Stock-equity compensation plans that comply with U.S. laws may not always translate to other countries, creating mismatches in taxation that diminish tax treaty advantages and complicate withholding methods, two international payroll specialists said Sept. 21.
Employers must look at the plans and details to determine tax treatment in each country, said Patrick Landers, CPP, a partner with Ernst & Young LLP. The attributes of each plan mean behind-the-scene computations often need to be performed because most existing payroll systems are not flexible enough to account for different rates, said Mary Brumm, CPP, director of global payroll training and development at the American Payroll Association’s global management institute.
Companies need to be aware that if some aspects of the plan are not upheld, the entire plan may become nonqualified, Brumm said at a workshop at the APA’s fall forum in Las Vegas.
Global payroll professionals dealing with equity compensation should understand each country’s reporting requirements, Brumm said. This information needs to be gathered and matched up with due dates while keeping in mind that some countries have a different tax year than the calendar year, she said.
Employers with multiple equity compensation arrangements need to rank those plans for compliance exposure, Landers said. Be aware of the visibility of certain individuals to authorities in other countries and know that countries are ramping up monitoring of stock plan activities, requiring special reporting, he said, adding that authorities may return with tax assessments and penalties.
A spreadsheet or manual should be developed for each country, customized based on the organization’s equity plans and country-specific rules. For the U.S., there generally is no tax component until stock options are exercised, but other countries have different tax aspects to consider, Landers said.
The affected employees should understand what is happening—companies should plan to communicate and educate potential tax exposure issues to workers, Brumm said.
Communication plays a key role in controlling a situation, Landers said. Accounting and financial reporting of stock options are affected by payroll-related withholding.
If the rates you are using differ from general statutory rates, bring together various groups in the organization that are involved in stock plans, Landers said.
The legal team should be involved early so if something goes wrong, they can be in the loop, Brumm said. Everybody needs to know who is doing what, including the group that administers stock, corporate tax, human resources and finance, she said, adding that the global mobility team also should be involved.
Employees need to be told to come forward when ready to exercise shares because this may trigger extra expenses if not properly planned, Brumm said. These employees should contact the company to ensure that the exercise does not trigger unintended tax consequences, she said. Additionally, employers should work with stock administrators to possibly pre-clear the stock exercise by showing tax consequences too, Landers said.
Global payroll professionals should stay alert for tax changes, Brumm said.
Because of the mismatched laws governing when equity compensation needs to be taxed and how it should be reported, it is possible that someone may have to pay taxes on such income overseas before being able to credit it on a U.S. tax return, Landers said. Plans developed outside U.S. need to be vetted for U.S. tax treatment and vice versa.
Payroll operations need to determine who is responsible for obtaining the proper information, Brumm said. Among the questions that should be asked: Who is responsible for getting that grid developed on taxation of equity across the countries? Who should deal with reporting requirements across countries? Is there a tax equalization piece? Does the employee understand what is happening?
While some company may not want to spend money in this area, Landers said one audit is all that is needed to uncover a large exposure.
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