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1 Mobility Tax Compliance: You ve Heard the Risk, But What Do You Do? BEFORE WE START PLEASE SETUP LIVE POLLING ON YOUR PHONE Text MOBILITYTAX to to join. Next, just type in your answer to questions when displayed. For institutional use only 1

2 Mobility Tax Compliance: You ve Heard the Risk, But What Do You Do? Sinead Kelly Partner, Baker McKenzie Matthew McKittrick Managing Director, Moss Adams Robert Turner Director, Fortinet Virginia Crofoot Sr. Manager, Charles Schwab SPS March 27, 2018

3 Today's Agenda Introduction The case for compliance and where to begin with mobility tax Aligning resources and IT systems to build auditable processes Hear from a peer, an Issuer s adoption experience For institutional use only 3

4 Panelists Robert Turner Director, Stock Administration Fortinet, Inc. Sinead Kelly Partner Baker & McKenzie Matthew McKittrick Managing Director Moss Adams Virginia Crofoot Senior Manager Charles Schwab Robert Turner is a seasoned and accomplished stock administration professional, with significant experience managing a wide range of equity compensation matters for both public and private companies. He holds a BS degree in Business Administration from California Polytechnic State University, San Luis Obispo, CA Sinead's practice focuses on tax and regulatory compliance for executive compensation arrangements and global equity and incentive plans. She has an LL.B. from Queen's University Belfast and an LL.M. from the University of California, Hastings College of the Law. Matt has over 20 years of consulting experience providing a wide range of business process, application and data analytics solutions to help clients address regulatory and compliance challenges. He has a BA in Economics from University of Virginia and an MBA from University of Colorado. He is a Certified Information Systems Auditor and a Certified Equity Professional (CEP). Virginia has 10 years of combined experience in stock plan administration and SOX compliance. She is a graduate of Indiana University with a bachelor's degree in accounting, Certified Public Accountant (CPA) designation, and is a Certified Equity Professional (CEP). For institutional use only 4

5 Fortinet (NASDAQ: FTNT) Secures the largest enterprise, service provider, and government organizations around the world, whether in networked, application, cloud or mobile environments Ranks #1 in the most security appliances shipped worldwide More than 330,000 customers trust Fortinet to protect their businesses Employee Population Total Employees: ~5,230 US Employees: ~1,670 Non-US Employees: ~3,560 Equity Award Practices Options (NQ) RSUs (some PSUs) ESPP For institutional use only 5

6 POLL QUESTION 1 What level of income sourcing for your mobile employees are you currently performing? a) Domestic Only b) International Only c) Business Travel Only d) Some Mix of the Above e) What is Income Sourcing? f) Not Yet Handling For institutional use only 6

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8 The case for compliance and where to begin with mobility tax For institutional use only 8

9 Tax Compliance Challenge for Mobile Employees: An Overview Transfer Transfer Jurisdiction A Grant Jurisdiction B Vesting Period Jurisdiction C Vest Date RSU Gain/ Option Spread Source Taxation? 100% as grant location? Any tax withholding or reporting? Source Taxation? Any Exemptions how long in Jurisdiction B? Any tax withholding or reporting? 100% Resident Tax? Any tax withholding or reporting? Any double withholding relief? Citizenship/residency? Social taxes?

10 Equity Income Sourcing - Global Citizenship taxation - US federal tax on 100% worldwide income for citizens and other tax residents (very rare) "Source" taxation - where income deemed earned (very common): Where did the employee work from grant to vest, grant to exercise, etc. Different sourcing rules for different jurisdictions US Treasury Regulations employment over option vesting period Some US tax treaties employment from grant to exercise (for options)

11 Equity Income Sourcing - Domestic State rules may differ from US federal income tax sourcing rules Virginia and California - grant to exercise New York grant to vest Tax based on location at grant (North Carolina) Equity award appreciation in-state (Ohio) Proposed Mobile Workforce State Income Tax Simplification Act 30 day in state rule

12 POLL QUESTION 2 Has your company been audited for mobile employee income sourcing and tax compliance? a) Yes, by a US state b) Yes, by a non-us jurisdiction c) No/Not that I know of For institutional use only 12

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14 Key Locations of Consideration Internal and External Factors Key Domestic Locations California, New York, Pennsylvania Connecticut (recent Supreme Court case) Key Countries US, Canada, France, Israel and UK (withholding countries) Australia and Japan (no withholding, but reporting required) Recent general audit activity around equity awards in Belgium Key Locations For Your Company Large employee and/or mobile employee populations Location of mobile executives Biggest risk states/countries For institutional use only 14

15 Making the Case for Compliance Increased scrutiny by tax authorities Employer audit Employee audit Increasingly complex tax laws Increased use of equity? Globally? Increased mobility within company? Employee relations and litigation re withholding errors Corporate risk - reputational, penalties For institutional use only 15

16 Conducting an Exposure Assessment Develop a high-level exposure assessment Pick a sample timeframe and focus areas Develop a methodology for determining reasonable estimates for employees and equity grants Prepare range of hypothetical mobility exposure based on employees in each category and assumptions related to stock grants Prepare executive recommendations Consider raising awareness if significant resource and/or budget constraints exist. Consider potential future benefits (reduced processing time, greater accuracy,) For institutional use only 16

17 Mobility Assessment Example Past/Future For institutional use only

18 Aligning resources and IT systems to build auditable processes For institutional use only 18

19 Reduce the Audit Risk 3 Key Steps to Compliance 1 Establish a core team and manageable tracking system 2 Develop assumptions that fit employees 3 Confirm tax rules early and often! Doing SOMETHING is better than nothing (even if it isn't perfect) For institutional use only 19

20 Establishing the Right Team Establish a cross-functional project team Executive Level Stakeholder Payroll and Stock Plan Admin (key players) HR (including for employee communications around mobility policy) Tax Consider including: tax consultants, legal, business travel, facilities, other stakeholders/end users of stock plan data and reporting Project Team Executive Stakeholder Payroll and Stock Admin Human Resources Tax Additional Roles For institutional use only 20

21 Determining the Optimal Mobility Solution to Address Risks Equity types and amounts Mobility Tracking Types: Country-to-country, state-to-state, business travel, live/work Number of employees with mobility considerations Number of mobility events per year Payroll reporting and reconciliation Existing record keeping system functionality Company Policies Employee Statements/Employee Communication For institutional use only 21

22 POLL QUESTION 3 How many payroll vendors do you utilize to process your equity? a) 1 Vendor b) 2-5 Vendors c) 6-10 Vendors d) More than 10 Vendors For institutional use only 22

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24 Considerations to Manage Tax Jurisdictions Flexibility in Setup Tax Considerations based on internal policy and interpretation of tax guidance Participant Connection Jurisdiction Income Tax Agreements Live Work Taxable Income, full or sourced Reportable Income, full or sourced Reciprocity Tax Credit / Reverse Tax Credit Income Deduction For institutional use only 24

25 Additional Features for Tax Compliance Tax Rates Tiered tax rates Special qualified award rates Additional considerations to help meet jurisdictional tax requirements and ease administration Foreign Currency Tracking FMV Rules Report income and taxes in USD and foreign currencies Apply country-specific FMV rules Special Tax Events At Grant At Exit For institutional use only 25

26 Start Somewhere Process taxable events with more automation Reduce reliance on processes outside of the system Work toward tax compliance Consult with your external tax advisors Develop policies with internal partners Talk with your Stock Plan Service Provider to Leverage Functionality For institutional use only 26

27 White Paper from Baker McKenzie For institutional use only 27

28 Contacts Robert Turner Director, Stock Administration Fortinet, Inc. Sinead Kelly Partner Baker & McKenzie Matthew McKittrick Managing Director Moss Adams Virginia Crofoot Senior Manager Charles Schwab For institutional use only 28

29 Thank You! For institutional use only 29