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!
-Rachel
Tags: cross-border, immigration, income, mobile, mobility, resident, tax, taxation, U.S., United States
India
When the Finance Bill 2007 extended India’s Fringe Benefit Tax (FBT) to include equity compensation, companies scrambled to respond. The Finance Bill uprooted tax-favorable plans, changed the valuation method, and required employers to pay the tax. Companies had to determine how to accommodate the new tax (many passed the tax through to employees) and make the estimated tax payments.
Now, all that may be turned upside down. India’s Finance Minister has proposed to abolish the FBT beginning retroactively as of April 1, 2009; and not just for equity compensation, but for all FBT items.
What we do know this means is:
- Equity compensation will be treated as perquisite income, valued at exercise for options, purchase for ESPP, and at vest for restricted stock.
- Employers will be required to withhold income tax on equity transactions, but social insurance contributions most likely will not be required.
- The further sale of shares will be subject to capital gains tax.
The questions this leaves unanswered are:
- What valuation method will be acceptable; will companies still be required to use a merchant bank valuation?
- Will there be any tax-favorable plans like those that existed prior to FBT on equity compensation?
- Since the abolition of FBT is retroactive to April 1, 2009, how should transactions that have taken place since then be handled?
What also remains to be seen is whether or this will ultimately be easier or more difficult to administer than FBT. Employers who have already accommodated the FBT will once more need to confirm that grant agreements are adequate and make tax payments to the government. Employers who were not passing the FBT through to employees will now need to implement tax withholding on equity compensation. However, if the proposal eliminates the need to use merchant bank valuations, streamlining valuations to be more consistent with other country methodology, it would certainly make things easier! Stay tuned for more updates as clarifications become available.
Australia
The abolition of FBT in India may be a welcomed change, but the proposed updates to taxation of equity compensation in Australia have been met with overwhelming opposition. This upset proposal in the 2009/2010 Australian Federal Budget was to tax options at grant. Recently, we have heard that the proposal has been modified to allow a deferral of taxes until there is no longer a risk of forfeiture and there are no longer disposal restrictions attached to the shares. This, like the FBT change, will be a retroactive change to taxation of equity grants.
Belgium
Belgium, in an effort to provide some relief in these difficult economic times, has proposed an opportunity for companies to extend the term of underwater options for up to five years without incurring additional individual income taxes due for the option-holder. Outside of this opportunity, extending the term of an option would constitute the grant of a new option; options are taxable at grant in Belgium. Options eligible for this treatment must have a grant date from January 1, 2003 through August 31, 2009. U.S. companies willing to take the expense hit for such an extension should keep an eye out for the final version of the Belgian Economic Recovery Act.
Stay Current
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Tags: Australia, Belgium, FBT, Fringe Benefit tax, income tax, India, tax