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Global Equity Services
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Legal Alert
March 9, 2010
For more information please contact one of the GES partners listed below.
Narendra Acharya, Chicago
narendra.acharya@bakernet.com
June Anne Burke, New York
june.anne.burke@bakernet.com
Edward Burmeister, San Francisco
edward.d.burmeister@bakernet.com
Valerie Diamond, San Francisco
valerie.h.diamond@bakernet.com
David Ellis, Chicago
david.w.ellis@bakernet.com
Jennifer George, San Francisco
jennifer.b.george@bakernet.com
Jennifer Kirk, San Francisco
jennifer.f.kirk@bakernet.com
Barbara Klementz, San Francisco
barbara.klementz@bakernet.com
Bonnie Levitt, San Francisco
bonnie.k.levitt@bakernet.com
Brian Wydajewski, Chicago
brian.wydajewski@bakernet.com
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Act Now to Address Important Tax Changes and New Requirements in Canada, India and Ireland
Elimination of Stock Option Deferral Election in Canada
As
part of the 2010 federal budget announced on March 4, 2010, the
Government of Canada has proposed to eliminate the tax deferral
available with respect to income from stock options. Under the current
rules, one-half of the spread (i.e.,
the difference between the fair market value of the shares at exercise
and the exercise price) at exercise of options (or 25% in the case of
Quebec employees with respect to Quebec income taxes) is exempt from
income tax (provided certain conditions are satisfied) (the "one-half
exemption") and the optionee typically is able to elect to defer
income tax due on the remaining one-half of the spread at exercise up
to C$100,000 worth of options that vest in any one year until the
optionee sells the shares, dies or becomes a non-resident of Canada.
As
the budget is almost certain to be enacted, optionees are no longer
able to elect to defer income tax due on the remaining one-half of the
spread for option exercises after 4 p.m. EST on March 4, 2010.
Practically, this change should have little impact on most optionees,
as most individuals typically do a cashless exercise, in which case
they cannot take advantage of the deferral anyway. The one-half
exemption will continue to apply for options exercised to acquire
shares in the parent company (including pursuant to a cashless sell-all
exercise).
According
to the Government, the elimination of the deferral election is intended
to avoid situations where employees whose stock decreased in value
between the time the options were exercised and the time the shares
were subsequently sold were unable to meet their tax obligations. The
budget provides some relief for individuals in this situation, so
please consult your regular GES attorney if you would like more
information for your employees. The budget also clarifies that local
employers must (as in the past) withhold income tax (and Canada Pension
Plan contributions) on the spread at exercise (subject to the one-half
exemption) and remit such amounts with all other tax withheld at source
in respect of all employee salary and benefits. Companies should
ensure that local payroll in Canada is aware of these changes and that
any employee communication materials are updated to reflect the
elimination of the deferral election.
India FBT Refund Process Published - Action Required by March 15, 2010!
As
you may recall, the June 6, 2009 Indian budget announced its proposal
to eliminate the "fringe benefit tax" ("FBT") applicable to employee
equity awards with effect from April 1, 2009. Under the
FBT regime, FBT was payable in advance in four quarterly installments
and the first installment of FBT for the 2009/2010 tax year (i.e., April 1, 2009 – March 31, 2010) was due on June 15, 2009. Thus, companies may have paid some FBT on the June 15, 2009 payment date prior to FBT being abolished, yet the effective date for abolishing FBT was April 1, 2009. Consequently, companies should be entitled to a refund for the FBT paid, but until now, it was uncertain whether and how such refund could be obtained.
On
January 29, 2010, the Central Board of Direct Taxes ("CBDT") published
a circular establishing the procedure for recovering FBT paid on equity
award income paid in the 2009/2010 tax year. As you may
recall, FBT was an employer-paid tax, but it was possible to "transfer"
the cost to employees either by collecting funds from employees in
advance of paying the FBT, or by paying the FBT from the company's own
funds and subsequently recovering the cost from its employees. The
January 29th circular discusses adjusting both employer-paid FBT, as
well as FBT that had been paid over by the company from its own funds
but subsequently recovered from the employee. In
both cases, the company will have to adjust its last quarterly advance
payment for the 2009/2010 tax year (due by March 15, 2010) to deduct
the FBT paid on equity income during the first quarter. (Note that the Indian employer is likely paying FBT for other fringe benefits and, therefore, still making quarterly installment payments.) It appears this will be the only way to obtain a refund. Therefore, companies will have to act by March 15, 2010 in order to "recover" the FBT previously paid.
We
recommend contacting your local entity(ies) in India to make sure they
are aware that an adjustment is possible and that they adjust their
taxes accordingly in this last 2009/2010 tax year payment date.
The CBDT has not issued guidance on how the employee may seek a refund for FBT collected by the company and paid over to the Government with the June 15, 2009 installment. For
now, it seems the only way the employee might obtain a refund under
this scenario would be if the company provided the refund after seeking
an adjustment to its tax liability for the advance FBT payment. Further guidance is awaited on this issue.
New Tax Reporting Obligations for Equity Awards in Ireland
The Irish
Department of Finance published the Finance Bill 2010 on December 9,
2009. As a result of the new Finance Bill, employers now have a
mandatory tax reporting duty for all forms of equity awards. Previously, employers in Ireland were required to report the grant and exercise of stock options and the purchase of shares under an ESPP on Form S02 by March 31 of each year (for grants and exercises/purchases in the previous calendar year). Employers
were not required to report the grant or vesting of stock-based awards
(such as restricted stock or restricted stock units) unless the Irish
Revenue Commissioner sent a notice in writing to the employer
requesting a report. If an employer received such a notice, the employer was required to report the grant and vesting of the stock-based awards on Form P11D also by March 31 of each year.
The Irish Revenue Commissioners are in the process of combining the Form S02 and the Form P11D into one composite form for reporting of stock options/ESPP and stock-based awards going forward. Note that employers will not be required to file a report for 2009 until the composite form is available and may no longer use the old S02 or P11D Forms to file a report. The new composite form generally will be due by March 31. However, since the composite form has not been finalized, the Irish Revenue Commissioners have extended the filing date for the composite form for 2009 until July 9, 2010.
Companies
should ensure their Irish entities are aware of the new reporting
obligations and do not attempt to file a Form S02 or P11D by March 31,
2010 (for grants and taxable events in 2009). Please ask your GES
attorney to let you know when the new composite form has been issued,
so that the tax reporting obligations for 2009 can be satisfied.
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Pursuant to
requirements related to practice before the Internal Revenue Service,
any tax advice contained in this communication (including any
attachments) is not intended to be used, and cannot be sued, for
purposes of (i) avoiding penalties imposed under the United States
Internal Revenue Code or (ii) promoting, marketing or recommending to
another person any tax-rated matter.
Baker & McKenzie
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