traveling with equity - ny naspp chapter meeting - 12/11/2009

Traveling with Equity

Geoffrey Hammel, PricewaterhouseCoopers

Eileen Lacamera, Pfizer Inc.

Craig Long, Bank of America Merrill Lynch

Agenda/Contents

•Challenges of Global Equity•Inconsistent Tax Rules Between Countries•Administrative process•Tax Withholding methodologies•Employee Communications•Lessons Learned

December 2009Slide 3

NASPP Conference

Mobile Employees – Who are they?

• Expatriates• International Transferees• Local Nationals• Business Travelers

• Example of Trailing liability:- John worked in the U.S., received RSUs, was

relocated to the U.K. where he vested in the first tranche, then to Switzerland where he vested in the second tranche. Is the RSU value allocated to countries where he resided?

Does your company track the movements of expatriates/cross-border employees from the time of grant of an award through settlement date?

0%

10%

20%

30%

40%

50%

60%

70%

80%

2009All Companies

2007 All Companies

Yes No

If your company tracks the movements of expatriates/cross-border employees from the time of grant of an award through settlement date, how do you do so?

0%

5%

10%

15%

20%

25%

Excel spreadsheet

Mobility department

Stock planadmin SW -

"snaphot" only

SPA tracks historic mobility

Reconcile SPA SW to payroll stubs

Other

2009All Companies

2007 All Companies

If your company does not track the movements of expatriates/cross border employees, why not?

0%

10%

20%

30%

40%

50%

60%

70%

Too few mobile employeesto prioritize

Still developing anapproach

Number of shares grantedto mobile employees is not

significant

Waiting for SPA to provide Other

2009All Companies

2007 All Companies

Does your company source equity income in relation to awards provided to expatriates or cross-border employees?

0%

10%

20%

30%

40%

50%

60%

70%

2009All Companies

2007All Companies

2006 All Companies

Yes No

Does your company consider trailing liabilities once an expatriate/cross-border employees leaves a particular country?

46%

53%

54%

47%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2007 All Companies

2009All Companies

Yes, we track them

No, we don’t track them


NASPP Conference

Inconsistent Tax Rules between Countries

• Timing of tax event varies (grant, exercise, exit or sale)

• Amount subject to tax varies - Italy: average price over the prior month - China/Taiwan: closing price on date of transaction

• Sourcing rules vary (location at grant/vesting, grant to vest, grant to exercise, treaty sourcing rules)

• Withholding rules vary from income tax rules

• Sourcing of Social tax rules often different than income taxes.

• Reporting – when and how much

• Many countries tax a portion of the award even if employee is no longer present at taxable event (trailing liabilities)

• Qualified or tax favored plans

• Chargebacks


NASPP Conference

U.S. Withholding Rules

Withholding is due at exercise, payroll taxes must be remitted in accordance with the company’s normal remittance timeframe.

• Federal Income TaxSupplemental federal withholding rate: 25% if less than $1,000,000; 35% on any excess

• State Income Tax- State specific withholding requirements and supplemental withholding rate- Not all states follow federal sourcing rules

• Social SecurityOASDI 6.2% on annual wages up to $106,800; Medicare 1.45% on all income. Consider state SDI


NASPP Conference

Foreign Withholding Rules

• Most countries require some form of “real time” wage withholding

• Most countries require withholding at individual rates depending on: - Employee’s marginal tax bracket - Various deductions / exemptions / martial status, etc. - Social tax wage caps often applied on a monthly basis

• Consequently, withholding rates vary by individual and may vary during the course of the year

• Determination of “minimum statutory withholding” is a challenging

• Some countries do not require personal income tax withholding (e.g. Australia, France, Hong Kong); may still require reporting and impose social taxes


NASPP Conference

Trailing Liabilities Issues

• Identifying affected individuals (expatriates, short-term assignees/permanent transfers, international transferees, business travelers)

• Prior work/home location• Applying income tax withholding correctly to allocated

awards• Remittance of taxes when employee is no longer on

payroll and taxes due with non-resident tax return filing• Tax equalization• Employee communication


NASPP Conference

International Plan Administration

• Tracking• Coordination with providers• Tax Withholding


NASPP Conference

International Plan Administration – Timing is everything

Process with broker/admin provider- RSUs- Stock options

Communication with Payroll

Communication with HR

Communication with Employees


NASPP Conference

Tax Withholding and Accounting

• Participant pays cash: Compensation/wage withholding determined at source, employee tenders cash for liability- Requires pre-education, communication, employee

readiness• Compensation/wage withholding determined at source, parent

withholds shares using tax estimate and releases net shares- Local true-up generally required- Potential conflict with accounting requirements for US Co’s


NASPP Conference

Tax Withholding and Accounting

• Compensation/wage withholding determined at source, employer provides information to local payroll, local payroll provides withholding amount to parent and associated shares are withheld

- Precise withholding but delay in share release

• Compensation/wage withholding estimated in advance by local payroll using estimated compensation amount

- Parent withholds shares using estimated withholding, minimal local true up needed

- Shares can be released immediately


NASPP Conference

Net Share Withholding

• Employee receives the number of shares less the shares retained to satisfy the withholding taxes.

• The employer pays, with company funds, the amount of tax equal to the FMV of the number of shares not delivered to satisfy withholding taxes via the local country payroll.

• Actual shares retained by the employer are not issued (and do not become part of treasury stock).

• Rounding?• IFRS implications


NASPP Conference

Net Share Withholding Considerations

• Liability Accounting under FAS 123R• Liability Accounting also applies to hypothetical tax• Implications to qualified plan treatment• Share withholding will result in a cash drain on the company.

For foreign operations, will this be funded locally or through contribution to capital by parent?

• When the company withholds in shares, the employee cannot elect a higher withholding amount


NASPP Conference

Sourcing – Recharge agreements & DTAs • Income allocation between countries• Impact of amounts recharged?• Impact on DTA’s


NASPP Conference

Prevalence of Chargebacks by Country

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

US France Denmark Switzerland UK Germany Mexico Argentina Spain

2007All Companies

2006All Companies

2007Europe

2007 Global Equity Incentives Survey Results


NASPP Conference

Reasons for Chargeback

0%

5%

10%

15%

20%

25%

30%

35%

40%

To secure local tax

deductions

To mitigate costs of expensing

Mitigate costs &secure deduction

Other

2007All Companies

2007 Based in Europe

2007 Global Equity Incentives Survey Results


NASPP Conference

Employee Communications

- HR, Equity, Tax work together to educate employees going on assignment

- Mobility Team educates employees on impact of assignments on stock grants as part of overall mobile employee education

- Hire consultant to advise of procedure and in-country regulation

- Tax advisor engaged by company provides support/assistance to employees while on assignment


NASPP Conference

Lessons Learned

- Tracking mobile employees needs to be “sponsored” by a global executive- Administration can never be fully automated (in this lifetime)- One process does not fit all- Functional limitations of Host and Home Country Payroll Systems may

require exception/manual processing for mobile employees*Primary hurdle in implementing a global process

- Under a distributive payroll organization, Global Payroll Executive must take active roll in driving processes through his/her organization

- Enlist support from Internal Audit Department to ensure compliance by making tax compliance review as part of the regular country audit program

*Start with a pilot program as proof of concept


NASPP Conference

Lessons Learned

- Establish a working team with major stakeholders managers (Stock Team, HR, Tax, Global Payroll) to ensure operation compliance *Forum to discuss issues and share new information

- 100% compliance with all global tax regulations/obligations by a Plan Sponsor is often difficult to obtain

- Considerations*Prioritize based on countries with the highest financial and

business risk*Establish a Global Compliance team (Legal/HR/Stock team) to

establish priorities- It is better to at least start tracking than to keep ignoring.

Start somewhere…

December 2009

Lessons Learned

• While there are tools and tricks that help, presently it will remain partly manual until features are added to the software and countries become more consistent with taxation practices

• Check for updates frequently (rates, laws, addresses!)

Slide 25NASPP Conference

December 2009

Bank of America Merrill Lynch Disclaimers

Bank of America Merrill Lynch and its representatives do not provide tax, accounting or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used for the purpose of avoiding U.S. federal, state or local tax penalties. Please consult your own independent advisor as to any tax, accounting or legal statements made herein.

Bank of America Merrill Lynch is not affiliated with PricewaterhouseCoopers LLP or Pfizer Inc.

Bank of America Merrill Lynch is a marketing name for the Retirement & Philanthropic Services businesses of Bank of America Corporation. Banking and fiduciary activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Brokerage services are performed globally by brokerage affiliates of Bank of America Corporation, including Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPFS). MLPFS is a registered broker-dealer, Member SIPC, and a wholly owned subsidiary of Bank of America Corporation.

Investment products:

Bank of America Merrill Lynch makes available investment products sponsored, managed, distributed or provided by companies that are affiliates of Bank of America Corporation or in which Bank of America Corporation has a substantial economic interest, including Columbia Management, BlackRock, and Nuveen Investments.

Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value

The following disclaimers are applicable to pages 22 through 25 only.

© 2009 PricewaterhouseCoopers LLP. All rights reserved. "PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopers International Ltd., each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP.

Questions?

All charts and graphics on pages 4 – 21 are reproduced from the 2009 PricewaterhouseCoopers LLP Global Equity Incentive Survey.

This presentation and underlying documents should not be relied upon as constituting tax advice to attendees and the materials were not intended or written to be used, and they cannot be used, for the purpose of avoiding U.S. federal state or local tax penalties.