Global equity compensation Recent legislative updates July 2012 Edition Country Summaries (for a more comprehensive discussion, please see the "Country Discussions" section below) Brazil New accounting rules may impact the tax treatment of equity awards Due to recent changes in accounting rules, Brazilian companies are required to adopt IFRS 2. As a result, Brazilian companies (including subsidiaries of US based parent companies) are now required to expense the cost of equity awards in their statutory book accounts. This change may potentially trigger individual income and social tax charges and local employer withholding and reporting requirements at the time of share delivery regardless of whether the costs of the awards are charged back by the parent company to the Brazilian subsidiary. While there has been no official announcement by the Brazilian tax authorities regarding changes to the tax treatment of such awards, companies should be aware these potential changes may materialize in the future. PwC Global Equity Compensation 1
Denmark Danish High Court denies corporate tax deduction for costs associated with exit bonuses In a recent decision, the Danish High Court rules that a company was not allowed to receive a corporate tax deduction for the costs of exit bonuses paid to employees. The Danish tax authorities did not approve the deduction as the bonuses were extensively aimed at rewarding employees to stay following the sale of the company. Strengthened focus on employer obligations in connection with equity-based compensation The Danish tax authorities have published their plan of action for 2012, which identifies a number of increased focus areas. According to the plan, a greater effort will be applied towards employer obligations in connection with equity-based compensation. In light of this development, PwC Denmark recommends that companies that offer equity-based compensation to Danish employees seek advice on the specific employer obligations in Denmark to ensure compliance. France Expected tax increase on qualified stock options and free share awards The French Government issued a press release on new tax measures that will be included in the 2 nd Amended Finance Bill for 2012. One of these tax measures concerns the taxation of qualified stock options and free share awards. Under the draft bill, employer healthcare contributions due at the time of grant of qualified awards will increase from 10%/14% to 30% for grants made on or after July 11, 2012. Whereas, employee social tax contributions due at the time of sale will increase from 2.5%/8% to 10% once the Amended Finance Bill actually comes into effect. Ireland Final legislation removing the social tax employer withholding obligation on stock option income As provided in the May Global Legislative Update, effective July 1, 2012, the Social Welfare and Pensions Act 2012 eliminates the employee Social Security (PRSI) withholding obligation for employers, placing the obligation to remit payments on the employee. PwC Global Equity Compensation 2
Japan Amended Annual Disclosure Regulations in connection with security offerings On April 1, 2012, new regulations came into effect in relation to the disclosure requirements for certain offerings of equity awards to employees in Japan. Under the amended English Language Disclosure system, US companies may file their Form 10- K and Form 10-Q with summary documents in Japanese and in English, in order to satisfy these disclosure requirements. The amended regulations are intended to substantially alleviate the documentation workload and reduce a company s Japanese translation costs in order to satisfy their on-going requirements. United Kingdom UK General Anti-Abuse Rule Further to the UK 2012 Budget update provided in the April Global Legislative Update, Her Majesty's Revenue & Customs (HMRC) has published its consultation and draft legislation on the introduction of a General Anti-Abuse rule (GAAR). The GAAR will be a further strand in the UK authorities' approach to tackling tax avoidance and demonstrates the continuing focus on clamping down on abusive arrangements. Real-Time Information - new employer reporting requirements As provided in the February Global Legislative Update, a fundamental change to UK Pay-As-You Earn (PAYE) tax reporting administration is planned with the introduction of Real Time Information (RTI). Under RTI, while the underlying processes for PAYE tax withholding will not change, employers will need to send information to UK HMRC in "real time" rather than just following tax year-end. PAYE-related income in the form of equity compensation awards will be covered by RTI. HMRC has published a consultation document regarding compliance with the new regime and potential penalty measures. Views are invited as to how to maximize compliance and regarding the design of penalties. PwC Global Equity Compensation 3
Proposed changes to UK approved share plans The Government recently published its response to the Office of Tax Simplification s (OTS) reports on tax advantaged employee share plans. A majority of the proposed changes to the plans covered in the consultation will have a positive (simplifying) outcome for employers and employees. The consultation paper requests comments by September 18, 2012, with draft legislation anticipated toward the end of 2012, inclusion in the 2013 Finance Bill and implementation of changes by July 2013 (although some changes may take longer to come into effect and may not apply until 2014). PwC Global Equity Compensation 4
Country Discussions Brazil New accounting rules may impact the tax treatment of equity awards Currently in Brazil, where the parent company granting equity to employees of its Brazilian subsidiary does not chargeback award costs to the subsidiary, income and social taxes will generally not be due at the time of delivery of the underlying shares (e.g., exercise of stock options). Rather taxation may be deferred until the time of sale of the underlying shares at which time any gain will be subject to capital gains tax. Similarly, for free share awards (e.g., restricted stock unit) while income taxes may be due at the time of vesting even where there is no chargeback, social taxes will not be due on the award income. For all awards, the Brazilian employer is not required to withhold any taxes or report the income at the time of exercise/vesting. However, due to recent changes to the accounting rules, Brazilian companies are required to adopt IFRS 2. As a result, Brazilian companies (including subsidiaries of US based parent companies) are required to expense the cost of equity awards in their statutory book accounts. As the award expense will be accounted for on the local company books, there is a possibility that individual income and social tax charges will be triggered at exercise/vesting, and local employer withholding and reporting will be required regardless of whether the costs are charged back to the Brazilian subsidiary. While there has been no official announcement by the Brazilian tax authorities regarding changes to the tax treatment of such awards, companies should be aware of these potential changes which may materialize in the future. We will provide additional updates as they become available. Denmark Danish High Court denies corporate tax deduction for costs associated with exit bonuses The Danish High Court, in a recent decision, ruled that a company was not allowed a corporate tax deduction for the costs of exit bonuses that a company had paid out to a group of employees. The ruling concerned a Danish company that had been sold to PwC Global Equity Compensation 5
another company in 2005. Prior to the sale, the acquired company had signed agreements with a number of key employees for bonuses that would become payable in case of stock listing or sale of the company. The agreement was put into place to aid in the retention of qualified staff in case of change of ownership. Subsequently, when the change of ownership became a reality the company paid the bonuses in accordance with the agreements and claimed a tax deduction for the costs associated with the payout. However, the Danish tax authorities would not approve the deduction since the bonuses were extensively aimed at rewarding the employees to encourage them to stay with the company in the event of a sale of the company. Strengthened focus on employer obligations in connection with equity-based compensation The Danish tax authorities have published their plan of action for 2012. Highlighted in the plan are a number of tax areas where authorities intend to increase their focus, including employer obligations in connection with equity-based compensation (e.g., reporting). In PwC Denmark's experience, local payroll departments are often not aware of what reporting obligations they have in connection with foreign incentive schemes. In light of this development PwC Denmark recommends that companies that offer equity-based compensation to Danish employees seek advice on the specific employer obligations in Denmark and communicate such obligation to the local employer in order to comply with the legislation. France Expected tax increase on qualified stock options and free share awards The French Government has issued a press release on new tax measures which will be included in the 2 nd Amended Finance Bill for 2012. As noted in our last Alert, one of these tax measures concerns the taxation of qualified stock options and RSUs/PSUs. As a background, qualified stock options and qualified free shares awards which fulfill the conditions set forth under French law are currently exempt from social security charges. However, for qualified award grants on or after October 16, 2007, qualified stock options and RSUs/PSUs are subject to: PwC Global Equity Compensation 6
an employer contribution (14% due upon the grant of stock options / 14% or 10% due upon the grant of RSUs/PSUs on a taxable basis determined at that date), and an employee contribution of 8% or 2.5% (due upon sale of the shares and based on the acquisition gain determined upon exercise for stock options or upon the transfer date for RSUs/PSUs). The alternative 14% or 10% rates for the employer and 8% or 2.5% depend on the grant levels. In the draft bill, these contributions will be increased to: 30% for the employer contribution (single rate for stock options and RSUs/PSUs) for grants made on or after July 11, 2012; and 10% (single rate for stock options and RSUs) for the employee contribution. The new rate applicable to the employee contribution would be applicable as from the entry into force of this 2 nd Amended Finance Bill for 2012. The Draft Amended Finance Bill is scheduled to be debated by the parliament starting July 16, 2012. We will provide additional updates regarding these changes as they become available. Ireland Final legislation removing the social tax employer withholding obligation on stock option income Under previous legislation, the 4% employee social security charge (PRSI) due on unapproved share option gains has been collected and remitted by the employer via payroll withholding. However, the employee is obligated to pay the corresponding income tax (up to 41%) and the universal social charge (USC up to 7%) within 30 days of exercise through a self-assessment RTSO1 process. As provided in the May Global Legislative Update, the Irish Social Welfare and Pensions Act 2012 has introduced changes to the collection mechanism by which employee PRSI is to be collected on the exercise of share options. The changes are as follows: Effective July 1, 2012, employers are no longer required to withhold the employee PRSI charge in respect of unapproved share option gains by current and former employees. Instead, the PRSI payment obligation is passed to the employee as part of a revised RTSO1 process. PwC Global Equity Compensation 7
Tax approved SAYE options gains of current employees will continue to attract employee PRSI via employer payroll withholdings (along with USC). For SAYE option gains arising to former employees, the PRSI liability will be payable by the employee by self-assessment under a special collection system. In all other scenarios (e.g. assignment or release of options), employee PRSI should be withheld by the employer via payroll. These changes are effective from July 1, 2012. A revised Form RTSO1 is now available and this form should be used by all relevant individuals exercising options on or after July 1, 2012. For ease of reference, the new form clearly highlights the requirement to account for RTSO, USC and employee PRSI. Employers must continue to report all unapproved share option grants, exercises, releases or assignments on Form RSS1 by March 31 following the end of the tax year. There is no change proposed in relation to the social security collection mechanism for restricted stock units (RSUs), or other share awards. In addition, all employee share based remuneration continues to be excluded from a charge to employer s social security (10.75%). Existing employee communication materials should be updated to reflect this change in the withholding position. Please refer to the attached PwC Ireland Bulletin for additional details. Japan Amended Annual Disclosure Regulations in connection with security offerings Where a foreign parent company grants equity awards to employees of its Japanese subsidiary, a securities filing under the Japan Securities and Exchange Law (SEL) may be required unless an exemption applies. Companies may also be subject to ongoing annual and semi-annual disclosure requirements under these rules. On April 1, 2012, new regulations came into effect simplifying these disclosure requirements. Under the amended English Language Disclosure system, US companies may file their Form 10-K and Form 10-Q with summary documents in Japanese and in English, in order to satisfy the disclosure requirements. The amended regulations clarified what documents need to be submitted and the applicable sections requiring translation into Japanese. PwC Global Equity Compensation 8
The amended regulations are intended to substantially alleviate the documentation workload and reduce a translation costs in order to satisfy these requirements. Companies should contact local legal counsel in order to gain a better understanding of the new regulations and how it will affect the offer of equity awards to employees in Japan. United Kingdom UK General Anti-Abuse Rule Further to the UK 2012 Budget update provided in the April Global Legislative Update, HMRC has published its consultation and draft legislation on the introduction of a General Anti-Abuse rule (GAAR). The consultation document confirms that the GAAR should not be a broad anti-avoidance rule but instead something targeted at abusive and artificial tax avoidance arrangements. Specifically it should be targeted at schemes that are complex and/or novel such that they could not have been contemplated directly when the legislation was written. PwC- UK is considering the scope of the proposed rule for reward arrangements. However, in a global equity context, the rule is unlikely to catch most normal mainstream share plans. The tax authorities are consulting with businesses, individuals and representative bodies over the summer period regarding the draft legislation. HMRC then plan to produce revised legislation in the fall which will be the subject of further consultation, with a view to including final legislation in the 2013 Finance Bill. Real-Time Information - new employer reporting requirements HMRC reports they are on track with the introduction of a new Real Time Information (RTI) system (as provided in the February Global Legislative Update) for employer payroll reporting. Unlike the present system, under RTI, employers and pension providers will need to send details of every payment made to each employee/pensioner on or before the day that payment is made. Actual tax payment deadlines will not change and monthly or quarterly payments still need to be made to HMRC by the 19th or 22nd of the month or quarter. On June 12, HMRC published a consultation document "Securing Compliance with Real Time Information Late Filing and Late Payment Penalties. In the consultation, HMRC invites views from those working in payroll on how to maximize compliance under the new system and on the design of a fair and effective penalty PwC Global Equity Compensation 9
system. It considers alternatives for calculating RTI penalties for different sizes of employer and for various degrees of default, as well as how often penalties should be charged. HMRC's proposed RTI timeline is currently as follows: The deadline for responses to the consultation is September 6, 2012. Subject to the current initial pilot of around 300 employers being successful, up to around 1,300 volunteer employers will be reporting PAYE in real time by September 2012. By March 2013, subject to the success of the early pilot stage, around 250,000 employers will be reporting in real time. Most remaining employers will join RTI from April 2013, with all employers reporting PAYE in RTI by October 2013. We will provide additional updates regarding these changes as they become available. Proposed changes to UK approved share plans The Government recently published its response to the Office of Tax Simplification s (OTS) reports on tax advantaged employee share plans. The key points under the consultation include: Future of the company share option plan (CSOP): The OTS recommended that further work needs to be done to explore whether the CSOP is still appropriate for businesses in the UK. The Government has asked, among other things, for new economic evidence on whether the CSOP has a positive effect on productivity and economic growth. Given that companies these days are granting share awards that are not standard market value options there must be a risk that CSOPs could be abolished. However, there is also an opportunity for companies to get the CSOP rules changed to allow other types of award. We d recommend that companies that use CSOPs, as well as other unapproved plans, respond to the consultation. Self-certification rather than approval: Companies will be able to selfcertify that plans qualify for favorable tax treatment in a way similar to enterprise management incentives. This change is expected to come into effect by 2014. While we believe that this will have little impact on companies with existing approved plans, it will speed up the introduction of new plans. PwC Global Equity Compensation 10
No change to five year share incentive plans (SIP) limit: Due to the costs involved, the Government will not reduce the current five year limit to three years. There are also a number of other points that the consultation covers, including: All approved plans Changes to retirement age and good leaver provisions. Alignment of material interest rules. Relaxing the type of restrictions on shares that can be used. Whether there can be tax-favored early exercise/vesting on a takeover. Share incentive plans Dealing with employer s National Insurance contributions (NIC) on shares if a company is taken over and employees have to sell their shares for cash. Allowing some degree of choice in the purchase price of partnership shares where there is an accumulation period. Increasing the 1,500 limit of dividend reinvestment. The practical operation of pay as you earn (PAYE) when shares leave a SIP early. Save as you earn (SAYE) plans Abolishing the seven year SAYE contract. Allowing contributions to be paid directly to the SAYE provider (e.g. while on maternity leave). Enterprise management incentive plans Extending the 40 day exercise period for a disqualifying event. Generally, a majority of the proposed changes will have a positive outcome for employers and employees although, for example, the abolition of new seven year SAYE contracts would adversely affect some employees. What will the Government do now? The consultation paper asks for comments by interested parties by September 18, 2012. It is expected that the Government will then review the responses and publish draft legislation towards the end of 2012. This would be included in Finance Bill 2013 thus we would expect most of the changes to be in force by July 2013. However some changes, such as the new self-certification process, may take longer and thus may not come into effect until 2014. PwC Global Equity Compensation 11
Contact information For more information about any of these developments, please feel free to contact any of our team members listed below. Philadelphia, PA Bill Dunn (Partner) 267 330 6105 AmyLynn Flood (Partner) 267 330 6274 Kerri McKenna 267 330 1723 Michael Shapson 267 330 2114 Stamford, CT Heather Royce 203 539 4210 Los Angeles, CA Aldona Gorman 213 356 6127 New York, NY Parmjit Sandhu 646 471 0819 Ari Solomon 646 471 8477 Chicago, IL Anne Roest 312 298 2646 San Jose, CA / San Francisco, CA Julie Rumberger 408 817 4460 Jennifer George 408 817 4370 Karolyn Sadowski* 267 330 1935 *currently seconded to Zurich, Switzerland This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. SOLICITATION 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers LLP, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. PwC Global Equity Compensation 12