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).
It can take a considerable amount of effort, not to mention legal advice, to correctly report income and withhold taxes on your globally mobile employees. In the spirit of keeping this short, I’m going to talk about some of the issues around double taxation and employee mobility in the context of a U.S. company and a U.S. citizen.
Double Taxation
All income made by a U.S. citizen is taxable in the U.S., regardless of where the income was earned. Additionally, the company has the withholding and reporting obligations with regards to income and income tax. This means that a conservative approach to withholding on income from equity compensation for your U.S. employees who are working abroad would be to withhold U.S. income tax on the entire amount. The local tax authority in the country in which your mobile employee resides may also require reporting and withholding on that same income, creating double taxation for the employee. This issue was addressed in 2004 by the Organisation for Economic Co-Operation and Development (OECD) in their paper on the taxation of mobile employees. In this paper, the OECD calls for tax treaties that help alleviate the burden of double taxation by sourcing the income based on where it was earned. Although the paper, and other recommendations by the OECD, is non-binding to any country, it has influenced the way equity compensation income is addressed in tax treaties.
Tax Treaties
Fortunately, many countries have treaties in place that provide a protocol for income tax obligations on income that may be sourced to more than one country. In fact, the U.S. has entered into income tax treaties with over 60 countries. You can find them all on the IRS website HERE. These treaties are typically for the individual and do not necessarily relate to your company’s obligation as an employer to report and/or withhold. They often permit the individual to receive a foreign tax credit on income that was earned outside of the U.S. and is also taxed in the other country. Some employers, at the recommendation or approval of their own tax advisors, apply these tax credits proactively to equity compensation income that was “earned” outside the U.S., using a pro-rata arrangement to allocate income that was earned while the employee was still in the U.S.
Totalization Agreements
Income tax is not the only tax that companies need to consider when dealing with globally mobile employees. Social taxes also apply, and may be handled differently than income tax arrangements. Double taxation is also an issue with social taxes like the U.S. social security tax and Medicare; this is called dual coverage since social taxes are typically designed to cover an individual or their families in retirement, illness, disability, or death. The issue of dual coverage is costly for both your mobile employees and your company, since most countries have an employer-paid portion of social taxes. To address this issue, the U.S. has entered into “Totalization agreements”. These agreements allow the individual and the company to source the entire amount of equity income to one country or the other, per the agreement (you can’t choose which country to contribute social taxes to). You can find all the countries with which the U.S. Social Security Administration (SSA) has Totalization agreements on the SSA site HERE. If your company is planning to rely on a Totalization agreement for some or all of your mobile employees, you will need to ensure that each employee has a certificate of coverage issued from the country in which the employee will be paying social taxes. In the U.S., the certificate of coverage can be requested from the SSA by your company on behalf of the employee.
Multiple Sourcing Periods
What all this means is that if your company decided to proactively apply both the income tax treaties and the Totalization agreements, there may be several ways in which income is allocated. Even though this is advantageous to your mobile employees because they will not need to pay now and true-up their tax obligation when they file their income tax returns, it does mean that you will need to communicate very clearly with your employees and your Payroll department. Essentially, your company will need to report a different amount of income in Box 1 of the W-2 than is in Box 3 and Box 5 (see our Tax Withholding and Reporting portal for more on U.S. tax withholding). Additionally, if you are sourcing the income pro-rata, the sourcing may be applied differently in the U.S. than in the other country. In the U.S., it’s generally accepted that the sourcing is from grant to vest for options, but in some countries it may be grant to exercise.
Key Resources
There are, of course, many additional considerations for tax withholding for your mobile employees. You can find additional resources in the NASPP Global Stock Plans portal, in our Document Library, and on the Discussion Forum (search for the keyword “mobile”). You can also see what other companies are doing by reviewing our 2006 and 2008 International Stock Plan Design and Administration Surveys, co-sponsored by Deloitte. Until the full 2008 survey is available on our site, you can catch the highlights in the archive of our recent webcast, Top Trends in Stock Plans for Overseas Employees.
You should already be registered for our 17th Annual NASPP Conference. If you haven’t, act now – the early bird rates end this Friday. If global mobility is a topic you want to hear more about, be sure to sign up for the workshop “Traveling with Equity” at the Conference!