Crystal Gronau & Marlene Zobayan
Rutlen Associates LLC
October 9, 2015, Session 5
This presentation contains general information only
and the respective speakers and their represented
firm are not, by means of this presentation, rendering
accounting, business, financial, investment, legal, tax,
or other professional advice or services. This
presentation is not a substitute for such professional
advice or services, nor should it be used as a basis for
any decision or action that may affect your
business. Before making any decision or taking any
action that may affect your business, you should
consult a qualified professional advisor. The
respective speakers and firm shall not be responsible
for any loss sustained by any person who relies on
this presentation.
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To understand the payroll challenges faced
by companies operating global stock plans
◦ Parent company
◦ Foreign affiliate
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To appreciate the typical non-payroll
compliance requirements
To understand U.S. payroll challenges for U.S.
expatriate and inpatriate employees with
equity compensation
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Central administration of stock plans by parent
company
Only domestic payroll feeds
Compliance requirements (for payroll employer):
◦ Tax withholding & reporting
◦ Employer social taxes
◦ Legal requirements
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Corporate tax deductions
Locally qualifying plans
Mobile employees
Time zone, currency and language issues
Staying up to date
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Stock options
◦ Non-qualifying
◦ Qualifying
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Restricted stock awards
Restricted stock units
Performance shares
Employee stock purchase plans
Stock bonuses
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At grant
◦ 83(b) elections
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At vest
◦ Restricted stock awards
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At release
◦ Restricted stock units
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At exercise
◦ Non-qualifying stock options
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At sale
◦ Incentive stock options
◦ Employee stock purchase plans
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At grant
◦ Most countries for restricted stock awards
◦ Some countries tax stock options
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At vest
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At exercise
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At purchase
◦ Most countries for restricted stock units
◦ Some countries tax stock options
◦ Most countries tax stock options
◦ Most countries for employee stock purchase plans
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At sale
◦ Brazil, Israel, most locally qualifying plans
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Potential Solutions
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Deduct tax through salary
Ask employee for check
Withholding from shares
Withholding from sale proceeds
Proceeds to subsidiary
May require different processes for different
plans or sets of employees
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Informs
company of
exercise
Proceeds or Shares
Withholding from
next paycheck
Remits taxes
Advantages:
Employee receives
proceeds quickly
Correct withholding is
applied
Employee can retain
all the shares
Disadvantages:
No withholding
mechanism for terminated
employees
Salary may not be
sufficient to cover liability
Local employer needs to
act quickly
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Informs
company of
exercise
Proceeds or Shares
Employee cuts check
Remits taxes
Advantages:
Employee can retain
all the shares
Disadvantages:
No withholding mechanism
for terminated employees
(unless required as a
condition of exercise/release)
Employer acts as collection
agency
Foreign exchange/ wire issues
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Informs
company of
exercise
Remits taxes
Proceeds or Shares
less withholding
Actual
rate
Actual
withholding
Advantages:
Ensures withholding for
terminated employees
Correct withholding is
applied
Disadvantages:
Early planning is a must!
Withholding has to be at
minimum statutory rate to
avoid U.S. accounting issues
Administratively burdensome
Company has to find the cash
to remit to tax authorities
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Proceeds less flat
percentage
Flat withholding
percentage
Reconcile withholding
Remits taxes
Advantages:
Disadvantages:
Employee receives
proceeds quickly
Ensures some
withholding for
terminated employees
Withholding process done
twice
As usually at flat rate,
initial taxes withheld may
be too much or too little
(employee expectation
management)
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All proceeds
Proceeds less
withholding
Remits taxes
Advantages:
Disadvantages:
Ensures withholding for
terminated employees
Correct withholding is
applied
Administratively simple
As payrolls are usually monthly
outside U.S., employee may
have to wait some time for
proceeds
Need to be careful of US GAAP
Employee has no ability to
retain shares/tax
disadvantageous
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Timing of reporting
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Grant
Vest
Exercise
Sale
Annual
How will local tax/payroll department get
access to data?
◦ Beware of Data Privacy issues
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Legal Requirements
◦ Local securities filing
◦ Contract law
◦ Data privacy
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Foreign exchange
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Difficulties in communication due to
◦ Time zone
◦ Language
◦ Who is going to answer employee questions?
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Currency issues
◦ Are there cash disbursement restrictions?
◦ How will funds be disbursed to employees?
 Local currency: check/wire
 Through payroll
 Cost to employee
◦ What exchange rate should be used?
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Assignees – including expatriates, inpatriates,
third-party nationals
◦ Long or short term
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Permanent transfers
Business travelers – including commuters
Telecommuters
Can be domestic or international
Individuals can have more than one type of
mobility
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The general rule is that income is sourced where
it is earned or over the “earnings period”
Each taxing jurisdiction may have a different view
of the earnings period
U.S.
◦ Generally where “earned”
◦ Equity usually deemed to be earned from grant to
vest
 Maybe overridden by treaty
◦ State sourcing may vary from Federal
 E.g., Ohio stock options
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Employee is granted an award which vests on
the 4th anniversary. Employee relocates 2
years after grant and exercises 3 years later.
Chart shown the percentage sourced to
jurisdiction of grant
U.S.
Singapore
Japan
0%
20%
40%
60%
80%
100%
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Since January 1, 2006 Federal sourcing is
based on US workdays from grant to vest
Some treaties state otherwise:
◦ US: Canada
◦ US: Japan
◦ US: UK
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Specific grants may require different sourcing
◦ E.g., an award granted for a project undertaken in a
particular location
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US resident
◦ Tax entire award
◦ Allocate award between US and foreign source
◦ Foreign earned income exclusion and FTCs can be
taken against foreign source income
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US non-resident
◦ Tax US sourced portion only
International Assignees
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Tax equalization process requires special
treatment
◦ Expatriate pays tax only to same extent they would
have paid in the their home country
 Hypo-tax
◦ Company pays host country and home country
actual taxes
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Tax impact of exercising stock options varies
widely due to location at:
◦ Grant, vest, exercise and sale
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What countries require reporting
Is the inpatriate tax equalized
◦ Hypo tax compared to actual tax deposits
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What social tax scheme is the employee
covered by – home or host
Do you withhold taxes at the minimum
statutory tax rates or sell to cover anticipated
actual tax liabilities
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What countries require reporting
Is the expatriate tax equalized
◦ Hypo tax compared to actual tax deposits
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What social tax scheme is the employee
covered by – home or host
Do you withhold taxes at the minimum
statutory tax rates or sell to cover anticipated
actual tax liabilities
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Each double tax treaty is different
U.S has double tax treaties with almost 70
countries
BUT generally an individual is tax exempt if :
◦ The employee is present in the host country for 183 days or
less,
 In the taxable year concerned or rolling 12 month period
 Referred to as 183 day rule
◦ The employee compensation is paid by or on behalf of an
employer which is not a resident of the host country, and
◦ The compensation is not borne by a Permanent
Establishment (PE) or fixed base which the employer has in
the host country
◦ Economic employer
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Similar to double tax treaties but focus is
social security
U.S. has totalization agreements with 25
countries
Generally, individual can be covered in “Home
Country‘” for up to 5 years
May mean that income tax and social tax are
sourced differently for the same income
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Peter, an employee of ACME Inc. in the U.S. is assigned to work
in Germany for 3 years starting July 1, 2014. ACME obtain a
Certificate of Coverage to retain Peter in the U.S. social security
system during the course of his assignment. In March 2015,
Peter receives a bonus of $10,000 related to his performance
during 2014. What taxes have to be paid?
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U.S. income tax on $10,000 x 50%*
U.S. social tax on $10,000 x 100%
German income tax on $10,000 x 50%
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Does the payer matter?
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* Assuming a US citizen and the company takes a position that
U.S. withholding is not required on foreign sourced income as
the individual is subject to foreign withholding
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Shadow payroll for international assignees
◦ Exchange rates
◦ Actual or hypo tax
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For short term mobile employees from non
treaty countries – How do you withhold on
and report earnings?
◦ Form W-7 – Individual Taxpayer Identification
Number
 Timing and processing issues
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Tracking and allocating multistate domestic
workdays – includes sales team
◦ Permanent transfers
◦ Business travelers
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Taxes withheld on equity transactions have
the same withholding deposit rules as a
regular payroll
Tax withholding in excess of $100,000
◦ Must be deposited the next business day
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Withholding rates change annually
Constant international law changes
◦ Withholding requirements
◦ Reporting requirements
◦ Legal requirements
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Consultant update newsletters
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Crystal Gronau
Rutlen Associates LLC
cgronau@rutlen.com
650-279-5879
Marlene Zobayan
Rutlen Associates LLC
mzobayan@rutlen.com
650-868-9282
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