Risky Business Managing Tax Risk for your Mobile Workforce

Transcription

1 Risky Business Managing Tax Risk for your Mobile Workforce

2 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 2

3 With you today Ed Gibbons - Principal, IES Andrew Gewirtz - Tax Managing Director, IES Scott Schapiro - Principal, IES 3

4 From the Board Room Audit Committee Top Concerns for 2011 Risk management and crisis response Financial communications/new financial standards convergence Legal/regulatory compliance Uncertain economy and government regulation Leadership/culture/tone at the top IT/emerging technologies (cloud computing) Audit committee effectiveness (composition/evaluation) Globalization (off-shoring and supply chain) Source: KPMG 2011 Audit Committee Conference 4

5 Short Clip Bringing Tax to the Table 5

6 The Current Environment Corporate, payroll and social security tax compliance Broader use of equity awards Long Term Awards Complexity around awards Globally mobile workforces Current and trailing liabilities Difficulty in controlling the process Focus by media Increased scrutiny by tax authorities Mobile Employees Regulatory Activity/Tax Compliance Corporate monetary and brand risk 6

7 KPMG Survey Information by Region and Country Source: KPMG Member Firms Current or increase in audit activity Europe Belgium Cyprus Germany Greece Kazakhstan Ireland Norway Portugal Spain Sweden Switzerland United Kingdom Africa Botswana Morocco South Africa Americas Canada Costa Rica Honduras Mexico United States Asia China Hong Kong India Japan Korea Malaysia Singapore Australia 7

8 Global Equity Tax Risk and Exposure Andrew Gewirtz Tax Managing Director 8

9 Objectives Global Equity Taxation Highlight tax technical issues and those frequently overlooked issues that may inflate risk exposure Timing of taxable event Payroll Trailing liabilities employer and employee tax compliance 402(b) Taxability of beneficiary of nonexempt trust 409A Nonqualified deferred compensation foreign nationals first-year elections Corporate recharge allocation of expense Minimum statutory withholding FICA taxation Share experience on what we see and what we don t see that we should 9

10 Timing of Taxation - Globally We frequently see companies grant awards without prior knowledge of the tax consequences under local legislation, so here is a high-level overview: Type of Award Restricted Stock Awards (RSA) Stock Options Global Point of Taxation Taxed at grant or vest, depends on country rules and when employee receives ownership interest under local law Taxation at grant (if readily ascertainable value or under local law e.g., Belgium, certain cantons in Switzerland absent a ruling) Taxation at vest (discounted option under IRC 409A or transferable at vest, Australia) Taxation at exercise, or at sale of underlying stock (U.S. ISO, Vietnam, UK approved plan, France qualified plan) 10

11 Timing of Taxation - Globally Overview continued: Type of Award Restricted Stock Units (RSUs) Stock purchase plans (ESPP, France-PEE, UK -SAYE, Australia-Salary Sacrifice Plan) Point of Taxation Generally taxed at vest or transfer Taxation depends on plan and country IRC 423 ESPP tax treatment only valid under U.S. tax law, so generally taxable at purchase outside U.S. 11

12 Payroll Issues Global payroll compliance is one of the primary concerns expressed by our clients when addressing equity-based compensation Should we report? Should we withhold? How much to report? How much to withhold? When to report? Timeliness of tax deposits Treas. Reg (c)(3) One-Day rule 12

13 Non-U.S. Payroll Obligations Sampling of countries that do NOT generally require income tax withholding on equity compensation: Australia Belgium Brazil China Country Unless employee fails to provide TFN Dependent on plan administration and recharge Condition Generally no individual income tax withholding but corporate withholding required on settlement of recharge Dependent on chargeback (year of departure only) France Social tax withholding only for residents, nonresident income tax withholding required as of April 1, 2011 Hong Kong Indonesia Japan Singapore Switzerland Sweden Many in Latin America Reporting but no withholding Dependent on chargeback Dependent on issuing entity; if US branch then nonresident withholding applies Reporting but no withholding, except for deemed exercise at departure Withholding may be required for expats Withhold cash from the regular monthly salary only; 25% final flat rate available for nonresidents upon filing and approval of application Dependent on chargeback 13

14 Frequently Overlooked U.S. Tax Issues Employer and employee tax compliance associated with trailing liabilities Allocation of equity compensation expense among multiple entities 402(b) Taxability of Beneficiary of Nonexempt Trust Important consideration for foreign plans that make use of trust arrangements for their qualified or tax preferred plans (e.g., Ireland, Australia, Israel) or employee share plans (e.g., UK EBT) 409A Nonqualified Deferred Compensation Non-US person becomes US taxpayer and defers amounts in nonqualified deferred compensation plan not excepted from 409A Former nonresident alien in plan subject to 409A becomes US taxpayer and plan does not comply with 409A payment requirements 14

15 Corporate Tax Deduction for Equity Expense Is a corporate tax deduction available? If a deduction is available, when is it available and how much? To charge or not to charge? Cost/benefit of the deduction Do we need to allocate expense to multiple subsidiaries for globally mobile employees? What to do to secure a deduction? Do we need an intercompany agreement? 15

16 Minimum Statutory Withholding Requirement under US GAAP Prescribed by ASC 718 For financial reporting purposes awards are classified either as equity (e.g., share-settled) or liability (e.g., cash-settled) Equity Awards may be reclassified from equity to liability awards if the company exhibits a pattern of cash settlement, withholds taxes in excess of minimum statutory rates, or permits an invalid broker-assisted cashless exercise (ASC ) For this purpose must consider tax rates in all applicable tax jurisdictions (this includes hypothetical taxes deducted for tax equalized international assignees) 16

17 What are Wages Subject to FICA Tax? Federal income tax and FICA tax provisions are similar, but do not mirror each other There are situations where compensation may be exempt from income tax but not from FICA tax or subject to income tax but not to FICA tax Non-elective A taxpayer may not elect to participate in the U.S. Social Security system One may not elect out of the U.S. Social Security system if they otherwise meet the criteria for participation and no exception applies 17

18 When Does Equity Income Result in a Social Security Tax Liability*? *terms and taxable events indicated are generalizations for purposes of illustration only United States Foreign Country Deferred Compensation Later of: (1) when the services are performed or (2) date on which the right to the amount is not subject to a substantial risk or forfeiture. IRC 3121(v) Stock Options Qualified stock options 422 no FICA Non-statutory stock options FICA taxable at exercise Restricted stock FICA taxable at vest Restricted stock units FICA taxable at vest (subject to special timing rules and exceptions under Reg (v)(2)-1) ESPP 423 no FICA Deferred Compensation Depends if jurisdiction recognizes deferral Stock Options Qualified stock options 422 has no relevance outside of the U.S. so taxed under local law applicable to options. Taxation of locally qualified plans, such as French free shares or UK approved plans, will depend on local legislation and be exempt from social taxes or taxed at reduced rate Non-statutory stock options generally at exercise unless taxable at a different time under local law (Examples: Panama, Australia, Belgium) Restricted stock taxable at grant or vest depending on country Restricted stock units generally taxable at vest/transfer ESPP 423 taxable at purchase 18

19 State Reporting of Equity Compensation Short Term Business Travelers Scott Schapiro - Principal 19

20 State Income Tax Withholding Some states have de minimis thresholds (NY, GA, etc.) that must be identified and monitored. Equity comp v base pay What? Employers Need to Know Company officers could be liable for underwithheld amounts. Audits may be aggressive in certain states. Payroll systems may be ineffective in handling. 20

21 Multistate Focus on All Compensation The identification and assessment of tax on short term business travelers continues to be a focus There has been significant movement by organizations to implement procedures to assess their exposure Government regulation will continue to increase Public pressure growing NY Times Article 3/21/10 States Look Beyond Borders to Collect Owed Taxes Anyone who crosses a border for work probably owes income tax in that state States have greater access to data warehouses to help them better track taxes owed State audit emphasis Changing rules/guidelines 21

22 State Income Tax Withholding The Basics Requirements and obligations of employer well defined in most cases The employer is ultimately responsible for proper withholding and reporting of their employee s state sourced income Sourcing rules (generally) Income should be sourced to state or states where employee performs services Nonresident employees traveling to different states should have state income tax (SIT) withheld in those states Treatment of deferred comp/equity compensation generally follows withholding treatment with specific exceptions and/or qualifiers 22

23 Nonresident State Income Tax Withholding In general, employers are required to withhold SIT on nonresidents of a state if services are or were performed by the employee in that state. Section 114 (former Public Law ) exception retirement/ pension income Exceptions/limitations: De minimis rules of certain states (not always applicable to equity compensation) Reciprocal agreements between states Telecommuting (convenience of the employer doctrine) Exemption certificate allocation 23

24 WA De Minimis Jurisdictions As of September 1, 2011 MT ND* MA VT ME OR ID WY SD MN WI MI CT NY NH CA NV AZ UT NM CO NE KS OK IA MO AR IL IN TN KY OH WV SC PA VA NC RI NJ DE MD DC MS AL GA TX LA FL AK States with de minimis rules or exceptions States without de minimis rules or exceptions HI * Eff 1/1/12 Source: KPMG LLP International Executive Services PR 24 VI

25 State Activity (samples) New York California Aggressive enforcement for almost a decade Large assessments especially on allocation of equity compensation Aggressive since the mid-90s San Francisco Payroll Expense Tax Connecticut Enacted New York s de minimis regulations as their own Uptick in Connecticut audits Increase in audit activity in states that border a state with no personal income taxes Massachusetts, Georgia, etc. Increase in review of payroll apportionment factors, equity compensation calculations and payroll reported in corporate tax audits 25

26 Equity Awards & Compensation Basis for equity based compensation typically spans multiple years Employers required to allocate gain based upon time an employee performs services in a particular jurisdiction. Many employers have not instituted procedures necessary to track employee movements for equity based compensation withholding purposes. Highly compensated individuals, such as C suite executives, travel to numerous states while executing their responsibilities. States are aware of such employee movements and are becoming more aggressive in their enforcement efforts with respect to employer withholding. Public corporations, private equity firms, financial institutions and non US based companies with US presence are key audit targets 26

27 Equity Awards & Compensation Most states follow federal treatment of equity compensation (grant to vest) Some states do not follow federal treatment (examples) Hawaii Does not tax income recognized by an employee from stock options granted by a qualified high technology business. Haw. Rev. Stat , Pennsylvania ISO taxed the same as NQs, taxing the spread on the exercise date. 61 Pa. Code 101.6(f) Rhode Island Does not tax income from stock options granted by qualifying corporations to RI resident employee. R.I. Gen. Laws ,

28 Equity Awards Lack of state to state uniformity or formal guidance on non resident allocation Grant to vest vs. grant to exercise for example: California - wages derived from stock options are allocated between the states in which the employee performs services for the employer that grants the option. This allocation begins when the option is granted and ends when the income derived becomes taxable. CA Information Sheet DE 231 Connecticut - the compensable period is based on the first day of the taxable year of grant and ends on the last day of the taxable year of exercise in the case of an option or the last day of the taxable year of vesting, in the case of restricted stock. Conn. Agencies Regs (b)- (16),(18) 28

29 Equity Awards (Cont.) New York : Grant to vest allocation based on services performed within the state for stock options, non statutory options (w/o readily ascertainable FMV) and SARs - NYS TSB-M-07(7)1 Withholding required on 100% of deferred compensation unless the employee provides the employer with the proper allocation percentage for the non-deferred income and the deferred compensation is less than $1 million, or the employer has adequate records to determine the proper allocation percentage NYS Withholding Tax Field Audit Guidelines De minimis guidelines do not apply with respect to equity compensation 29

30 Equity Awards Challenges to Withholding on Gain Lack of state to state uniformity or formal guidance on non resident allocation how do you build a system or process without uniformity? Attempts to come into current compliance for SIT base compensation requires multi-year state tracking for equity compensation Complexity increases when global mobility is taken into account What about local payroll taxation, e.g. Philadelphia, San Francisco Third party plan administrator and payroll vendor communication issues and concerns 30

31 Multistate Withholding Risks & Control Obstacles Potential risk associated with noncompliance Audit risk Public relations Tax principal/penalty/interest assessments Barriers to compliance Time and expense system limitations Third-party vendors unable to comply Corporate culture Employee impact Employers cannot track employee movement on a daily basis Inconsistent policies and procedures for monitoring a mobile workforce 31

32 Legislative Outlook The Mobile Workforce State Income Tax Simplification Act of 2011 H.R Introduced 5/12/11 Limitation on state income tax withholding on all wages or other remuneration Taxed in resident state and nonresident state (if present more than 30 days) A day is where an employee performs a preponderance of his duties (if in both resident and nonresident state, considered a nonresident day) If time and attendance system maintained; data from system must be used..if not, employee estimate of time to be spent in a nonresident state may be sufficient for allocation Similar legislation has been introduced in past Congressional sessions Opposition from key states seen as the major obstacle states with the most aggressive tax compliance teams have the most to gain [CA, CT, NY ] 32

33 Varying Approaches to Multistate Withholding Noncompliance Not complying with nonresident withholding rules regardless of where compensation was sourced as earned. Partial Compliance Establish a system for all or select employees who perform services in specific states to track source income. Full Compliance Building an in-house system to ensure proper withholding and source recognition of earnings in nonresident states. FULL COMPLIANCE IS NOT AN OPTION Any approach that does not involve withholding and remitting taxes on all wages earned in nonresident state could have an associated tax exposure, including penalty and interest assessment. 33

34 Multistate Withholding What Can Be Done? Evaluation/Assessment Identify states and employees that have multistate activity Identify records/sources that provide indicators of activity Compliance Policy Design Determine processes to be used for multistate compliance Communicate policies to employees Determine internal audit procedures Practical Issues/Concerns Monitoring of federal & state legislative and related activity Voluntary Disclosure Programs 34

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