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Top 10 Withholding Woes (and How to Avoid Them!)
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Catherine Turner, Dun & Bradstreet
Andrew Schwartz, Computershare
Nicole Calabro, Baker & McKenzie LLP
Speaker Information
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1. Withholding timing and reporting requirements
2. Withholding methods
3. Withholding rates
4. Country-specific valuation requirements
5. Taxation timing differences around the world
6. Withholding for non-employees and former employees
7. Withholding for mobile employees
8. Authorized withholding methods?
9. Withholding failures and penalties
10. Staying compliant
Top 10 Withholding Woes
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1
Withholding Timing and
Reporting Requirements
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Identify:
Timing of taxation and taxable amount
An obligation to withhold, report or both
o Income tax, social contributions, other taxes
Exceptions:
IRS Field Directive
o Stock Options
o T + 4
ISOs
o No Federal/Employment withholding
o Voluntary withholding
1. Withholding Timing and Reporting Requirements
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2
Withholding Methods
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May Depend on Plan / Company Default Method
1. Selling shares for taxes (forced or voluntary)
2. Wage withholding
3. Net share issuance / share withholding
4. Cash from participant
Withholding – Methods
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Mechanics
Broker sells sufficient shares to cover taxes and other withholding amounts
Selling Shares to Cover Taxes
Advantages
‒ Sale generates cash to cover taxes
(no cash flow issue for company or
employee)
‒ Can withhold at a single combined
maximum rate
(but should confirm with auditors)
Disadvantages / Challenges
– Blackout periods; may require
10b5-1 plan
– Large # of shares sold on a single
day
– Employee consent/broker
authorization
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Mechanics
Company / employer withholds taxes and other withholding amounts from the employee’s salary
Wage Withholding
Advantages
‒ Can use exact rate for each employee
‒ No company cash flow issues
‒ Ease of administration
Disadvantages / Challenges
‒ Salary may be insufficient to cover
withholding amounts
‒ Increased entitlement risk
‒ Country limits on % of salary that
may be withheld
‒ Employee consent may be required
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Mechanics
Company holds back sufficient number of shares to cover the employee’s taxes and other withholding amounts and employee receives the net shares
Company uses cash on hand to remit to tax authorities
Withholding in Shares/Net Share Issuance
Advantages
‒ No market sales
‒ Share preservation
(if set forth in plan)
‒ Likely no broker involvement
Disadvantages / Challenges
‒ Company cash flow issues
‒ Accounting issues / appropriate rate
(subject to change)
‒ Permissible under plan and local
rules?
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Mechanics
Employee pays taxes and other withholding amounts by check, wire transfer or other cash equivalent acceptable to the company
Receive Cash Payment from Participant
Advantages
‒ No broker involvement required
‒ No market sale
‒ No company cash flow issues
Disadvantages / Challenges
‒ Employee cash flow issues
‒ Administratively burdensome
‒ Delay in posting shares
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Computershare Supported Tax Payment Methods
Sell-to-cover
Same-day sale
Cash transfer
Share withholding
Swap – sell for taxes
Online Tax Payment Elections
Allows employees to elect a tax payment method online based on your company’s plan specifications
Special Handling
Ability to aggregate shares for tax collection orders into special handling trades executed by trading team
Computershare Tax Collection Overview
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3
Withholding Rates
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Approaches
IRS: Two valid methods
o 25% / 39.6% flat rates
o W-4 rate combined with regular salary payment
Bridging earnings levels
Tax generally due at employee’s marginal tax rate
May wish to withhold at one rate per country (admin. ease)
o Special considerations may apply if withholding in shares
Withholding – Rates
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4
Country-Specific
Valuation Requirements
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Country-Specific Requirements to Determine Value of Shares at Taxable Moment (Not Exhaustive)
India – category I merchant banker valuation
Italy – average closing price of the shares over the month preceding the date of taxation (ending on the date of taxation and starting on the same day the preceding calendar month)
Malaysia – average of high and low trading price
Country-Specific Valuation Requirements
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5
Taxation Timing Differences
Around the World
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Typically
Tax upon option exercise, RSU vesting, ESPP purchase
Exceptions (Not Exhaustive)
Belgium – options may be taxed at “offer”
Israel – all awards taxed at sale of shares
U.S. – ISOs / 423 ESPP
Exit tax – e.g., Singapore, Israel
Rule of administrative convenience / Retirement - U.S. FICA
Withholding - Timing
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6
Withholding for
Non-Employees and Former
Employees
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Non-Employees
Contractors / consultants
Non-employee directors
Former Employees
Majority of countries will have same treatment as for active employees (but some exceptions)
Issue with reopening payroll for employees
o Even if no withholding
o ESPP Qualified Dispositions
Non-Employees and Former Employees
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7
Withholding for Mobile
Employees
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Country-to-Country
Reopening payroll in former country
Taxable amount
Social taxes
Internal data issues
State-to State
Taxable amount
Internal data issue
Reopening payroll in former state
Solutions
Calculation engines
Manual calculations
Mobile Employees
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8
Authorized Withholding
Method?
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Approaches
Check plan / agreement language (beyond tax withholding provisions) to determine if can rely on other provisions
Obtain consent?
Provide notice, indicating method deemed accepted unless actively rejected? (check with broker if sell-to-cover)
IRS or Other Limitations
o Would IRS care?
o Does not conform to rules
o Allocation of withholding ratably (W-2) vs. estimated payments (1040-ES)
Authorizing Withholding Methods
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9
Withholding Failures
& Penalties
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Significant Area of Exposure
Governments want their money and want to shift responsibility from employees to employers
Tax audits are increasing
Consequences of non-compliance range from moderate (interest, penalties) to severe (criminal liability)
Failure to Withhold
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Voluntary Correction
Statute of limitations generally continues to run until tax is paid
Can mitigate potential fines / penalties by self-reporting / correcting
Failure to Withhold
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10 Staying Compliant
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Best Practices
Re-evaluate withholding obligations at least once per year; monitor new developments in the interim
Re-evaluate withholding obligations more frequently if learn of legislative changes, entity structure changes or if a reimbursement agreement is put into place
Follow-up with local employer to ensure withholding and reporting is occurring properly
Audit your reports – does the withholding make sense?
Staying Compliant
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Review and broaden tax withholding provisions in plans / agreements
Create a task force: HR, legal, accounting, payroll, treasury, tax, vendors
Advise local entities of requirements; audit actual withholding / reporting
Coordinate flow of funds with broker / local entity
Notify participants they remain responsible for taxes, even if there is a withholding obligation
Re-evaluate withholding obligations at least once per year; monitor new developments in the interim
Key Takeaways / Closing Remarks
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Speaker Contact Information
Catherine Turner, Dun & Bradstreet
(973) 921-5598
Andrew Schwartz, Computershare
(201) 680-3340
Nicole Calabro, Baker & McKenzie LLP
(415) 576-3010