Tax Implications of Equity Compensation on Mobile Employees

HR professionals and employees are often not aware of the tax implications of equity incentives at various stages

By

MICHELLE TAI AND JAMES CLEMENCE

http://www.businesstimes.com.sg/sub/views/story/0,4574,307430,00.html?

IN
ORDER to attract, develop and retain key talent, reward strategies need
to be robust and competitive. Equity compensation has always played an
important role in total compensation and is seen as a key component of
total reward. With an internationally mobile workforce, this creates
significant additional challenges.

Taxing situation: Foreign employees responsible for paying their own taxes are quite often caught by surprise by the 'deemed exercise rule' prevalent in Singapore, and only become aware of this deemed taxable event upon cessation of assignment or employment

Companies are facing constant pressure internally from shareholders and
externally from regulators to ensure that processes are in place to
uphold corporate governance, manage risks and ensure compliance with
tax, social security and regulatory requirements around the world.

With the increased mobility of employees, the human resource (HR)
function is faced with the challenge of administering and monitoring
equity incentive schemes for their mobile workforce and ensuring
compliance with tax, legal and regulatory requirements in various
jurisdictions. It does not help that many tax administrations around
the world are struggling to keep up with the increasing complexity of
equity compensation. In addition, frequent changes in legislation often
create more uncertainty in the appropriate tax treatment to be applied.

So what are some of the concerns in managing equity incentive
schemes for a mobile workforce? More than 100 Singapore-based companies
recently participated in a survey on 'Key Trends of Cross-Border Moves
in Asia' conducted by PwC International Assignment Services. As part of
the survey, participants were asked to share the challenges they faced
in administering equity compensation for their internationally mobile
workforce.

The majority of companies manage their global equity
programmes centrally from corporate headquarters, and are sometimes
assisted by external fund management institutions. Local HR
professionals feel that they do not always have the visibility they
need of their mobile employees' stock activities as this information is
often shared only between the head office and the employee. Even if
information is shared with the local HR, the reports often do not
provide sufficient information to meet the different tax reporting
obligations in each local country.

Respondents also shared
that they may not be fully aware of awards or options granted to
foreign employees in their home locations prior to their relocation to
Asia. Should the employee subsequently be sent on an international
assignment from Asia, companies fear that they may not be in a position
to fully comprehend the potential trailing tax liabilities involved and
the applicable tax laws which may apply.

The survey also found
that some employees or HR specialists may have a misconception about
awards or options granted before the employee relocates to the new
location. Often, this group of employees and HR specialists would
assume that the awards or options are considered tax-free in the host
location, with many not validating this assumption against local tax
laws.

Most HR professionals and employees are often not aware
of the tax implications of equity incentives at grant, during the
vesting period or upon exercise. To complicate matters, tax
implications differ from country to country.

In the context of
globally mobile employees, grant, vesting and exercise may take place
when the employee is residing in different countries (for example,
back-to-back assignments). Understanding the tax laws of different
countries, key events that may trigger tax liability and ensuring
reporting obligations of the various countries are met has proven to be
a major challenge for companies.

One suggestion is to
implement a real-time online tax calculator that estimates tax and
social security withholdings on share awards for an unlimited number of
consecutive assignments, incorporating tax rules of all the countries
the assignee would have resided in. It can either facilitate stand
alone withholding calculations or be fully integrated into in-house HR
systems or third-party administration systems.

Monitoring movements

The benefits that companies can reap from using such a tool are
improved tax compliance, a seamless real-time integration with in-house
or administrators' award systems for automatic calculation of
withholdings as well as the opportunity to re-use the data to enhance
tax return preparation services and advise on corporate reporting and
payroll compliance.

More than half of the companies interviewed
stated that HR seldom or never tracked and monitored the travel days of
their mobile employees. In many companies, the responsibility of
tracking travel days may lie with the business units, secretaries or
the employees themselves. This may be a cause for concern when the
tracking process is not 'owned' or centrally managed as employees'
exposure to tax and immigration obligations may not be fully adhered
to.

The importance of this process has an added significance
in relation to equity incentive awards. Throughout the life of an
award, the employee may have travelled to various jurisdictions for
business or have been placed on international assignments which may
result in multiple tax exposures and trailing liabilities. This aspect
cannot be overlooked.

Foreign employees who are responsible for
the payment of their own taxes are quite often caught by surprise by
the 'deemed exercise rule' prevalent in Singapore. More often than not,
they only become aware of this deemed taxable event upon cessation of
assignment or employment in Singapore.

To better manage the impact of deemed exercise on employees, some suggestions that companies could consider are:

• 
  Where employees are covered under a tax equalisation programme, it is
  essential for companies to ensure that their tax equalisation policy
  clearly addresses and defines what constitutes employment and personal
  income. This allows employees to understand what their tax obligations
  are, especially when it comes to equity incentives and how they would
  be treated under the policy. Based on the responses from our survey,
  many companies shared that they were not aware of the extent to which
  their policy addresses such definitions.

• 
  Regardless of whether equity incentives are treated as one of the
  components to be included in tax equalisation calculations, it is vital
  that companies clearly communicate tax obligations to their employees
  prior to their move to the new location. It is recommended that
  companies engage tax specialists to provide departure and arrival tax
  consultations in the home and host countries so as to give employees a
  better understanding of the tax rules, requirements as well as the
  implications.

• Perform a review of the equity
  incentive schemes currently offered to foreign employees and explore
  alternatives or modifications to the existing equity incentive schemes
  to better manage the tax position in Singapore and the cash flow of
  these employees.
  

  Equity plans developed centrally at a global
  level may be difficult to implement in all jurisdictions, especially in
  situations where employees are mobile during their careers with the
  company. In view of the complexities involved in administering equity
  compensation, it is important that proper tax planning advice is sought
  at the conceptualisation stage to better understand the tax triggers so
  as to avoid double taxation and explore alternative schemes that can be
  offered to their mobile employees.

  
  

  The importance of tracking employees' movements and the impact on awards or options granted should not be underestimated.

  
  

  
  Michelle Tai is senior manager and James Clemence is a partner, PwC
  International Assignment Services. The PwC International Assignment
  Services practice provides services for organistions deploying staff
  across international boundaries. This includes strategic consulting
  advice, planning and compliance services, as well as programme
  administration