Making Mobility Taxation Less Taxing Edward Gibbons, KPMG (US) Michael Kuchs, American Express (US) Nancy Mesereau, Morgan Stanley (US) May 9, 2014
Agenda Bringing Tax to the Table The Current Environment: Tax and Risk Case Study: Mobility Tax Process at American Express Considerations for Equity Plan Administration
SHORT CLIP: BRINGING TAX TO THE TABLE 2014 KPMG LLP, a Delaware limited liability partnership and the US member firm of the KPMG network of independent member Firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 262022
The Current Environment A Perfect Storm Focus by media Scrutiny by global tax authorities Payroll: Reporting and withholding Corporate: Chargebacks/deductions Wider use of equity awards (more complex) Less use of stock options More RS and RSUs tied to performance Globally mobile workforces Long term, short term, business trips Domestic and international Ability of control process Complex global tax regulations Increase in volume of award grants Corporate risk monetary and brand 2014 KPMG LLP, a Delaware limited liability partnership and the US member firm of the KPMG network of independent member Firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 262022 Long Term Awards Mobile Employees Regulatory Activity/Tax Compliance
Key Challenges - Tax Employer Withholding and Reporting obligations Multi-country combinations Unclear tax laws Tax treaties Different share prices to calculate gains Tax equalization hypo taxes Foreign tax credits Social security taxes 2014 KPMG LLP, a Delaware limited liability partnership and the US member firm of the KPMG network of independent member Firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 262022
Assessing Risk Brand Damage vs. Monetary Corporate Payroll non-compliance principal/penalties Loss of foreign tax credits Accounting issue re: minimum statutory rate Loss of corporate deduction Overpayment of liabilities/non-refundable Increase in AR for Equalized Expats Individual Penalties for non-payment/non-filing Thailand ignoring a known issue 2014 KPMG LLP, a Delaware limited liability partnership and the US member firm of the KPMG network of independent member Firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 262022
Employer Compliance How the Numbers Add Up! 2014 KPMG LLP, a Delaware limited liability partnership and the US member firm of the KPMG network of independent member Firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 262022
KPMG Survey Information by Region and Country Current or increase in audit activity Source: KPMG Member Firms 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
CA Nonresident Withholding de minimis Jurisdictions OR WA NV ID AZ UT MT WY NM CO ND SD NE TX KS OK MN IA MO AR LA WI IL MS IN TN MI KY AL As of 04/01/2014 OH GA WV SC FL PA VA NC NY ME VT NH MA CT RI NJ MD DE DC AK HI Source: KPMG LLP International Executive Services. States with de minimis rules or exceptions States without de minimis rules or exceptions States with no withholding provision
Key Challenges Project Ownership and Stakeholders Employee How can I better understand my awards and my tax liability? How does moving abroad affect my awards? Why can t the process for exercising options and selling stock be straightforward? HR How do I maintain accurate, timely data? Are our equity programs helping us acquire and retain talent around the world? Can I reduce manual processing? Can I outsource equity administration and still maintain control over it? Finance and Payroll What should we report and withhold, and when? Who is legally liable for remittances? How do we make sure we apply the right accounting treatment to awards? Are we making the right financial disclosures? IT How can our systems be scalable, and truly global? How can I ensure ironclad security and privacy, inside and outside our network? Internal Audit Are we maintaining appropriate controls over equity grants? Are we creating a sufficient audit trail? Business Unit Leaders How can I reward high performers and attract talent with equity? Are comp costs being allocated properly as employees move? Legal How do we make sure that our grants consistently conform to our plan terms? How do we keep up with changing laws and Corp Tax regulation around the world and ensure How do we secure appropriate compliance? deductions and credits? How do we handle multicountry combinations?
THE MOBILITY TAX PROCESS AT AMERICAN EXPRESS
Background Participants: 9,000+ participants with outstanding awards Located in more than 40 countries Award types: Restricted Stock Units vesting 25% each year Performance Stock Units, 3-year cliff vesting Stock Options and Performance Stock Options Transactions: 13,000-15,000 annually Approximately 10% of all transactions have trailing tax liabilities.
How we started (2005) Identified the risks Analyzed plan and demographic data to quantify exposure Presented findings to senior management Obtained project funding
The Project Team (2006 2007) Corporate Secretary s Office (owner of plan administration) Tax Controllership / Quality / Six Sigma (Project Management Office) Technologies Payroll Operations & Payroll Systems HR Systems
The Project Key Challenges Subject Matter Experts limited bandwidth RFP process for tax advisor Define business requirements, rigorous technical due diligence, data privacy issues Agree scope of project ( perfect is the enemy of the good ) Focus on largest areas of exposure first (largest market, highest paid employees) Align on calculation method (blended rate or real-time) Agree tax rates in all markets Need to tailor external tax advice to your participant population
The Project Key Challenges Identify most reliable source of key data inputs required, get buy-in Demographics Work location at time of key events in award life cycle (grant, vest, payout) Employment status Nationality Payroll: Payroll codes Wage codes Year-to-date income from all sources Award and transactions details Vesting schedule (cliff, ratable) Transaction type (exercise, release, accelerated upon retirement) Method of payment and withholding (sell to cover, withhold shares for taxes)
The Project Key Challenges Explaining it to impacted participants They do not like it They do not understand it Post-settlement adjustments are not pretty Communications plan: Communicate to all participants prior to launch Communicate to impacted employees at time of taxable event Be prepared to respond to inquiries Spike during tax season Employee audit requests for historical data
Mobility in the real world It s always something! Bad data (work location, employment status) System outages, system changes / data migration, corporate events Keeping YTD data in synch across multiple vendors Cleaning up over/under withholding can drain resources, strain relationships
Where we are today Formed new Center of Excellence to oversee mobility tax Single end-to-end process owner Dedicated Subject Matter Experts More closely aligned with payroll organization Expanding staff of 2 to 6 to support mobility tax Operating & Steering Committees govern funding, prioritization
Parting Wisdom Create a compelling, quantitative business case focused on risk and exposure. Develop a governance structure to: Define roles and responsibilities Manage costs and secure new funding Prioritize initiatives Ensure commitment from key stakeholders Do not underestimate the resources required to sustain your mobility process; the project never ends. Plan for change. (tax requirements, systems, vendors)
CONSIDERATIONS FOR EQUITY PLAN ADMINISTRATION
Administrative challenges The mobile population is growing Timing of option exercises is controlled by participant Frequent vestings of restricted awards make planning more complex Risk of over- or under-withholding for Sell to cover transactions using inaccurate tax rates Explaining details of taxes to participant 2014 Morgan Stanley Smith Barney LLC. Member SIPC
Common Approaches Approach Pros Cons Blended rate. Company provides blended tax rate to administrator; adjustments made via payroll Apply prior to vesting. Tax advisor provides rates to administrator immediately prior to vesting Real-time adjustment. Taxes adjusted by tax advisor after transaction, prior to settlement by broker 2014 Morgan Stanley Smith Barney LLC. Member SIPC Simple, does not slow down transaction processing Simple, does not slow down transaction processing Real-time, accurate Eliminates adjustments via payroll Adjustments could be sizable Challenging to communicate details to participant Impractical for frequent vestings Impractical for stock option exercises Major effort to establish and coordinate across data sources and service providers
Automated, real-time tax calculation for mobile employees 2014 Morgan Stanley Smith Barney LLC. Member SIPC
Taxation of equity compensation is just a component of a mobility program Assess impact of mobility program on plans and practice Award types: options, awards, cash Transaction methods; payment of proceeds Document all processes/procedures, including exception handling and error processing Agree on ongoing ownership of mobility program Roles and responsibilities: internal and external vendors/partners Maintenance of data and systems: internal and external Allocation of costs and savings Participant communications 2014 Morgan Stanley Smith Barney LLC. Member SIPC
Q & A Edward Gibbons, KPMG Phone: 212-872-6693 egibbons@kpmg.com Michael Kuchs, American Express Phone: 212-640-5695 michael.kuchs@aexp.com Nancy Mesereau, Morgan Stanley Phone: 212-783-2528 nancy.mesereau@morganstanley.com 2014 Morgan Stanley Smith Barney LLC. Member SIPC CRC 886690 03/2014
Disclaimer 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. 2014 KPMG LLP, a Delaware limited liability partnership and the US member firm of the KPMG network of independent member Firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 262022