Equity planning for employees can be complicated. International working arrangements can be complicated. Put the two together? Yes, it’s definitely complex. However, as with many tax-related issues, by acknowledging these complexities and with advance planning, processes can be put in place to ensure that things run smoothly, and compliant reporting can be appropriately managed in any relevant jurisdiction.
Some of the issues employers might face when offering share incentives to an internationally mobile workforce are discussed below. In many organisations, this issue will be disproportionally significant for executives, who are invariably among the participants. The article also offers some potentially helpful actions or tools for companies dealing with these issues, and alternatives to mitigate some of the complexity.
For simplicity, the term internationally mobile employees (IMEs) will be deemed to also include employees with international remote working arrangements.
Are there robust processes and policies in place to govern these arrangements, and are the arrangements tracked? Some IME scenarios, such as permanent transfers or formal secondments, may be more straightforward to identify if they are monitored actively by a central team, but IMEs who may trigger overseas tax obligations because of international business travel may not be as well captured in employer data. This can be a particular risk area for executives who travel frequently. For prior coverage of this topic, see From boardroom to boarding gate: mitigating global tax risks for executive business travellers.
Tracking the locations where employees work may not be a significant problem once tracking processes have been set up, particularly if there is an established annual process, on or around the vesting date, when reporting assessments are made and tax calculations prepared. However, it may become more challenging to administer if you are also dealing with longer-term plans without fixed trigger events; for example, you may have stock option plans that vest after a certain period but then have an extended window for the employee to choose when they exercise the option. This may often be up to 10 years after the grant of the option. Do you have processes in place to track such share events and ensure that the required compliance actions are taken as and when they exercise options with an international dimension?
Employers should also consider periodic rule changes in the relevant jurisdictions and ensure that processes and reporting are up to date. For example, Ireland recently amended the rules for reporting the exercising of share options, which previously were reported outside of payroll but now require payroll reporting and withholding of tax and social security.
There may be other circumstances where cash/phantom plans may be used to circumvent specific local rules and constraints. For example, in Singapore, non-citizens are typically deemed to exercise any unexercised stock options and unvested share awards when they cease employment in Singapore. Assignees leaving Singapore after an assignment may face a ‘dry’ tax charge before they are able to liquidate any funds in connection with the share awards, creating a cash flow issue, as well as a challenge if the value of the award subsequently falls. The use of phantom/cash plans could be helpful in mitigating these issues for Singapore-based assignees.
Given these concerns, employers should consider whether local hires and IMEs should be enrolled in these tax-advantaged schemes at all. For Enterprise Management Incentive (EMI) schemes in the UK, for example, there is an overall limit on the value of shares that can be subject to unexercised EMI options, so it may be preferable to allocate this limited pool to employees who will benefit from the tax advantages and use an alternative provision for IMEs.
It may also be possible to review international schemes to assess the viability of introducing local sub-plans that benefit from tax-advantaged treatment in that jurisdiction, and access tax and/or social security savings for the employee and/or employer.
BDO can offer employers help reviewing existing equity plans and evaluating if they are fit for purpose for an international workforce, or if there is potential scope to improve the overall tax efficiency.
BDO’s Global Equity Mobility Solution (GEMS) is our digital tool combining tax and employee data with streamlined technology to support employer compliance with regulatory requirements and prepare real-time calculations of tax withholdings for IMEs.
Partnering with BDO International colleagues in 164 countries, we can advise on the tax treatment of share plans in any of those jurisdictions, assist in any potential planning to improve the tax efficiency of the arrangements, and support businesses to satisfy local compliance requirements.
For more information on employer share schemes and international executives, please consult your regular BDO contact or the author of this article.
Steph Carr
BDO in United Kingdom
Some of the issues employers might face when offering share incentives to an internationally mobile workforce are discussed below. In many organisations, this issue will be disproportionally significant for executives, who are invariably among the participants. The article also offers some potentially helpful actions or tools for companies dealing with these issues, and alternatives to mitigate some of the complexity.
For simplicity, the term internationally mobile employees (IMEs) will be deemed to also include employees with international remote working arrangements.
The fundamental questions
Before an employer can determine the likely implications of offering share incentives to IMEs, it must be able to ascertain which employees fall into this category. The fundamental questions for employers – Who are they? What are they doing? Where are they? How long will they be there? What awards do they have? – are the starting points to identify this population and understand the international profile of their arrangements sufficiently to determine what the implications will be.Are there robust processes and policies in place to govern these arrangements, and are the arrangements tracked? Some IME scenarios, such as permanent transfers or formal secondments, may be more straightforward to identify if they are monitored actively by a central team, but IMEs who may trigger overseas tax obligations because of international business travel may not be as well captured in employer data. This can be a particular risk area for executives who travel frequently. For prior coverage of this topic, see From boardroom to boarding gate: mitigating global tax risks for executive business travellers.
Trailing issues
It is common for employer share schemes like PSPs (Performance Share Plans) or RSU/PSUs (Restricted Stock or Performance Stock Units) to include vesting periods and/or performance conditions that could span several years and multiple tax trigger events (for example, when tranches of awards vest annually). It is typical for the tax treatment of such awards to be assessed over the relevant earnings period, typically the period from grant to vest of the award. If there is even a temporary period of international work during an earnings period (or, indeed, multiple award earnings periods) this could impact the tax treatment and reporting of vesting awards over a series of tax years. Employers must have processes in place to track when and where employees have worked internationally -- potentially in multiple locations -- and how this impacts the tax treatment and employer reporting requirements in all relevant jurisdictions.Tracking the locations where employees work may not be a significant problem once tracking processes have been set up, particularly if there is an established annual process, on or around the vesting date, when reporting assessments are made and tax calculations prepared. However, it may become more challenging to administer if you are also dealing with longer-term plans without fixed trigger events; for example, you may have stock option plans that vest after a certain period but then have an extended window for the employee to choose when they exercise the option. This may often be up to 10 years after the grant of the option. Do you have processes in place to track such share events and ensure that the required compliance actions are taken as and when they exercise options with an international dimension?
Domestic reporting requirements and restrictions
Local rules may require employers to declare employment-related share awards to the tax authorities, whether via payroll or in an alternative format or annual filing. For example, in the UK there are potential PAYE reporting requirements for employers issuing shares to employees, as well as annual employment-related securities reporting to HMRC. These rules also apply to employees who may be taxable in the UK only on part of their overall share award. Employers need to assess and understand any such domestic obligations in all locations where they have IMEs; many countries, including Australia, Belgium, and Ireland have comparable reporting requirements.Employers should also consider periodic rule changes in the relevant jurisdictions and ensure that processes and reporting are up to date. For example, Ireland recently amended the rules for reporting the exercising of share options, which previously were reported outside of payroll but now require payroll reporting and withholding of tax and social security.
The use of cash or phantom share plans
Some countries have securities laws or exchange controls that effectively prevent employees from owning securities directly, so alternative provisions may need to be considered. In such cases, the employer may include a cash settlement discretionary option in the plan, or a separate ‘phantom’ share plan that allows an employer to replicate the incentives offered by stock-based plans. A phantom stock plan is an employee benefit plan that provides selected employees many of the benefits of stock ownership without actually giving them any company stock. The plans may involve performance conditions, and a certain number of ‘shares’ with an ‘exercise price’ that will crystallise as cash value on a fixed date or event. The employer does need to have the funds available to pay cash bonuses, but by issuing phantom shares instead of actual shares the company can conserve its equity and avoid dilution of existing holdings (depending on the intent of the plan).There may be other circumstances where cash/phantom plans may be used to circumvent specific local rules and constraints. For example, in Singapore, non-citizens are typically deemed to exercise any unexercised stock options and unvested share awards when they cease employment in Singapore. Assignees leaving Singapore after an assignment may face a ‘dry’ tax charge before they are able to liquidate any funds in connection with the share awards, creating a cash flow issue, as well as a challenge if the value of the award subsequently falls. The use of phantom/cash plans could be helpful in mitigating these issues for Singapore-based assignees.
Tax advantaged schemes
Many employers in the UK (and elsewhere) may use tax-advantaged plans to incentivise their employees in a tax-efficient manner. Employees and employers should be made aware that recognised plans in one jurisdiction are unlikely to attract the same tax efficiencies in other jurisdictions, which may result in unexpected host country income tax, social security, and capital gains tax implications and cost exposures. Employers and employees should agree on an approach regarding the company’s assignment/tax policy as to who should be responsible for settling any such taxes.Given these concerns, employers should consider whether local hires and IMEs should be enrolled in these tax-advantaged schemes at all. For Enterprise Management Incentive (EMI) schemes in the UK, for example, there is an overall limit on the value of shares that can be subject to unexercised EMI options, so it may be preferable to allocate this limited pool to employees who will benefit from the tax advantages and use an alternative provision for IMEs.
It may also be possible to review international schemes to assess the viability of introducing local sub-plans that benefit from tax-advantaged treatment in that jurisdiction, and access tax and/or social security savings for the employee and/or employer.
The complexity of ‘U.S. persons’
U.S. citizens and green card holders are essentially perpetual U.S. tax residents, with their worldwide income and gains remaining permanently within the U.S. tax net even if residing outside the U.S. The same rule applies to resident aliens of the U.S. For an employee, being a ‘U.S. person’ for tax purposes also means that IRS tax regulations continue to apply to them. These rules may not align with the tax rules in the U.S. person’s country of employment, and this can cause issues. There are specific U.S. tax rules around non-qualified deferred compensation that can apply to stock-based compensation, and non-U.S. share plans will commonly not be compliant with these rules. This can cause significant issues for U.S. taxpayers, potentially creating unexpected tax liabilities at unexpected times, and a 20% penalty tax if a solution is not implemented. It is therefore important to understand if an employer’s international plans are properly structured to ensure the penalty charge is not triggered, either for local U.S. participants or otherwise for U.S. persons employed in other locations. Identifying these employee populations is key to effective reward planning. For employers who tax-protect, or tax-equalise their IMEs on share-based incentives, there are additional associated tax costs.Corporate tax considerations
In the UK, statutory corporate tax deductions available with employer share plans have been available for many years. However, claiming these deductions may result in many practical issues, one of which is how to deal with claims in connection with IMEs. The specific nature of the underlying plan and the employee’s residence and working status in or outside the UK at the time of grant and vesting/exercising will potentially impact the nature of any deductions available from a UK corporate tax perspective. Similar considerations may arise in other jurisdictions where the employee may be working, and determining the appropriate deductions available in multiple jurisdictions should be considered to secure the overall tax efficiency of the scheme.How BDO can help
Tracking where employees are employed, living, and travelling to is an essential part of effectively managing any global equity scheme. BDO’s digital business traveller tracking solution, BDO QuickTrip, allows employees to easily record their international travel and identifies potential tax, social security, and immigration risks. Recent enhancements include remote worker tracking and assessments.BDO can offer employers help reviewing existing equity plans and evaluating if they are fit for purpose for an international workforce, or if there is potential scope to improve the overall tax efficiency.
BDO’s Global Equity Mobility Solution (GEMS) is our digital tool combining tax and employee data with streamlined technology to support employer compliance with regulatory requirements and prepare real-time calculations of tax withholdings for IMEs.
Partnering with BDO International colleagues in 164 countries, we can advise on the tax treatment of share plans in any of those jurisdictions, assist in any potential planning to improve the tax efficiency of the arrangements, and support businesses to satisfy local compliance requirements.
For more information on employer share schemes and international executives, please consult your regular BDO contact or the author of this article.
Steph Carr
BDO in United Kingdom