On April 21, 2017, the Trump Administration issued Executive Order 13789, which instructed the IRS to review all “significant tax regulations” issued on or after January 1, 2016 to identify as targets for modification, rescission or delayed effectiveness any regulations that (i) impose an undue financial burden on U.S. taxpayers; (ii) add undue complexity to the Federal tax laws; or (iii) exceed the statutory authority of the IRS. Having completed this review, earlier this month,…
It is almost the end of the calendar year, and in addition to wrapping up gifts and holiday parties, it is time for multinational companies to consider the necessary tax and regulatory filings for global stock plans triggered by the close of 2016. As you consider the steps your company may need to take to start the new year right, please see our Global Equity Services Year-End / Annual Equity Awards Filing Chart, which contains…
Many companies are considering changing their tax withholding practices after FASB modified the accounting rules for share-based awards (ASC 718). For most companies, the modified rules become mandatory for accounting periods starting after December 15, 2016, although companies are able to voluntarily implement the revised rules earlier.
The changes to ASC 718 were mainly intended to facilitate tax withholding for equity awards granted to employees outside the U.S., but have also raised questions for taxes withheld for U.S. executives.
The Court Case
In December 2015, the Tel Aviv District Court issued a ruling (the “Kontera decision”) that could have significant implications for companies that have a cost-plus structure in Israel and grant equity awards to employees of the Israeli entity. Under a cost-plus transfer pricing method, the parent company (or another entity in the company group) compensates the local entity with a fee that equals its direct and indirect costs related to the service provided by the local entity (the “cost base”) plus a mark-up (usually, a percentage of the cost base). The total fee is treated as taxable income to the local entity. It is therefore critical that all expenses that comprise the cost base are deductible expenses for local tax purposes. If they are, then the taxable income will equal only the amount of the “plus.”
In most countries, companies can determine the amount of their intercompany service fees under the cost-plus approach without including the “cost” of equity awards in the cost base. This is based on the argument that, absent a recharge payment by the local entity, there is no actual cost incurred by the local entity. In this case, the amount of the “plus” is minimized and it is less critical to ensure that the amount of the notional equity compensation “cost” is a locally deductible expense.
However, the Tel Aviv District court rejected this argument in the Kontera decision: in a case where the Israeli entity was being compensated under the cost-plus method, the court ruled that the expense related to the grant of options to employees of the entity had to be included in the cost base. The “cost” to be included was equal to the accounting expense of the options, not the value of the shares issued to employees (minus the exercise price paid by employees).
As we reported in our July 2, 2015 client alert, the new Australian share plan legislation received Royal Assent on June 30, 2015 and applies to all equity awards granted on or after July 1, 2015. Under the new tax regime, stock options are generally taxed at exercise only (not at vesting).
In this post, I want to explore the practical implications of the new legislation for most companies and examine the exceptions to the rule.
Grant Document Changes
Under the old tax regime that was in effect from July 1, 2009 until June 30, 2015, options generally were taxed at vesting which obviously was not a good result for companies nor for employees. As a result, many companies stopped granting options in Australia altogether. The companies that persevered (often private companies with no alternatives, such as RSUs, available to them) usually imposed special terms designed to avoid a taxable event prior to a liquidity event or at a time when options were underwater. To achieve this, they restricted exercisability of the options until a liquidity event occurred and/or until the option was in the money.
For options granted prior to July 1, 2015, these restrictions should continue to be enforced because the old tax regime continues to apply to these grants. However, for options granted on or after July 1, 2015, these restrictions are no longer needed. This means companies should revise their award documents and delete these restrictions (usually contained in the Australia appendix to the award agreement).