You are undoubtedly aware that the current corona virus pandemic has resulted in a steep decline in stock markets around the world. The Dow Jones Industrial Average fell from a high of 29,568 in mid-February to 19,173 on March 20. Obviously, this steep decline has many significant ramifications for all of us. However, the focus of this post is the global equity tax impact.
There are going to be some participants whose taxes may be affected more than others’ during times like this. In particular, there are three categories of concern:
The two countries that most come to mind in this category are Italy and India. Participants in Italy are subject to tax using the “normal value” of the shares, normal value being the average closing price in the previous month. In times of steep market decline, like now, the normal value of the shares and, therefore, the taxable income are likely to be much higher than the actual income these participants will realize.
Participants in India will have their taxable income calculated using a valuation from a Category One Merchant Banker. While this valuation is good for 180 days, companies should consider updating their valuations frequently to avoid participants paying taxes on an out-of-date and probably too-high valuation.
Even participants in countries that use a closing price to determine taxable value, such as China, may end up with a high valuation if the transaction occurred on a rare stock market rebound day such as March 13 when the Dow Jones Industrial Average rose by approximately 5.5%, only to drop again the next day.
Some participants may be in countries where taxes are due after year-end with the filing of their tax returns and therefore no employer tax withholding is required at the time of transaction. Australia, Japan, and Hong Kong are examples of these. Many companies have quarterly RSU vest events in mid to late February. If participants had taxable transactions and did not dispose of the shares at that time to set aside funds for taxes, they will likely have cash flow issues when the time arrives to pay taxes.
Take an example based roughly on the Dow Jones Industrial Average: if the vest occurred when the share price was $30 and the share price subsequently drops to and remains at around $20 until the tax return is filed, a participant who vested in 1,000 shares and pays tax at, say, 40%, would have taxable income of $30,000 and owe tax of $12,000. This would result in the individual potentially needing to sell 600 shares ($12,000 in taxes divided by a sale price of $20 per share) instead of 400 that would be sufficient to cover the taxes if the shares were sold at $30 per share, an additional 20% of the award.
Note that US participants who 1) had supplemental income taxes withheld at 22% but owe taxes at a higher rate or 2) exercised ISOs and made disqualifying dispositions are likely to be in similar situations.
Some participants may have paid taxes prior to a transaction. Notable cases are those participants who accept stock options within 60 days in Belgium and those participants who paid the exit tax when leaving Singapore. Luckily for employees who paid the exit tax, they can apply for a reassessment after the actual transaction takes place as long as it is within four years of assessment from the year the exit tax was paid.
Unfortunately, there is no magic remedy for many of these situations; the only relief that an employee may have is a capital loss carry forward. Once countries get their arms around how to handle the pandemic, there may be other relief forthcoming, but it is too soon to tell.
As issuers, you can inform your employees of their tax obligations by reminding them where to find such information (if your company includes non-US tax FAQs) and/or remind them to seek qualified tax advice.
If your company is thinking of issuing bonuses or loans to make up for a shortfall in the stock price, please consult with your global equity advisor as those additional benefits could change the taxation of the equity awards.
If your company is considering granting stock options in the current market conditions, please remember that certain countries, such as France (qualifying plans) and Belgium, have certain exercise price requirements to avoid the stock option being deemed to be granted with an exercise price lower than the fair market value of the underlying shares.
Finally, this is also a good time to review any securities and foreign exchange filings and related quotas to determine the impact, if any, of a volatile stock price.
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