Global Equity Crystal Gronau Marlene Zobayan October 6

Global Equity Crystal Gronau & Marlene Zobayan October 6, 2016 1

Disclaimer This presentation contains general information only and the respective speakers and their represented firm are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and firm shall not be responsible for any loss sustained by any person who relies on this presentation. 2

Objectives • To understand the payroll challenges faced by companies operating global equity plans • Parent company • Foreign affiliate • To appreciate the typical non-payroll compliance requirements • To understand U. S. payroll challenges for U. S. expatriate and inpatriate employees with equity compensation 3

What Is Global Equity? • Stock options • Non-qualifying • Incentive Stock Options • • • Restricted stock awards Restricted stock units Performance shares Employee stock purchase plans Stock bonuses 4

U. S. Taxation of Equity (Generic Plans) Incentive Stock Options Non. Qualifying Stock Option Restricted Stock Awards Restricted Employee Stock Units Purchase Plans At grant √ - If s 83(b) At vest √ - Without √ - Vest for s 83(b) social tax; release for income tax At exercise / purchase At sale √ √ - If not a s 423 Plan √ √ √ 5

Non-U. S. Taxation of Equity (Generic Plans) Stock Options Restricted Stock Awards At grant √ - Some locations √ - Most locations At vest √ - Some locations At exercise / purchase √ - Most locations At sale √ Restricted Stock Units Employee Purchase Plans √ √ (Purchase) √ √ √ 6

What Are Typical Challenges? Stakeholders Central Administration Limited systems interfaces Differing compliance requirements by country Corporate structure & intercompany arrangements Mobile employees Tome zone, language, currency Communication 7 Ever-changing Landscape

How to Withhold Tax When Employer is Not the Issuing Company • Potential withholding methods • • • Deduct tax through salary Ask employee for check Withholding from shares Withholding from sale proceeds Proceeds to subsidiary • May require different processes for different plans or sets of employees 8

Withholding From Salary Informs Employer of exercise Employer Remits taxes Parent Co. Withholding from next paycheck Gross proceeds or gross shares Employee Disadvantages: No withholding mechanism for Correct withholding is terminated employees Salary may not be applied sufficient to cover Employee can retain liability all the shares Local employer needs to act quickly Advantages: Employee receives proceeds quickly 9

Employee Cuts Check Informs Employer of exercise Employer Remits taxes Parent Co. Gross proceeds or gross shares Employee cuts check Employee Advantages: Disadvantages: Employee can retain all the shares No withholding mechanism for terminated employees (unless required as a condition of exercise/release) Employer acts as collection agency Foreign exchange/ wire issues 10

Withholding From Shares Informs Employer of exercise & taxes withheld Employer Parent Co. Tax withholding rate Reconcile withholding Net shares Employee Disadvantages: Ensures withholding for Early planning is a must! Withholding has to be at terminated employees minimum statutory rate to avoid Correct withholding is U. S. accounting issues applied - Note changes based on ASU 2016 -09 Administratively burdensome Company has to find the cash to remit to tax authorities Advantages: Remits taxes 11

ASU 2016 -09 • Allows share withholding up to maximum tax rate in location without triggering adverse accounting • Even if higher than employee’s tax rate • The company MUST be liable for withholding • Effective accounting periods starting on or after December 15, 2016 for public companies • Can adopt early BUT • IRS (not FASB) mandates withholding rates • For supplemental income, IRS allows: • Supplemental income rate • W-4 rate • States may have similar requirements 12

Withholding From Sale Proceeds Informs Employer of exercise & taxes withheld Employer Remits taxes Parent Co. Tax withholding rate Net shares or proceeds Employee Reconcile withholding Advantages: Employee receives proceeds quickly Ensures some withholding for terminated employees Disadvantages: Withholding process done twice As usually at flat rate, initial taxes withheld may be too much or too little (employee expectation management) 13

Withholding – Proceeds to Subsidiary All proceeds Employer Remits taxes Parent Co. Proceeds less withholding Employee Advantages: Disadvantages: Ensures withholding for terminated employees Correct withholding is applied Administratively simple As payrolls are usually monthly outside U. S. , employee may have to wait some time for proceeds Need to be careful of US GAAP Employee has no ability to retain shares/tax disadvantageous 14

U. S. Payroll Reporting Requirements • W-2 inclusion • Box 1 taxable income including disqualifying disposition of Incentive Stock Options & ESPP disposition (discount) • Box 3 & 5 income subject to social security and Medicare but not incentive stock options or ESPP • Box 12 for non-qualifying stock options • Box 14 optional • 6039 • Incentive stock options • Employee stock purchase plan 15

Non-U. S. Payroll Reporting Requirements • Timing of reporting • Taxable Event • Inclusion in payroll reports • Annual reporting, e. g. , • • Australia Ireland (stock options) Japan U. K. • How will local tax/payroll department get access to data? • Beware of Data Privacy issues 16

Other Global Equity Compliance Requirements • Tax registration & reporting; e. g. • China • Luxembourg • Legal Requirements • Local securities filing • Contract law • Data privacy • Foreign exchange 17

Time Zone, Currency & Language • Difficulties in communication due to • Time zone • Language • Who is going to answer employee questions? • Currency issues • Are there cash disbursement restrictions? • How will funds be disbursed to employees? • Local currency: check/wire • Through payroll • Cost to employee • What exchange rate should be used? 18

What is a Mobile Employee? • Assignees – including expatriates, inpatriates, third-party nationals • Long or short term • Permanent transfers • Business travelers – including commuters • Telecommuters Can be domestic or international Individuals can have more than one type of mobility 19

Sourcing Principles • The general rule is that income is sourced where it is earned or over the “earnings period” • Each taxing jurisdiction may have a different view of the earnings period • U. S. • Generally where “earned” • Equity usually deemed to be earned from grant to vest • Maybe overridden by treaty • State sourcing may vary from Federal • E. g. , Ohio stock options 20

Sourcing For Equity Compensation Employee is granted an award which vests on the 4 th anniversary. Employee relocates 2 years after grant and exercises 3 years later. Chart shown the percentage sourced to jurisdiction of grant U. S. Singapore Japan 21 0% 20% 40% 60% 80% 100%

U. S. Income Tax Sourcing Rules • Since January 1, 2006 Federal sourcing is based on U. S. workdays from grant to vest • Some treaties state otherwise: • U. S. : Canada • U. S. : Japan • U. S. : U. K. • Specific grants may require different sourcing • E. g. , an award granted for a project undertaken in a particular location 22

U. S. Income Tax Sourcing Rules U. S. resident - Tax entire award - Allocate award between U. S. and foreign source - Foreign earned income exclusion and FTCs can be taken against foreign source income Foreig U. S. n Source Incom e e Assume income is 50% U. S. source and 50% foreign source U. S. nonresident Tax on U. S. sourced portion only 23

International Assignees • Tax equalization process requires special treatment • Expatriate pays tax only to same extent they would have paid in their home country • Hypo-tax • Company pays host country and home country actual taxes • Gross up considerations • Tax impact of equity compensation varies widely due to location at: • Grant, vest, exercise and sale 24

Inpatriate • Is the inpatriate tax equalized? • Hypo tax compared to actual tax deposits • What social tax scheme is the employee covered by – home or host? • Does the non-U. S. country require tax deposits? • Does the non-U. S. country require income reporting? • What U. S. payroll compliance is required? • Does the treaty allow a reduction of Federal tax deposits? • Does the state require full or sourced payroll compliance? 25

Expatriate • Is the inpatriate tax equalized? • Hypo tax compared to actual tax deposits • What social tax scheme is the employee covered by – home or host? • Does the non-U. S. country require tax deposits? • Does the non-U. S. country require income reporting? • What U. S. payroll compliance is required? • Does the treaty allow a reduction of Federal tax deposits? • Did the individual break state residency? • Does the state require full or sourced payroll compliance? 26

Double Tax Treaties • Each double tax treaty is different • U. S has double tax treaties with almost 70 countries • BUT generally an individual is tax exempt if : • The employee is present in the host country for 183 days or less, • In the taxable year concerned or rolling 12 month period • Referred to as 183 day rule • The employee compensation is paid by or on behalf of an employer which is not a resident of the host country, and • The compensation is not borne by a Permanent Establishment (PE) or fixed base which the employer has in the host country • Economic employer 27

Totalization Agreements • Similar to double tax treaties but focus is social security • U. S. has totalization agreements with 25 countries • Generally, individual can be covered in “Home Country” for up to 5 years • Requires a document from the social security authorities known as Certificate of Coverage • May mean that income tax and social tax are sourced differently for the same income 28

Example • Peter, an employee of ACME Inc. in the U. S. is assigned to work in Germany for 3 years starting July 1, 2014. ACME obtain a Certificate of Coverage to retain Peter in the U. S. social security system during the course of his assignment. In March 2015, Peter receives a bonus of $10, 000 related to his performance during 2014. What taxes have to be paid? • U. S. income tax on $10, 000 x 50%* • U. S. social tax on $10, 000 x 100% • German income tax on $10, 000 x 50% • Does the payer matter? • * Assuming a US citizen and the company takes a position that U. S. withholding is not required on foreign sourced income as the individual is subject to foreign withholding 29

Other Administrative Items • Shadow payroll for international assignees • Exchange rates • Actual or hypo tax • For short term mobile employees from non treaty countries – How do you withhold on and report earnings? • Form W-7 – Individual Taxpayer Identification Number • Timing and processing issues 30

Other Sourcing Issues • Tracking and allocating multistate domestic workdays – includes sales team • Permanent transfers • Business travelers 31

Payroll Deposit Rule • Taxes withheld on equity transactions have the same withholding deposit rules as a regular payroll • Tax withholding in excess of $100, 000 • Must be deposited the next business day 32

Any Questions? Crystal Gronau Rutlen Associates LLC cgronau@rutlen. com 650 -279 -5879 Marlene Zobayan Rutlen Associates LLC mzobayan@rutlen. com 650 -868 -9282 33

Thank you Please remember to complete your evaluation of this session 34