Top 10 Withholding Woes (and How to Avoid Them!)

Top 10 Withholding Woes (and How to Avoid Them!)

Speaker Information Catherine Turner, Dun & Bradstreet Andrew Schwartz, Computershare Nicole Calabro, Baker & McKenzie LLP -2-

Top 10 Withholding Woes 1. Withholding timing and reporting requirements 2. Withholding methods 3. Withholding rates 4. Country-specific valuation requirements 5. Taxation timing differences around the world 6. Withholding for non-employees and former employees 7. Withholding for mobile employees 8. Authorized withholding methods? 9. Withholding failures and penalties 10. Staying compliant -3-

1 Withholding Timing and Reporting Requirements -4-

1. Withholding Timing and Reporting Requirements Identify: Timing of taxation and taxable amount An obligation to withhold, report or both o Income tax, social contributions, other taxes Exceptions: IRS Field Directive o Stock Options o T + 4 ISOs o No Federal/Employment withholding o Voluntary withholding -5-

2 Withholding Methods -6-

Withholding Methods May Depend on Plan / Company Default Method 1. Selling shares for taxes (forced or voluntary) 2. Wage withholding 3. Net share issuance / share withholding 4. Cash from participant -7-

Selling Shares to Cover Taxes Mechanics Broker sells sufficient shares to cover taxes and other withholding amounts Advantages Sale generates cash to cover taxes (no cash flow issue for company or employee) Can withhold at a single combined maximum rate (but should confirm with auditors) Disadvantages / Challenges Blackout periods; may require 10b5-1 plan Large # of shares sold on a single day Employee consent/broker authorization -8-

Wage Withholding Mechanics Company / employer withholds taxes and other withholding amounts from the employee s salary Advantages Can use exact rate for each employee No company cash flow issues Ease of administration Disadvantages / Challenges Salary may be insufficient to cover withholding amounts Increased entitlement risk Country limits on % of salary that may be withheld Employee consent may be required -9-

Withholding in Shares/Net Share Issuance Mechanics Company holds back sufficient number of shares to cover the employee s taxes and other withholding amounts and employee receives the net shares Company uses cash on hand to remit to tax authorities Advantages No market sales Share preservation (if set forth in plan) Likely no broker involvement Disadvantages / Challenges Company cash flow issues Accounting issues / appropriate rate (subject to change) Permissible under plan and local rules? -10-

Receive Cash Payment from Participant Mechanics Employee pays taxes and other withholding amounts by check, wire transfer or other cash equivalent acceptable to the company Advantages No broker involvement required No market sale No company cash flow issues Disadvantages / Challenges Employee cash flow issues Administratively burdensome Delay in posting shares -11-

Computershare Tax Collection Overview Computershare Supported Tax Payment Methods Sell-to-cover Same-day sale Cash transfer Share withholding Swap sell for taxes Online Tax Payment Elections Allows employees to elect a tax payment method online based on your company s plan specifications Special Handling Ability to aggregate shares for tax collection orders into special handling trades executed by trading team -12-

3 Withholding Rates -13-

Withholding Rates Approaches IRS: Two valid methods o 25% / 39.6% flat rates o W-4 rate combined with regular salary payment Bridging earnings levels Tax generally due at employee s marginal tax rate May wish to withhold at one rate per country (admin. ease) o Special considerations may apply if withholding in shares -14-

4 Country-Specific Valuation Requirements -15-

Country-Specific Valuation Requirements Country-Specific Requirements to Determine Value of Shares at Taxable Moment (Not Exhaustive) India category I merchant banker valuation Italy average closing price of the shares over the month preceding the date of taxation (ending on the date of taxation and starting on the same day the preceding calendar month) Malaysia average of high and low trading price -16-

5 Taxation Timing Differences Around the World -17-

Withholding - Timing Typically Tax upon option exercise, RSU vesting, ESPP purchase Exceptions (Not Exhaustive) Belgium options may be taxed at offer Israel all awards taxed at sale of shares U.S. ISOs / 423 ESPP Exit tax e.g., Singapore, Israel Rule of administrative convenience / Retirement - U.S. FICA -18-18

6 Withholding for Non-Employees and Former Employees -19-

Non-Employees and Former Employees Non-Employees Contractors / consultants Non-employee directors Former Employees Majority of countries will have same treatment as for active employees (but some exceptions) Issue with reopening payroll for employees o Even if no withholding o ESPP Qualified Dispositions -20-

7 Withholding for Mobile Employees -21-

Mobile Employees Country-to-Country Reopening payroll in former country Taxable amount Social taxes Internal data issues State-to State Taxable amount Internal data issue Reopening payroll in former state Solutions Calculation engines Manual calculations -22-

8 Authorized Withholding Method? -23-

Authorizing Withholding Methods Approaches Check plan / agreement language (beyond tax withholding provisions) to determine if can rely on other provisions Obtain consent? Provide notice, indicating method deemed accepted unless actively rejected? (check with broker if sell-to-cover) IRS or Other Limitations o Would IRS care? o Does not conform to rules o Allocation of withholding ratably (W-2) vs. estimated payments (1040-ES) -24-

9 Withholding Failures & Penalties -25-

Failure to Withhold Significant Area of Exposure Governments want their money and want to shift responsibility from employees to employers Tax audits are increasing Consequences of non-compliance range from moderate (interest, penalties) to severe (criminal liability) -26-

Failure to Withhold Voluntary Correction Statute of limitations generally continues to run until tax is paid Can mitigate potential fines / penalties by self-reporting / correcting -27-

10 Staying Compliant -28-

Staying Compliant Best Practices Re-evaluate withholding obligations at least once per year; monitor new developments in the interim Re-evaluate withholding obligations more frequently if learn of legislative changes, entity structure changes or if a reimbursement agreement is put into place Follow-up with local employer to ensure withholding and reporting is occurring properly Audit your reports does the withholding make sense? -29-

Key Takeaways / Closing Remarks Review and broaden tax withholding provisions in plans / agreements Create a task force: HR, legal, accounting, payroll, treasury, tax, vendors Advise local entities of requirements; audit actual withholding / reporting Coordinate flow of funds with broker / local entity Notify participants they remain responsible for taxes, even if there is a withholding obligation Re-evaluate withholding obligations at least once per year; monitor new developments in the interim -30-

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Speaker Contact Information Catherine Turner, Dun & Bradstreet turnerc@dnb.com (973) 921-5598 Andrew Schwartz, Computershare andrew.schwartz@computershare.com (201) 680-3340 Nicole Calabro, Baker & McKenzie LLP nicole.calabro@bakermckenzie.com (415) 576-3010 -32-