FAS 123R and Cross-Border Tax Issues - Blog Entry, June 10, 2008

Tuesday, June 10, 2008

Practical International Tax Strategies' Executive Briefing

FAS 123R and Cross-Border Tax Issues

Excerpt from Practical US/International Tax Strategies by Albert W. Liguori, Michael Murphy and J.D. Ivy (Alvarez & Marsal Taxand, LLC)

Most
public companies provide some form of stock compensation to their
executives and employees and as a result must grapple with the tax and
financial statement treatment of such equity compensation awards.
Crossborder employment situations further complicate the tax and
financial statement treatment of these awards.

The
impact of recent developments in the transfer pricing arena as they
relate to how equity compensation is treated under Statement of
Financial Accounting Standards No. 123R (FAS 123R) and FAS 109 have now
become natural opportunities for companies to determine not only
whether they are in compliance with the financial statement and
transfer pricing rules but also to undertake some tax-efficient
planning.

Under FAS 123R, stock based compensation, which
includes stock options and restricted stock units, must be valued at
grant date and recognized as an expense for book purposes over the
equity compensations’ vesting period. The vesting period is also known
as the “service period” for which an employee earns the right to
benefit from such equity compensation. Naturally, the amount expensed
must be tax-effected. However, most foreign jurisdictions as well as
the U.S. do not allow a tax deduction for equity compensation until the
vesting is complete or the equity compensation is exercised. This
difference in time (i.e., expense now, deduct later) results in
deferred tax accounts. When accounting for these deferred taxes, it is
important to know if and where a deduction will ultimately become
available for the stock compensation, a task easier said than done.

Read More on FAS 123R