© 2009 e*trade financial corp. all rights reserved. this presentation contains confidential...

© 2009 E*TRADE FINANCIAL Corp. All rights reserved.This presentation contains confidential information and may not be disclosed without

E*TRADE FINANCIAL Corporation’s written permission.

Mobile Employees – Practical International Considerations

Magdala Cruz, CEPFinancial Reporting Product Manager


E*TRADE FINANCIAL Corporation’s written permission.2

Disclaimer

The laws, regulations and rulings addressed in this presentation and by the products and services offered by E*TRADE Corporate Services are subject to various interpretation and frequent change. Product descriptions and instructions in this presentation are general in nature and are not intended to replace documentation and instructional materials distributed by E*TRADE Corporate Services. E*TRADE Corporate Services and its affiliates do not provide legal, accounting or tax advice. Always consult your own professional advisers.



Agenda

Defining Mobile Employees

The Issues

Taxation

Tracking and Compliance

Preparation

Are you at risk?

Practical Guidelines

IFRS

Question and Answer

References/Resources



Mobile Employees

Who are they?



Mobile Employees

Those employees that work in multiple tax jurisdictions between the time a grant is issued and when the taxable event occurs. This can include:

Employees that permanently move from one location to another

Employees that move from their home location to another location for some time period and then return to their home location

Employees that work concurrently in more than one location

Business travelers

The move may be international or domestic.



The Issues

A variety of issues arise when you begin dealing with mobile employees:

Payroll compliance

Income allocation

Tax Treaties

Corporate Tax Deductions

Corporate Governance

Data Tracking



The Issues

Each tax jurisdiction can impose its own set of income, payroll, social security and other taxes

Limited statutory and administrative guidance in some countries

Some governments impose severe exchange control restrictions

Ownership of foreign currency prohibited

Ownership of foreign stock prohibited

Some governments may require central bank approval



Taxation

How and when does taxation apply?

Grant

Vest

Exercise

Sale

Each jurisdiction may want to tax the employee on the income

The employee may have to pay tax in more than one country

Employee may even be subject to tax in a jurisdiction where he/she no longer works



US Taxation

US citizen

Taxed on worldwide income regardless of where he/she is working

Will pay US tax on 100% of the income related to equity compensation even if he/she is working in another country

US tax resident (not US citizen)

May hold equity compensation that has not been taxed in the US

When taxable event occurs, will pay US tax on the portion of the income earned in the US



Avoiding Double Taxation

Local law may tax all income from the equity compensation or only a percentage

You may pay double tax since each jurisdiction has a right to tax the income

Look for tax credits

If taxed at 100% in the jurisdiction, a tax credit may be available.

Tax credits provide an “offset” for the income by reducing actual tax by tax paid in another tax jurisdiction



Employer Reporting and Withholding

US Tax Rules Employer required to withhold taxes and remit them to the

IRS

Gain should be reported on the employee’s W-2

US Sourced (granted in the US) Income is taxed in the US, regardless of employee location

Same withholding and reporting requirements apply

OECD (Organisation for Economic Co-Operation and Development)

Recommends that countries source stock option income based on workdays in that location for the period from grant to vest

Portion of gain calculated as a simple pro-rata based on days worked in each location between date of grant and vest




Employers may be required to report and withhold in multiple jurisdictions

Penalties for non-compliance

Administrative complexities

Companies may need to withhold on a different amount than the employee’s actual tax liability

Companies may manage the international complexity by withholding at a flat rate

Any excess withholding can returned to employee via local payroll

FAS123(R) contains provisions that complicates this for withholding outside the U.S.




Paragraph 35 of FAS 123(R) states that if the number of shares withheld exceed the number of shares needed to meet the minimum statutory withholding rate, the entire award shall be classified as a liability

Auditors would assert that this triggers liability accounting for the plan

The rule impacts awards settled into shares, including:

Restricted Stock

RSUs

Stock Settled Stock Appreciation Rights

Stock Options are often excluded




US Federal income tax withholding at the taxpayer’s top marginal rate or at the employee’s marginal tax rate will exceed the “minimum statutory withholding rate” under FAS 123(R)

US Federal supplemental withholding rate of 25% (35% for supplemental wages over $1 million)

State Withholding – What is the state minimum statutory withholding rate?

State supplemental withholding rate?

Where state has no supplemental withholding rate – employee’s marginal rate?

How do we determine what the “minimum statutory withholding rate” outside the US?

Very few countries outside the US have supplemental or flat withholding rates

Auditor sign off should be obtained to confirm that withholding methodology does not created adverse accounting implications.




RSUs – vesting and releases are scheduled events

Withholding and reporting can be determined prior to vest and/or release

Stock options – calculations done at time of exercise

T+3, may require planning

Analysis should be done to determine “minimum statutory withholding rates”

Taxable income and withholding may need to be apportioned

Locations and dates (effective dates) can be used to calculate a blended withholding rate of tax to apply to the income



Example How long did an optionee live in each location over the life of

the option?

Summarizes the percentage of time spent in a particular location for vesting periods



Example How long did an optionee live each location over the life of the exercised shares?

Summarizes the number of days an optionee spent in a given location when exercising option shares -- appears as a percentage of time spent in each location for each of the vesting periods.



Example

An employee is granted 3,000 Restricted Stock Units (RSUs) August 31, 2004

At grant the employee is living and working in the Netherlands.

RSUs will vest 1/3 on each anniversary of the grant date with the final vesting August 31, 2007

Employees moves to the US on March 1, 2005

Employee returns to the Netherlands on July 1, 2007

FMV of shares as follows on August 31, 2006 is $20

Global tax implications and reporting/withholding responsibilities. 1,000 shares at $20 per share = $20,000 plus $200 accrued dividends and

interest = $20,200 taxable income

Grant to vest – 8/31/04 to 8/31/06 Netherlands 6 months (9/04 through 2/05), US 18 months (3/05 through 8/06)

25% of the income is reportable and taxable in the Netherlands

75% of the income is reportable and taxable in the U.S.

Blended tax rate for plan administrator to use for withholding purposes.



Example

The vesting value of the shares will be unknown until the vesting date.

We cannot calculate how much income to report in each country in advance of this date.

However, we can calculate a blended withholding rate of tax to apply to the income on the vesting date.

Netherlands

$20,200 X 6/24 = $5,050 @ 52% = $2,626

OR

$20,200 @ 13% = 2,626 13% = 52% * 25%

United States

$20,200 X 18/24 = $15,150 @ 28% = $4,242 (Federal and State)

OR

$20,200 @ 21% = 4,242 21% = 28% * 75%



Tracking and Compliance

Allocating income between tax jurisdictions

Sourcing

Location at grant

Location during vesting

Location between grant and exercise

Tracking employees during the lifetime of the grant

Address changes

Maintain records / database

Exchange information with HR

Keep equity compensation records current with HR



Preparation

Global Long Term Incentive Plan(s)

Is it valued by employees?

Are you competitive in the employment market? Review the design of your plan on a country-by-country basis

Review and assess the awards and structure by looking at other global companies

Strategies for stock options Reduce number of stock options granted

Reduce participation

Introduce equity vehicles not typically used

Offset stock options with non-equity compensation

Increase use of performance shares

Strategies for restricted stock Less shares granted, less cost incurred

Less likely to be taxable on a consistent basis than other forms of equity



Are you at risk?

Incorrect reporting and withholding can expose employee and/or employer to penalties

Risks of non-compliance

Multiple penalties and interest

Negative publicity

Loss of government contracts

Reduced employee confidence

Increased chance of local tax authorities carrying out an investigation

Potential criminal liabilities

Exposure to civil penalties, i.e. jail time

More recently, mobile employees are being targeted by tax authorities for compliance.



Are you at risk?

Is someone tracking your mobile employees?

Are the employees being tracked with your stock plan information?

Are you complying with T+3 settlement ?

Who withholds taxes?

Where are the taxes remitted?

How do you handle terminated employees?




Employee involvement

Pro-active orientation process

Data collection and tracking

Tax planning and cost savings opportunities

Help ensure compliance

Raise issues to management

Involve all relevant functions (HR, Tax, Payroll, Treasury)

Balance practicality with risk management

Communicate frequently – inform employee of potential liabilities

Create policies and enforce them – be consistent




Identify impacted individuals

Design an effective and efficient withholding/reporting process

Review details of the relevant share plans and consider the geographies and demographics that apply

Understand local tax and social security implications and the impact of tax treaties, rulings and approvals

Specific legislation

Recharge

Large employee population

Identify accounting and reporting implications

Understand the policies and costs associated with international assignees

Achieve compliance consistency across different countries

Communicate actions to the employees and business units

Monitor, review progress and continuously improve quality



International Financial Reporting Standard

International Financial Reporting Standard 2 (IFRS 2)

Applies to companies operating under IAS (International Accounting Standards)

An alternative to GAAP and provides for consistent financial accounting across borders

Similar to FAS 123(R)

Disclosure & Recognition

Fair Value

Valuation Methodologies

Effective for annual periods beginning on or after January 1, 2005

Must be adopted by a country to apply to that jurisdiction



International Financial Reporting Requirements

IFRS 2

Uses same valuation techniques as under FAS 123(R)

Black-scholes

Binomial model

REQUIRES FIN 28 attribution (multiple approach)

Companies have to report:

Under US GAPP for consolidated financial statements

Under IFRS 2 where required locally



Questions?



References and Resources

Selected International Tax & Legal Consequences, Baker & McKenzie, Global Equity Services, March 2008

Cross-border Income Tax Issues Arising from Employee Stock Option Plans, Organisation for Economic Co-Operation and Development, June 16, 2004

An Overview of Global Employee Stock Plan Concepts, Understanding the basic concepts when offering a plan to participants outside the United States, Jon F. Doyle, DLA Piper US LLP; Carine M. Schneider, Global Shares; Craig P. Tanner, DLA Piper US, LLP (Certified Equity Professional International Article, 2008)

NASPP: www.naspp.com


E*TRADE FINANCIAL Corporation’s written permission.30

© 2009 e*trade financial corp. all rights reserved. this presentation contains confidential...

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