Global Tax Withholding for Employee Equity Awards: Practical Solutions to the Not-So-Practical Regulatory Challenges

Written By: Geoff Hammel

Employee equity awards are a popular way for multinational companies to reward and retain their workforce. However, the technical and administrative complexities of global tax withholding can be daunting. In this article, we will explore some practical solutions to navigate these requirements.

Understanding The Challenges

Before we dive into the solutions, let’s first understand the regulatory and operational complexities surrounding global payroll withholding for employee equity awards. These intricacies include:

Payroll laws

Different countries have different tax laws that affect the timing and amount of withholding due. For example, most jurisdictions require income tax withholding on restricted stock units (RSUs) when the awards vest. Others, like Israel, wait until the shares are sold to impose taxes. Withholding rates can also vary – for instance, to incentivize stock options, Canada typically taxes them at half the rate of full-value awards such as RSUs or performance shares. Staying compliant requires understanding individual country laws to properly withhold taxes at the right times and avoid under-withholding penalties or double taxation. As companies expand internationally, the complex web of payroll rules presents an increasing challenge requiring specialized knowledge or consultant support.

Tax Reporting Requirements

Across the globe, employers typically report equity award income in the same manner as an employee’s  regular cash compensation. So, no special, equity-specific forms or disclosures are required. However, some countries have additional tax reporting rules specifically for equity compensation that impose an additional burden on employers. For example, in the UK, employers must file an annual employment related securities (ERS) report detailing all equity award transactions such as grants, exercises, forfeitures, etc. for each employee during the tax year. Australia requires employers to submit an annual Employee Share Scheme (ESS) filing with extensive details on any equity awards issued to employees or shares acquired by employees, including market value at acquisition. Penalties can apply for non-compliance. As multinationals expand globally, nuanced foreign tax reporting obligations like these add substantial complexity for companies administering equity plans across multiple jurisdictions. Staying on top of constantly evolving regulations is critical yet challenging.

Potential risks and consequences

Noncompliance can lead to various risks and consequences, such as financial penalties, reputational damage, or loss of talent. In many jurisdictions, the local employer can be held secondarily liable. Companies need to assess these risks and consequences and take appropriate measures to mitigate them.

Non-compliance with global equity award tax rules can lead to serious financial, legal, and talent impacts:

  • Financial penalties – Failure to properly withhold, report, and remit equity award taxes can lead to fines, interest charges, and other monetary penalties (including secondary liability!) imposed by tax authorities. These costs can be substantial, especially for large multinationals.
  • Reputational damage – Noncompliance that becomes public can compromise a company’s employer brand and public image. This can negatively impact efforts to attract and retain top talent.
  • Employee dissatisfaction – Improper tax handling can financially harm employees if they end up with unexpected tax bills. Low employee satisfaction damages retention and engagement.
  • Loss of equity plan tax advantages – Failures to meet complex equity tax reporting rules can lead to loss of preferential tax treatment. This could significantly reduce the after-tax compensation value for employees.

With equity usage rising globally, it’s crucial for companies to invest in understanding regional tax rules and implement robust withholding, reporting and overall compliance processes. Getting this right mitigates financial, legal, reputational and employee satisfaction risks.

Potential Solutions

Selecting an appropriate tax withholding strategy is critical for global equity award programs. Rather than taking a country-by-country approach, companies should evaluate alternative models and implement a standardized worldwide methodology aligned to their priorities. There are four main methods, each with distinct trade-offs:

Withhold in cash

This approach avoids accounting issues but may create administrative hassles collecting checks globally or pulling extra taxes from employee paychecks. It also risks non-compliance if funds come up short. Feasibility is a concern for large grants where the tax burden would eat up an entire paycheck.

Automatic sale

This approach involves automatically selling a portion of the equity award to cover the tax liability. It can also provide liquidity to the employee and reduce the risk of holding concentrated equity positions. However, it may create additional transaction costs and market risks, and may not be suitable for all types of equity awards or employees.

Pre-code individual tax rates

This method involves pre-coding the individual tax rates for each employee based on their country of residence and other relevant factors. This approach can be used to provide more accuracy and transparency in the withholding process and reduce the risk of under- or over-withholding. However, it may require additional data collection and analysis efforts, and may not be feasible for all countries or employees.

Two-step share withholding

This technique involves two steps:

  1. A preliminary share withholding at vesting using the maximum individual tax rate across the country. This ensures sufficient shares are withheld to cover the tax obligation.
  2. After the vesting event, actual individual tax rates are immediately obtained from local payroll. Any excess shares preliminarily withheld are released back to the employee if actual taxes are lower.

Two-step withholding limits financial risk, avoids payroll cash flow issues, and accelerates share delivery. However, it may not work well for broad-based employee populations.

Each method has tradeoffs across considerations like administrative complexity, cash flow impact, participant experience, and compliance risk. Companies should assess which option best fits their needs before implementing globally. Tax and legal guidance is key when making this decision.

Other Considerations

In addition to the above solutions, companies should also consider the following factors and criteria when selecting their withholding methodology:

How to handle expatriates and cross-border employees

Companies need to be aware of the tax and legal implications of equity awards for employees who work in multiple countries or jurisdictions. They need to consider the relevant tax treaties, social security agreements, and immigration laws that affect the tax residency, source, and allocation of income. They also need to ensure that the equity awards comply with the local securities laws and exchange control regulations, and that the employees are aware of their reporting and filing obligations.

How to communicate and educate employees about the withholding process and options

Companies need to provide clear and timely information to their employees about the withholding process and options. They need to explain the tax and accounting rules that affect the equity awards and the potential risks and consequences of non-compliance or variable accounting. They also need to provide guidance on how to choose the best withholding solution based on their circumstances and preferences, and how to report and file their taxes correctly.

How to coordinate with payroll, tax, legal, and other stakeholders

Companies need to coordinate with their internal and external stakeholders to ensure that the withholding process is smooth and efficient. They need to work with their payroll providers to calculate and report the withholding amounts accurately and timely. They also need to work with their tax and legal advisors to ensure compliance with the relevant accounting rules and tax laws, and to resolve any disputes or issues that may arise. They also need to work with their equity plan administrators to ensure that the equity awards are granted, vested, and settled correctly.

How to monitor and update the withholding rates and rules

Companies need to monitor and update the withholding rates and rules regularly to ensure compliance with the changing tax and legal landscape. They need to stay up-to-date with the latest developments and best practices in each country and jurisdiction and seek expert advice when needed. They also need to communicate any changes or updates to their employees and stakeholders, and ensure that their equity plans and agreements reflect the new requirements.

By considering these other considerations, companies can ensure that their global tax withholding for employee equity awards is effective, efficient, and compliant with the relevant accounting rules and tax laws.

Final Word

Global withholding for employee equity awards can be a challenging and complex task. However, by implementing practical solutions and considerations, companies can navigate these challenges effectively, ensuring compliance with relevant accounting rules and tax laws.

If you’re seeking expert guidance to streamline your equity administration process and mitigate risks, consider partnering with Infinite Equity. Our comprehensive expertise can help you navigate the complexities of global tax withholding for employee equity awards, ensuring compliance every step of the way. To learn more and optimize your equity management strategy, reach out to us today

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