources the income. In many cases, the sourcing is between the grant and the exercise date for options (or vesting date for restricted stock). However, some states only consider residency at grant or at exercise and some completely have unique parameters.
Just like with international mobility, there will likely be situations of double taxation. States generally tax residents on all equity income, regardless of where it was earned. Alternatively, many states will also tax non-residents on equity income considered to be earned in that state. To address double taxation, there may be tax credit available to employees in either their state of residence or the non-residence state where equity income is earned. Additionally, some states have specific reciprocity agreements between them to avoid double taxation. It may be possible for your company to rely on these arrangements when reporting and withholding on equity compensation.
Steps to Compliance
A great way to tackle domestic mobility compliance is to start with the most visible (i.e. riskiest) and most common situations. Check to see if you have particular locations or employee segments where mobility is more common and determine which types of sourcing issues you are dealing with. Once you have an idea of what mobility issues you are going to address first, get informed on the sourcing and taxation requirements for the states in question. You can find information on our site in the State and Local Tax portal, but before making any decisions, consult your company’s tax advisor. Once you’ve made decision on how your company will handle specific situations, document a clear policy and run it past your auditor for confirmation.
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”.