Mastering ESPP and RSU Withholding Outside the United States By Jennifer Kirk and Narendra Acharya of Baker & McKenzie
In today’s world, your company cannot afford to be noncompliant with its global stock plan withholding and reporting obligations. On a daily basis, we hear about the fiscal challenges affecting governments around the world. In addition to the cutbacks of programs and increased taxes and fees, governments remain focused on greater enforcement of existing tax obligations. In a number of countries, revenue collected from employer tax withholding (including employer and employee contributions to social taxes) is often the largest source of tax revenue–but still not sufficient. Whether through increased frequency of payroll audits, hiring more specialized teams of auditors, and/or more robust or extra reporting requirements, it is reasonable to expect that stock plan withholding practices will be facing increased scrutiny on a global basis.
As a general example, in December 2010, the UK tax authorities (HMRC) published a discussion document aptly titled “Improving the Operation of PAYE – Collecting Real-Time Information.” Not content to rely on payroll filings, which may only be made annually, and the periodic audit, HMRC in the discussion document envisions a process where it is electronically notified whenever payment is made to an employee and would confirm that the appropriate income tax and social taxes (National Insurance Contributions) have been deducted. The latest version of the discussion document no longer contains the more controversial proposal of having the compensation funds flow from the employer to HMRC (as a “central calculator” and disbursement agent) and then to the employee. Regardless of the outcome of the proposals, they are a great example of government’s focus on getting the money sooner and greater review of payroll calculations.
While a “central calculator” may not be imminent in the UK, even the current employer withholding and reporting requirements in the UK, as an example, can be challenging. First, there are additional reporting requirements beyond traditional payroll reporting that apply to equity compensation plans. This includes the annual share schemes return (Form 42) where the details of equity grants need to be specifically reported. The HMRC is then better able to cross-check the annual payroll reporting done by the UK employer to confirm that the taxable amount of equity compensation is indeed reported (and withheld upon) correctly. Second, there are timing requirements such that if the appropriate UK tax is not collected within 90 days, the employee is deemed to receive an additional benefit from the employer equal to the tax that should have been withheld, but on a grossed up basis. In short, noncompliance in the UK can be quite expensive.
During the 19th Annual NASPP Conference, the session “Mastering ESPP and RSU Withholding Outside the United States” will answer the key questions: the who, what, where, why and how of withholding for global stock plans. Don’t allow your company to be an easy target for foreign governments seeking tax revenue, as the penalties (and unwelcome scrutiny from foreign tax agencies) will be a much greater burden than ensuring that it gets done correctly in the first place.
Across the globe, governments are working to improve financial stability, resulting in additional efforts to increase tax revenue. This means that countries are looking to capture incorrectly reported income or insufficient tax remittance and also update the timing or method for income reporting and tax withholding. Equity compensation is often top on the list for countries looking increase tax revenue, which can lead to some pretty drastic changes (think Australia).
Canada 2010 Budget
In case you missed it, Canada’s 2010 Budget proposes changes that will tighten tax rules for stock options. There are two changes that together will have a large impact on the administration of stock option programs in Canada. First, employees will no longer be able to defer income from options exercises to sale date. Rather, income will be realized, reportable and taxed at the exercise. In addition, the “undue hardship” exception for income tax withholding on option exercise income will no longer be available after 2010, meaning the employers will now be required to withhold income tax on option exercises. Stock plan management teams will need to get started as soon as possible establishing new tax withholding procedures and communicating changes to employees. There’s more to the 2010 Budget as it relates to equity compensation. Find out all the details in this alert from Deloitte and make sure you’re signed up to receive updates as they come in.
Ireland 2010 Finance Bill
Prior to the 2010 Finance Bill, employers in Ireland were generally only required to report on the grant and exercise of stock options and ESPP; reporting stock-based awards like restricted stock and RSUs was only required upon notice by the Irish Revenue Commissioners. However, after the 2010 Finance Bill, employers in Ireland must now report on the grant and vesting of all forms of equity compensation including restricted stock and restricted stock units. For companies already reporting both at the request of the Revenue Commissioners, the good news from this Bill is that the forms for reporting equity compensation will be combined to a single form. Reporting is generally due by March 31, but because the composite form isn’t available yet, the filing deadline for 2009 reporting has been extended to July 9, 2010. For more information on the Finance Bill 2010, check out this alerts under the Ireland Country Guide.
Testing UK Residency in the Courts
We’ve also seen a few ground-breaking rulings regarding UK residency. If you have employees on assignment in the UK, these recent rulings mean that now is a good time to take a closer look at the residency status of mobile employees working in the UK or who have left the UK on assignment. The HMRC is in the process of reviewing residency claims. With these rulings (from litigation that is the product of the HMRC’s efforts), some existing assumptions about claiming non-resident status in the UK have been challenged. Residency has never been a concrete idea in the UK. Although there are definite and obvious lines that disqualify employees from claiming non-resident status, there is still a significant amount of grey area. When reviewing residency, the HMRC takes all facts and circumstances into account, which means that companies determining how to withhold and report must also assess each mobile employee individually.
For employees leaving the UK to work abroad, the most significant implication of two recent rulings is that it will be more of a challenge to claim non-resident status if there isn’t a clear break with social or family ties in the UK. For employees on assignment to the UK, one recent ruling implies that when reviewing cases where the status of resident and not ordinarily residence (see my prior entry on UK mobile employee vocabulary), the original intent of the individual can be trumped by the actual outcome of the assignment. You can find more on these recent rulings in the alerts under the UK Country Chapter Guide.
Keep Up!
Have you been keeping up with international developments? There’s a lot on the move these days, and to stay ahead of the curve, you need to know what’s going on. The NASPP Global Stock Plans portal taps into resources from all of our Task Force members to provide you the latest alerts on global legislation, litigation, and other changes that impact equity compensation. If you’re not already on the list to receive global alerts by e-mail, sign up now!
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”.