When the country in which an employee works differs from the time when an equity award is granted to when it is vested or exercised, global payroll professionals must be alert to equity-award taxation requirements, payroll directors said May 15.
“Global tax authorities know that equity is a big part of peoples’ compensation structure, and they want a piece of the pie,” said Kathleen Soderman, a managing director at KPMG LLP. “They know how to get their hands on these income elements that need to be reported in these jurisdictions.”
Under the concept of trailing liability, a country where an employee worked when an equity award was granted recognizes the award as taxable and needing to be reported even if the employee left the country and the award vests or is exercised while the worker is in another country, said Irma Scott, also a managing director at KPMG.
“Just because someone is not in a jurisdiction any longer does not mean there is no trailing liability that you still need to account for with reporting in that jurisdiction,” Scott said at the annual American Payroll Association Congress in Long Beach, Calif.
To help manage the enforcement of trailing liability, a country may establish a time limit that starts when an equity award was granted to an employee working within its borders and ends a specified number of days after the employee has departed the country. Within this time period, the equity award remains taxable by and must be reported to the country when it is vested or exercised, Scott said.
An equity award granted to an employee who has worked in multiple countries following the date of grant and up to the date of vest or exercise may be taxable by and reported to all the countries where the employee has worked between the date of grant and the date of vest or exercise, Soderman said.
In such a situation, double taxation is often avoided by each country having taxability over part of the equity award amount, she said. To determine what portion of the award’s value is taxable by a country, the number of days must be calculated during which the employee was in the country, from when the award was granted to when it was vested or exercised. The resulting number of days is then divided by the total number of days in the period, she said.
For example, an employee worked in the U.S. when four portions, or tranches, of 25 restricted stock units (RSUs) totaling 100 units were granted on Jan. 1, 2016, Soderman said. In this case, one of the tranches vested by Dec. 31 each year from 2016 to 2019. If the employee is in the U.S. in 2016, in the U.K. in 2017 and 2018, and returns to the U.S. in 2019, here is how the the vesting would occur:
- The first tranche of 25 RSUs would be subject only to U.S. tax and reporting, based on the employee being in the U.S. from the grant date.
- The second and fourth tranches of 25 RSUs would involve half of each tranche (12.5 RSUs) being subject to U.S. tax and reporting and the other half subject to U.K. tax and reporting, based on the employee being in the U.S. for half the time from the grant date and in the U.K. for the rest of the time.
- The third tranche of 25 RSUs would involve one-third of the tranche (8.33 RSUs) subject to U.S. tax and reporting and the rest (16.67 RSUs) subject to U.K. tax and reporting, based on the employee being in the U.S. for one-third of the time from the grant date to the vesting date and in the U.K. for two-thirds of the time.
Properly tracking the location of employees after the date they were granted equity awards is necessary for payroll departments to achieve reporting and tax compliance, Scott said.
“Eighty-two percent of companies have some type of tracking for data in order to ensure that they’re tracking mobile individuals” to determine reporting and taxation of equity compensation, Scott said.
More information for payroll professionals to consider as it relates to compensation plans for globally mobile employees is available in Bloomberg Tax’s Building Expatriate Compensation Plans chapter.