Industry experts will guide you through building (or expanding upon) your domestic or global income sourcing program. This session will cover assessing risk exposure, securing people resources to define tax policies, and utilizing system resources to manage mobile taxation in the face of varying legislation. The focus of this session is split between US and global plans. 

Featured panelists:

• Nicole C. Calabro, Baker & McKenzie LLP
• Virginia M. Crofoot, CPA, CEP, Charles Schwab & Co. Inc.
• Melissa Howell, CEP, Charles Schwab & Co. Inc.
• Wendy Jennings, CEP, Cisco Systems, Inc.

Index
What We’re Talking About Today
Risk Assessment
Executive Sponsorship
Stakeholders
Tax Policy for Equity Comp
Align Systems
Participant Communication
Plan and Execute Adoption
 
 
Kathleen Cleary, CEP, NASPP:  Good afternoon, everyone.  Welcome to “Let's Get This Started, Build Your Mobility Tax Compliance Program.”  Our panel today will guide you through building or expanding your income-sourcing program and discuss strategies to help you assess risk exposure, define your policies, and utilize your system resources. 
 
First, we'll start with introductions.  My name is Kathleen Cleary and I'm the Education Director for the NASPP.  I'm very happy to welcome an exceptional panel of industry experts today, Nicole Calabro from Baker & McKenzie, Virginia Crofoot from Charles Schwab, Melissa Howell from Charles Schwab and Wendy Jennings from Cisco Systems. 
 
The slide presentation for the webcast is posted on our website, NASPP.com and you can download or print the slides out if you'd like to take notes on them.  If you are logged in to the GoToWebinar, you should be seeing the presentation slides as we move through the webcast.  You will also have an opportunity to ask questions throughout the webcast by typing them in your GoToWebinar panel.  If we are unable to get to your question during the webcast, I'll follow up with you afterwards by email.  You are always welcome to email me as well.
 
We will post an archive of this program in the next day or two and a transcript in the next few weeks, so you'll have those to refer to if you need to go back and listen or review a topic again.
 
We will go ahead and get started and I will turn you over to our panelists to introduce themselves a little more, beginning with Wendy.
 
Wendy Jennings, CEP, Cisco Systems:  Thanks, Kathleen.  I'm Wendy Jennings and I'm with Cisco's global stock operations team, as well as the M&A stock and payroll team for Cisco.  We manage compliance for around 74,000 employees in 98 countries.  I've been in the equity compensation field for over 30 years, and I’m really happy to be here today.  Now I will hand it over to Nicole. 

Nicole C. Calabro, Baker & McKenzie LLP:  Hi, I'm Nicole Calabro.  I'm a partner at Baker & McKenzie, based in San Francisco.  My main area of focus is global equity, advising multinational corporations on how to incentivize employees outside the U.S. using stock.  I want to thank Virginia and Melissa for being such troopers and making it in today with the storm there in Denver.  I thought it was a little cold in my office here in San Francisco today, but I can't imagine what it's like for you guys.

I’m going to turn it over to Virginia to introduce herself.
 
Virginia M. Crofoot, CPA, CEP, Charles Schwab & Co. Inc.: Thanks, Nicole.  Even in the face of a blizzard, we would not miss the opportunity to be present on an NASPP webcast, so thank you.  Most of my career has been focused around compliance, auditing, and taxation.  I started my career in public accounting as a CPA and then transitioned to the issuer side, but still focusing on audit and compliance, which led me to equity compliance and managing stock plans.  Most recently, I moved to the provider side with Schwab Stock Plan Services, where I currently consult with clients to adopt our global tax functionality and I’m excited, of course, to talk about adopting global tax and income sourcing.
 
Now on to Melissa.   

Melissa Howell, CEP, Charles Schwab & Co. Inc.:  Thank you, Virginia.  I'm Melissa Howell, a senior client service manager in the Charles Schwab Stock Plan and Client Services Group.  I have been with Schwab and working in equity comp for about eight years.  I've worked in various roles within the financial services industry for over 17 years.

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What We’re Talking About Today

 
Howell:  With that, I'm going to take us into our agenda for today.  What are we going to cover over the next hour?  You can see we have a pretty jammed full agenda.  We're going to start out by talking about assessing risk exposures, then go into how you obtain executive sponsorship, gather internal stakeholders, define your company's tax policy, how you assess your system capabilities, work on developing your participant communication plan, and finally executing your compliance adoption.
 
Virginia, do you want to lead us into our first polling question of the day?
 
Crofoot:  Absolutely.  Our first polling question is just to get a gauge of where you are.  Are you in the process of developing a compliance program?  A for “Yes”; B for “No”; C, “You already have one and you're just looking to refine”; or D, “What is compliance?”  You should be able to see the polls and submit your answer.
 
Cleary:  I'll just mention that nobody sees your name when you select your polling response.  So, if you say, “What is compliance?” it's OK, no one will know it was you.  I'll just leave it up for a couple more seconds, if you haven't put your response in yet, please go ahead and do that.  Okay, it looks like everybody who was going to vote has voted, I'm going to close the poll and share the results with you.
 
Crofoot:  Excellent, this is great.  Honestly, in our experience working with clients and talking to a lot of different service providers and consultants, we're seeing a lot of companies that are just now starting to get the budget and resources to support focusing on developing a compliance program for global mobility in taxation.
 
It's really great to see that 24 percent of people listening are already in the process of developing a program.  And I'm happily surprised, 41 percent already have a program and are just looking to refine.  The folks that said, "No" or "What is compliance?", we expected that answer, especially right now.  I think in the future, as we're moving towards more and more scrutiny around mobility taxation from jurisdictions around the globe, and that will change.  It continues to be a hot button issue, so we totally expect that and hopefully we can support you in some way today in transitioning towards developing a compliance program.
 
Moving into risk assessment, Nicole, would you get us started discussing your experience and comments? 
 
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Risk Assessment

 
Calabro:  Sure, we have another polling question here, “Have you conducted a tax risk exposure assessment?”  Easy answer, just yes or no.  We'll leave this up for a few seconds to give everyone a chance to respond.
 
Cleary:  All right.  Looks like the majority of those listening have responded, so I'm going to go ahead and put up the polling results.
 
Calabro:  It's very interesting, given the majority answer to the prior poll.  Moving on to the risk exposure, I will echo what Virginia just said, in that it's not uncommon for us to hear that companies have not yet developed their policy or done their risk exposure assessment.
                   
Part of what we're here to talk about today is for those of you who already have a compliance policy in place and are looking to refine.  What we're going to focus on first are the ways that you can assess your risk exposure and narrow the focus.
 
For those of you who haven't done anything yet, this can be a very daunting task.  Potentially, you have the whole world to worry about.  What we're trying to do here is to help those of you who want to refine your policies.  For those of you who haven't gotten started yet, we hope to give you a little bit of comfort and help you get started in the right direction.
 
For many companies, what you should be doing now is assessing your risk exposure and then narrowing your focus.  What I will say here is that it is definitely an area where there are technically correct answers to what the tax liability is or what you should be doing. Oftentimes to get to that answer, you would have to have information that not only don't you have, but maybe you cannot ask for from your employees.
 
Our suggestion here is that when you are looking at your risk exposure, you should get your hands around it in such a way that you can actually develop something you can administer.  Start by looking at areas—and this is really narrowing the focus—where you can look at participant population types.  Do you want to look at just the domestic, U.S. employees, state to state mobile employees, or do you want to look at international, permanent moves that become localized and then live/work, such as when someone lives in the States but works in Canada or vice versa?
                                       
Another population type you may want to focus on initially is your executive suite.  They usually have the bigger value awards, so when you're trying to get your arms around this or trying to refine your policy, that's a good group to look at.
 
The other thing to consider is looking at the largest concentrations of participants or where you have the largest concentrations of taxes due.  Again, this is something where you’re considering potentially the whole world, you could have some risks, depending on where your employees are moving.  You want to have a scalable, workable process, and these are areas where we would suggest you start looking.
 
The other thing to consider is key risk locations.  If you have people who are moving from the UAE to Saudi Arabia, guess what, they don't pay any income tax there, so there's not really a lot of risk or exposure for you as a company.  If you have people moving from Texas to Florida, no state income tax in either state, so you don't have anything to worry about there.
 
But if you have employees moving from New York to California or vice versa, those are states where there's a lot of audit activity, and those states are looking to collect income from these mobile employees.  Similarly, in terms of countries, we see audit activity in the UK and France, for example and if you have employees moving from the UK to U.S. or vice versa, that may be somewhere you want to start looking.
 
The other thing, once you start looking at these populations and the value of the awards, then you can start developing some de minimis considerations.  Those will vary by company and they will also vary based on where you have your grants and the value of the awards you're granting.  This is a place where companies may take a dollar figure, and say we're not going to worry about it, we're not going to track mobile for anyone whose grant value is under $10,000.  Maybe $10,000 will work for your company, but it may not work for another company—if everyone who is moving has grants under $10,000, they may all add up, and your exposure is greater.
 
Other companies we work with have a 30-day rule—if anyone moves within 30 days of a vest date or a grant date, they just don't worry about it.  Those are ways to minimize or help narrow the focus.
 
After you've assessed these key locations and are planning to start tracking and allocating the income, you’re ready to start trying to get your hands around the issue and correctly withhold and report.
 
The next thing to look at, are you as a company are seeing more and more of your employees moving, so you have an increase in mobile activity?  Are you about to open up operations in the UK or France, or another country or state, and as part of the ramping up and setting up new operations in these countries or states, part of that process is going to be that employees will be sent there for long-term assignments or possibly permanently?  Knowing that you're going into a new country or state, knowing that you have certain individuals transferring, it might be a good idea to look at these issues before you even start sending people.  That's obviously one of the best practices, if you can hit the ground running and start tackling these issues before they arise and before you move people all over the world, at least you're not in a situation where you're trying to do catch-up or correct under-withholdings or even over-withholdings.
 
I think in this area, for those of you who were in the "no" category, I won’t say not to worry, but I wouldn't worry too much because as Virginia mentioned, we are seeing countries developing laws that are specific to mobile employees.  In some cases—I think Belgium and France are good examples—where they have adopted new income tax withholding and reporting rules.
 
Clearly when they're starting to focus on collecting information for individuals who are resident in their countries, so that they can make sure they're getting the taxes they think they're owed, mobile employees are the next step.  That's an indication that these countries are looking for this type of revenue and this income, and they feel that if they're starting to have new rules for the income tax withholding and reporting for either their tax residence, which is the case for France and for Belgium, and it's actually specific for equity awards.
 
One of the things they are focusing on—and made it clear—is that income tax withholding and reporting is required even if the equity awards are granted by a foreign issuer parent.  For those of you who are starting fresh, these might be two countries that you especially want to look at because of the new rules and changes there.
 
Next slide, I talked a little bit about assessing the risk exposure and one of the things you have to worry about now is getting executive sponsorship.  For that, I'm going to turn it over to Wendy.
 
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Executive Sponsorship

 
Jennings:  Thank you, Nicole.  After you've made your assessments and decided how risk compliant or averse you're going to be, if you've decided you’re going to put a compliance program in place, you need to start thinking about how you're going to garner executive sponsorship, which is key for getting the resources that you may need.  You’ll also need a commitment from your key stakeholders to align with you on getting the project off the ground.
 
You really need to make a case for a compliance program with your leadership.  If you do already have a compliance program, ensure that you're utilizing the best practices.  If you are only partially compliant, you may need additional resources to enhance your tax policy and program.
 
Here are some suggestions for developing a proposal for your compliance project.  As Nicole mentioned, you want to look at your company’s statistics and where the populations are that she spoke about.  Are you growing in a certain region or increasing your mobile population?  Show your executives why you made the decisions that you did to focus on certain countries versus others.
 
As she said, some countries are really looking at this more than others, so it really depends where you have your high-risk populations or high-risk countries and how many employees are in those countries that may be a higher risk.  For example, if you are in France and you have a large population there, but you haven't been tracking mobility there in the past, like Nicole said, you probably want to take a look at that.
 
You want to look at where those high population countries are and whether those populations have a lot of equity awards.  If not, are you going to be growing in a certain country where you’ll be offering more equity awards in that particular country or do you have a country where you have a higher number of executives?  Those are some of the things you want to look at and inform your executives and stakeholders of the changes in laws in the jurisdictions with those high populations where high taxes may be due.
 
It’s not just whether a new country has implemented withholding such as France and Belgium, but are the tax rates changing too?  You want to take a look at that and maybe you're in a country where their tax rates weren’t that bad, but if there is a change in tax rate, now the risk goes up. You may want to take a look at that.  You really need to have an overall view of your risks and your system capabilities and determine the resources that you're going to need and present this all to leadership.
 
Do you have an internal tool?  Do you need to create one or engage a vendor for services in order to calculate your mobility taxes?  You have to look at the big picture to determine what resources you might need.
 
Then finally, document the decisions that you make.  I can tell you—I've been at Cisco now about a year and a half—and as you can imagine, it’s a company that has been around for many decades with policies and procedures in place.  It's one of the things you want to make sure you understand when you're coming into a new company, what were those decisions and were they documented?  Then you don't have to reinvent the wheel and do all of that assessment over again.  Maybe the company already looked at it and said, “We're not going to track X, Y, Z companies for X, Y, Z reasons.”
 
You want to be able to document your decisions and have something to rely on for historical purposes as well.  As time goes by, if something changes, you'll be able to go back and say, "We already looked at that country and decided to do the compliance there for mobility, yes or no."  Then if something changes, you'd be able to go back and revisit that.
 
All right, that gets us to our next polling question and, Melissa, I think you are taking this one.
 
Howell:  Thank you, Wendy.  This next polling question is pretty fitting considering we are in the midst of tax season right now.  During which war was the IRS created?  Was it, A, the Civil War; B, World War I; C, Vietnam; or D, World War II?
 
We'll give you all just a little bit of time to put your answers in.
 
Cleary:  For everyone listening, remember you can type a question into your GoToWebinar panel if you have a question as we go along.  This is a very experienced group of panelists, so bounce your questions off of them and I think you'll get a pretty helpful response.
 
It looks like just about everybody has voted.  If you want to put in an answer—now don't be Googling it on the side—this is off the top of your head.  All right, I am closing the poll and I'm going to share the results with you.
 
Melissa, I know you're not seeing the response, but 41 percent said World War I, 30 percent said World War II, 26 percent said the Civil War, and 2 percent said Vietnam.
 
Howell:  Well, the 26 percent are correct, it is the Civil War.  Just a little pivot on that, the IRS was actually founded on July 1st, 1862 and the roots of the IRS go back to the Civil War when President Lincoln and Congress created the position of Commissioner of Internal Revenue.  They enacted an income tax to help pay war expenses.  Later, that income tax was repealed after about 10 years.  Just a fun fact there for you.
 
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Stakeholders

 
Howell:  Now moving on to how to get started early with stakeholders.  We all probably know that whenever we're creating or even expanding upon an existing tax compliance program, it can actually be a pretty major undertaking for a company.  It requires collaboration and coordination from multiple stakeholders within.
 
I'm going to hand this over to Wendy to speak from the issuer side.  Wendy, will you talk a little bit about your experience and which internal teams you would recommend be included in these conversations early on?
 
Jennings:  Thanks, Melissa, and yes, I am speaking from the issuer perspective.  The list on slide 13 is pretty good to start with, everybody on this list has a stake in mobility compliance.  They all have reporting obligations, such as your payroll team.  Your accounting group is impacted as well.
 
The best thing to do is to create a task force with all of these stakeholders to align your compliance goals and discuss any changes you want to make with all of these stakeholders.  All of them will have an impact to their processes and you’ve got some external vendors listed here, too.  You want to make sure that your advisors know what your intentions are.
 
Don't let this be a surprise to your payroll team.  If you're not sourcing income today, and you decide to start doing that, you need to make sure that the various local payroll systems around the world and here in the U.S. can deal with the reporting requirements around the world, and that they have systems in place to report the income.
 
Then create a process to ensure that your payroll department, for example, can actually report and remit the taxes you've decided to source.  Another question is, do you have a global mobility team?  Some companies, like Cisco, have a mobile mobility department.  For smaller companies, it may be part of your HR or tax group.  They may have certain ways of handling things, and so they need to be engaged at the very beginning.
 
If you have a global compliance and legal team, you don't need to determine who within those teams are doing any mobility filings.  Discuss the risks with your legal team and get a handle on where you're willing to take the risk. This goes back to the risk assessment we already talked about, but are there certain areas where you want to be able to be compliant and to avoid the risk, or are you willing to take that risk?
 
In process as well, if you are cross charging different taxation amounts to different entities, do they have a process in place and do they have the right tools in place?  Finally, for your stock plan providers, you need to engage them early on.  They can partner with you to ensure that you're utilizing their system in the most efficient and correct way and they can help you find deficiencies.  You want to ensure that you’re pulling together all of the right stakeholders and create the right team to ultimately create the right compliance program. 
 
With that, I think we are going to go to another polling question.  In 1935, who had the U.S. tax code’s highest income tax bracket—which was 63 percent—applied to them?  The choices are Andrew Mellon, John D. Rockefeller, Sam Walton, or Henry Ford.  We’ll give you a few seconds to answer.
 
Cleary:  Wow, answers are coming in really quick.  Somebody was studying their history!  A couple people have made comments that the audio seems to be cutting out here and there and I apologize. We’re definitely dealing with weather issues across the country, which is impacting our connections.  Hopefully the recorded webcast will be clear and complete if you need to go back and listen to something you might have missed.
 
If you have a response you want enter, go ahead and do it.  I'm going to close out the poll and share the results with you.
 
Jennings:  Well, most people definitely got the right answer.  The right answer is John D. Rockefeller and 64 percent selected the right answer, so good job.  People know their history.  Twenty-two percent thought Henry Ford, seven percent Andrew Mellon, and six percent Sam Walton.  Interesting tidbit there.  Now I think we can move on to tax policy and how you go forward with creating one.
 
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Tax Policy for Equity Comp

 
Howell:  Before we move on and really drill into what to do when creating an equity comp tax policy, we do have one additional polling question for the group.  This one is a really easy yes-no question for you.  Do you have a documented tax policy for equity comp?  We’ll give you just a few moments there.
 
Cleary:  All right, you should be seeing the poll on your screen now.  Answers are coming in really quickly!  Remember no one sees your name, so you can feel comfortable with entering an answer.  I'm going to go ahead and close out the poll and I will share the results with everyone.  Melissa, it looks like 62 percent said that they do not have a documented tax policy for equity comp.
 
Howell:  That helps us as we go into the next section here.  Nicole, I'm hoping you can talk to us a little bit about where a company should start if they’re creating a tax policy or even if they’re just evaluating and updating their current tax policy.
 
Calabro:  I’ll just say for those of you who answered no, there’s no need to panic.  This is what we’re here for and this webcast will help you get started.  This is where you’re going to pull together what we’ve been talking about so far.
 
Hopefully, you’ve already completed a risk assessment and got buy-in from the key executives, and then your key stakeholders.  Here, we just want to comment on a couple of things that Wendy said.
 
For the executive sponsorship, I think it’s easiest to point to changes in the tax laws.  I know I mentioned earlier that France has new income tax withholding rules for their residents and I should have also mentioned that they actually started in 2011 by adopting tax rules requiring withholding on equity comp for non-tax residents.  They started with targeting people who were in France for a portion of the vesting period and then were no longer in France when they actually had a taxable event.  Those were the first people that they went after to try and get this additional revenue they thought they were losing out on.
 
I think whenever there’s a change in the law of a country or state addressing or targeting mobile employees, clearly that’s an easy place to start if you’re trying to get executive buy-in.  The other thing I will say with getting the stakeholders involved is the earlier, the better.  It will help you when you’re developing and creating or updating your tax policy. Getting the stakeholders involved early and making sure that they’re capable of carrying out whatever you’re trying to administer in your policy, that’s critical.  We do sometimes see where payroll is not involved early on, and then we’ve had situations where the company comes back to us and they withheld at the source for multiple countries only to find out that the employee experience was perhaps diminished in the sense that they had taxes withheld for both the UK and the U.S., for example.
 
Then they found out that the UK payroll didn’t have a way to report or remit those taxes to the HMRC, so that’s not a good situation.  Now you’ve had double withholding or extra withholding from an employee perspective, and then those funds did not even make it to the tax authority.
 
When you are updating or creating your tax policy, this is where you’re going to want to document the decisions you made, as Wendy said.  If you have determined that there are certain de minimis rules you’re going to apply because you’ve determined that from a risk perspective, maybe $10,000 or less works for your company or people who transfer within a month of the tax/grant event, you’re not going to track them or we’re only going track people who were transferred for more than 30 days—whatever you decide.  It’s very important to document this and if you have documented it in the past and you’re looking at your tax policy again, this is where you want to evaluate those decisions you made in the past to see if they still hold up.
 
Has your risk tolerance changed in the intervening years?  Or have you—for whatever reason—decided that you’re just not going to worry about a particular state or a particular country because when you developed this policy perhaps you only had 10 people there but now you have thousands?  These are the type of things that are helpful to understand, and to have everything documented as to what you came up with and why you made these decisions.  Certainly, if you are going to have a de minimis rule, we would suggest that you document it and include it in your tax policy.
 
When you are developing that policy, you’re going to want to look at the countries where you’re supposed to source income.  If there are specific rules on sourcing, does a particular country tax based on citizenship, residence, or does it depend on where they’re working, and who their employer is?  We work with a number of companies and they all have different philosophies when it comes to this, but companies want to mitigate double withholding or double taxation where they can.
 
Some companies will look to see if there is a treaty in place that might minimize the double tax impact.  This is also for your employees on an assignment—there may be tax equalization and that’s something you want to document.  Do you have a policy for when you are going to tax equalize someone?  Are there limits on what you’re going to tax equalize them on?
 
You want to look at what’s taxable income versus reportable income, then taxable events and income source timing.  When you’re developing this policy, again, it’s going to be based on the buy-in from your executives and stakeholders, and gathering the information from your risk assessment exposure.  This is where company philosophies will play a big part in developing the policy which also goes back to risk tolerance.  Some companies have a greater tolerance than others; some companies will take perhaps a more aggressive position when dealing with mobile employees and others will be super conservative. 
 
This is where we've seen companies all over the map, some of the companies we work with want to—even if there’s not a treaty or they don’t equalize the employees—minimize double withholding wherever they can.  Perhaps that’s not the technically correct response, but I gave the example where the company over withheld, and for some situations, that could end up eating up 80 percent of the award value, if you were to withhold in both countries according to the countries’ rules.  This is where a company will look at their philosophy, look at the employee experience and that will help define your policy.
 
That’s also where your external tax advisors or internal stakeholders and others can help play a part in determining what you, as a company, want to include in your policy.  I am, of course, a lawyer, so documentation is part of my lifeblood.  I deal with documents all day, every day.  I guess now they’re electronic documents as opposed to paper, but it’s very important here to document these decisions, so that the people who come after you understand what decisions were made.
 
I think that this is an area where many companies are not looking for an A+ score.  They’re looking to maybe get to a B or a C because again, there’s the competing concerns here.  You have the employee’s experience, you have the company’s risk exposure and then you have what you can actually do, what’s scalable for your company.  All of those competing concerns should play a part in what you come up with in terms of your policy.
 
Cleary:  Nicole, before we move on, we do have a question that came in from one of our listeners about the de minimis threshold.  She’s saying that she’s gotten different guidance from different tax experts, and I think that’s probably pretty typical.  Do you have something from your experience—or any of the other panelists—that might be a way to justify what their de minimis should be?
 
Calabro:  Yes, this is where I think that your risk exposure assessment and your risk tolerance both play a part.  I think I gave the example earlier that maybe some companies think that anything under $10,000 of value is acceptable, but if every single equity award you have out there is under $10,000, that might not be your de minimis threshold.
 
The same thing with the days.  I do work with one company that I think is pretty aggressive and they only start tracking after 180 days.  For other companies, it might be a week, it might be a month, it really depends, I think.  You can't just have a blanket rule for every company because it is going to depend on your risk tolerance, looking at your population, and where they are, but I don’t know if anyone else has a different experience on the panel. 
 
Cleary:  I would just share a comment that I heard in a mobility tax compliance session with Marlene Zobayan, “Don’t spend dollars to chase pennies.”  That’s her rule of thumb and I thought that was really good guidance.
 
Crofoot:  I would definitely agree with that and I’d say that we’ve had client experiences where we see them spending $40,000, $50,000, up to $400,000 if their population is significant to calculate taxes, what’s the impact of income sourcing and mobility?  In some cases, we’ve seen that the value the company is paying to have these calculations performed is as much as the tax liability, which might not make sense.  That makes me come back to the hybrid approach, maybe for a larger segment of the population, the assumptions, going with a really standardized way to tax.  When choosing the tax policy, maybe doing flat tax rates or things like that.  For a high-risk segment of the population, having the tax calculated more to the pennies, something like that.  I don’t know, Wendy, what are your thoughts?
 
Jennings:  I really think this is where there’s no one answer.  It depends on your company.  There’s no one size fits all kind of a thing and you really have to look at what your company’s risk tolerance is and the situation.
 
If you’re a company that has had tax audits or is in the middle of a tax audit, your risk tolerance may be lower than another company who hasn’t had anything like that.  What your past experiences have been is I think the biggest key.  What I’ve been told over many, many years is to be consistent and if you do make a change, make it for the right reasons. To what Virginia and Nicole were saying, if your potential tax risk and potential penalties are lower than the cost of what the compliance would be, you may be willing to take the risk.  It’s really not a one size fits all.
 
Cleary:  OK.  I think we can probably move on to talk about aligning your systems.  I’ll just mention a comment that one of our listeners shared, that she has seen a client spend millions on their tax compliance, for only 200 employees.  As Nicole mentioned earlier, if you’re striving for an A+ in this category, it may not be very practical.
 
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Align Systems

 
Crofoot:  That leads us into aligning systems.  It’s a fluid process to do the risk assessment and define tax policy with the consideration of what system capabilities you have.  During the process of defining the tax policy based on your risk assessment, you definitely want to be looking at your system to make sure that you’re going to be able to implement the policies that you come up with.
 
First is defining your system capabilities.  We often experience clients with limitations in transitioning and loading data to their HR system or their payroll system, not just domestically but around the globe.  What’s interesting about that is we sometimes find we have many clients using the same payroll provider and getting different responses from that payroll provider about what data they can accept and accommodate when it comes to transactions that have been income sourced and that have had tax treaty agreements applied, whether that’s tax credits or whatever it might be.
 
It’s not necessarily that the payroll provider is giving them conflicting information, but some of our clients have different levels of service with their payroll provider.  If you run into a situation where your payroll provider says they can't accommodate your taxable and reportable income being inconsistent—which could be the case if you have an income deduction or something going on where you need to fully report income.  Maybe you don’t have a withholding obligation or maybe only a portion of the income is taxable, but it’s fully reportable and so you have a conflict between those that your payroll provider says they can't accommodate.  It might not be that they can't, it might be the service level that you’re engaged with for their plan, so inquire about that, “Is there a different service level or is there a different option that we can choose to be able to accommodate these tax policy decisions?”  The answer may be yes or may be no, but just know that this is something we see with clients; it’s something we’re presenting so you can make sure before changing your tax policy decisions.
 
If the answer is no, then you might have to revisit the tax policies and look at where you can be as compliant as possible, looking at the 80/20 rule for instance, be as compliant as you can with your tax policy while still being able to sufficiently and efficiently process your tax event.  It’s not just finding a system to track mobility, but making sure that you can get the underlying information from your different HR systems or your different HR groups around the globe.
 
Sometimes we run into situations where companies want to implement their tax policy, get it squared away and then we’re going to tax four or five countries based on tiered tax rates—not necessarily having to do income sourcing but as part of your tax project altogether—and then come to find out they can't get the year-to-date in a timely manner from certain jurisdictions to be able to accommodate that.
 
Then you have to go back to the drawing board to figure out what’s the next step.  Are you going to apply a flat tax rate to all individuals in that jurisdiction or are you going to make assumptions, like maybe get an update periodically from those local payroll groups to assess where people are, or maybe a range of where they are?  And then use modified tiered rates, 20 percent or 40 percent, something like that or a 40 percent and a 45 percent, but not getting down into the individual tax rate.
 
We have different options there but, again, there needs to be a fluid conversation back and forth with your HR groups, your payroll teams and your payroll providers around the globe.  Managing taxation, do you have systems and can you get support from your stock plan administration team internally?  Is there anything that you already have in house that you can do to establish direct connections with your tax advisors when looking at and assessing all of your options?  What the pros and cons of those, before finalizing your tax policy?  Then moving back and forth between those and the HR and payroll systems.
 
I pointed out that we do see conflicts in systems around the globe and sometimes even the local payroll team’s understanding of what you’re looking for.  Due to cultural differences, you may embark on this project, you’ve pulled together your stakeholders, pretty much decided how you want to tax folks around the globe, maybe you’ve worked with your local payroll team and they keep telling you, “Yes, I understand, we get it, we’re ready to do that.”  Then as Nicole mentioned earlier, situations where you get to the end of the game, process the tax event and then the payroll team can't accommodate the information you’ve sent to them.
 
It can be really frustrating, because you’ve done your due diligence, you’ve made them aware of the changes, but it’s advisable to make absolutely sure they really and truly understand what you’re going to do by maybe doing some tests with them.  Send them test results and see if they can truly take those and accommodate and remit the taxes appropriately to the local authorities, and whether that works with their local payroll system, their HR system.
 
Again, I think for aligning the systems, the biggest takeaway is to be really fluid and have all of the information on your options as outlined and available as part of defining your tax policy.
 
Calabro:  I just wanted to say one thing about that, going back to getting the stakeholders involved and also your executive sponsorship, because what I see a lot is that the payrolls will tell you that they can't withhold or they can't remit the taxes for someone who is no longer on their payroll.
 
I am not a payroll person and I don’t know how payrolls are set up, but I think if you have the discussions early on and have the executive sponsorship, if the policy is that we are going to do everything in our power to track these people and remit the taxes, then I think this needs to be communicated.
 
I'm not exactly sure how it’s done, but perhaps they have to keep the person on the payroll or make sure that if you’re going to be withholding sourced income on these individuals for their equity award income, they have to do whatever they can to make sure those taxes are ultimately remitted and reported to the applicable tax authority.
 
Howell:  Thank you, really great information and suggestions there.  That takes us into another polling question for the group.  This is pretty easy for you all, “AMT was initially designed to target 155 wealthy taxpayers in 1969”, is that true or false?  We’ll try and get through the polling question somewhat quickly, because I know we’re near the top of the hour.
 
Cleary:  We have up until 2:30 if need more time and it looks like the responses are coming in.  If you have a response, go ahead and enter it and then I will close out the poll and share the results with you.  It looks like 83 percent of those responding said true.
 
Howell:  Yes, isn’t this unfortunate?  That is correct, it is true.  The AMT was enacted by Congress in 1969 and it was in response to data showing them that 155 taxpayers at that time made more than $200,000 per year had paid zero taxes after taking advantage of benefits and deductions.  The AMT add-on to the regular income tax was replaced 10 years later by what we all know and love as the AMT, but unfortunately the reach of AMT has expanded dramatically since then because the exemption thresholds did not rise with inflation for many, many years.
 
With that, we’re going to move into our next section which is participant communication.  And, Wendy, I'm going to throw this one back over to you and see if you can share with us some of the challenges that you come up against and how you overcome those and go about communicating both the compliance program as well as the company’s tax policy to participants.  That can be one of the greatest challenges of all.
 
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Participant Communication

 
Jennings:  Thank you, Melissa.  I think the key here is to communicate, communicate, and communicate.  The last thing you want to have is a process you put in place that backfires, either because your participants didn’t know the change in your process or your stakeholders didn’t know of the change in your process.
 
We think the key here is to define your communication process upfront when you’re defining your mobility policy.  Communication should be part of it, and you should create procedures that include the employee communication piece in the process.  You’ll need to decide if you are going to start to source income, is the stock admin group or the tax group going to be doing that communication?  Or do you have a mobility team that’s going to be doing it?
 
It really just depends on your company and your particular situation.  Depending on the size of your company, you may have a mobility department and a more formal process for communications, with communications tools and a policy around who sends out different communications and whether there any review requirements.  Will your service provider help you with those communications?  Is it more of a process where your policy might even provide help with tax return preparation, for example?  Some companies are willing to help their mobile employees with their tax returns, because the company has asked them to move.  Or maybe it’s all up to the employee to take care of it.
 
You have to decide what level of compliance, what level of assistance and what level of communication you’re going to have for your whole program.  The other thing, too, is if you get notified of a mobile employee, is there an automated notification through your tools with your HR group or is it a manual process?  Is HR sending you notification of upcoming mobile moves?  If so, are you making sure the employee understands the impact of the move on their equity awards?  Some companies will meet with the employees and have a dialogue with them directly, “OK, you are about to move from country A to country B, here is a list of all the awards, and here is the impact.”
 
I think it also depends on whether the company is asking that employee to move versus the employee asking to move.  Your tax policy may have different communications around those different types of situations.  I think the key, again, is to keep the employee informed.  They don't want to be surprised that there could be a double taxation issue.
 
The other thing is to work with your HR group and take a look at upcoming moves.  Is there a grant that the person is about to get, and maybe the company could hold off on making the grant until after the move is complete?  Then maybe that equity award does not have to be sourced, so different things can be done around that.
 
I think the best thing to do is to have your draft communication templates done in advance, so you at least have a start on what the communication is going to look like.  Then determine which population is going to get which type of a communication.  Again, work with your stakeholders on the communication process and make sure that everyone is satisfied with what you are going to say.  You've got to make sure that whatever you tell the employee is actually going to be able to be done by your stakeholders.  For example, is your payroll department going to be able to report that income?  They are probably going to have questions around whether there’s going to be any equalization because they've now got double taxation.  Again, it may depend on the moves and whether or not the company has asked them to move.
 
There could be a lot of questions.  One of the questions I've seen a lot—particularly with state to state mobility—is employees will say, “Well, I moved away from that state, so you reported this wrong.”  They've made assumptions that because they have moved, they are no longer subject to any tax in that particular area.  Communication is key before the moves are done.
 
All of your communications should encourage your employees to get their own tax advice.  Don't forget about that.  You are not a tax advisor.  You want to make sure—particularly if they have control over their move—that they get the advice they need and understand the impact before it happens.
 
You should also try, if you can, to inform them of what the tax withholding and impact may be as far as giving them estimates.  The communication goal is to just make sure that the employee doesn't have any surprises; they know what to expect with the impact on their awards, so they can make an informed decision as far as if they have any control over their move.
 
All right, I think we have another polling question coming up, Melissa?
 
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Plan and Execute Adoption

 
Howell:  Before we drill into planning and executing adoption, we do have one more polling question and I believe it's our final polling question of the day.  "Who said the hardest thing in the world is to understand is the income tax”?  Was it Barack Obama, Al Capone, Benjamin Franklin or Albert Einstein?"  We will give you all just a few moments here to log your answers in.
 
Cleary:  You should be seeing the poll up on your screen now.  Al Capone did go to prison for income tax evasion, so maybe he had a challenge understanding the system.  That probably was why, don't you think?
 
Howell:  I'm sure that's definitely what it was.
 
Cleary:  Not a lot of our listeners are going along with that philosophy.
 
Howell:  They are not buying it.  He understood it, so he was able to successfully evade it, for a time.
 
Cleary:  Yes, you are right, for a time.  But now you can go and visit his cell on Alcatraz.  All right, just a couple more seconds here and I will close out this poll and share the results with you.
 
Melissa, I know you are not seeing it, unless your power has come back on.  Albert Einstein was the number one choice, followed by Benjamin Franklin and then Barack Obama, and finally Al Capone.
 
Howell:  OK, so we've got some good history buffs here on the call today.  Albert Einstein, the physicist, is the correct answer.  This quotation was originally ascribed to Einstein by Leo Mattersdorf, who was a friend of Einstein and also his tax accountant.  Mattersdorf was visiting with Einstein and his wife, heard the statement from Einstein during a meal, and then that quote originally appeared in 1963, when Time Magazine published the letter written by Leo Mattersdorf.  I'm sure you all knew that already, though.
 
Now we are going to cover planning and executing adoption.  Virginia, I know we've gone through a lot of material in the last hour, but I am hoping you can still take a few moments here and talk to us about executing adoption and then maybe recap some of the most important takeaways or best practices that we can talk through from today's session.
 
Crofoot:  Certainly, Melissa.  In executing adoption, one of the most important things that I think gets missed, is conducting that risk exposure assessment.  The reason I think it is so valuable—and we've seen the value with clients—is that it really allows for you as the stock plan administration team to get the support you need to implement these programs locally and around the globe.  Getting executive sponsorship and then being able to really support why it is important to implement these programs despite how complex they can be, and the impacts there can be to participants.
 
Next, developing the compliance proposal based on the risk exposure that's been done, garnering the executive sponsorship and pulling together the stakeholders.  As I mentioned, pulling together the stakeholders because of cultural differences around the globe, especially if you haven't historically had a lot of interaction with these local payroll teams, can seem like things are going well, and unbeknownst to you, the understanding isn't really there.  Really digging in on that would be the suggestion there.
 
Ensuring, with testing actual validations and having those local payroll teams repeat back to you what their plan is, maybe even asking them questions to get them to respond so you can ensure that they get what it is you are planning, and what you are planning to implement, so everything goes seamlessly when you go live.
 
Defining your tax policies, and doing that fluidly with assessing your system capabilities and then revisiting the tax policy and the equity plan as needed.  We didn't touch on that deeply, but the equity plan can be a place where you can increase employee satisfaction with the stock plan in the face of global compliance and mobility taxation complexity.
 
We've seen where implementing a program to become more compliant can create "gotcha" situations with participants that maybe nobody thought about and nobody planned for, with what Wendy mentioned in communications.  If we haven't thought about the "gotcha" situations and communicated those to participants, all of a sudden, they are getting double withholding without the ability to apply tax treaties in some countries, and then the majority of the value of their equity award is getting absorbed by taxes, which is a terrible experience.
 
Look ahead during the tax policy and the equity plan considerations process, to see where those two things can be in balance to best support participants and increase their satisfaction with the plan.  Then perform test runs for the calculations, not just here domestically, but make sure that you understand the calculations, send them to the local payroll groups and make sure they are going to be able to execute them.  Keeping your participants informed as much as possible and updating them frequently, having resources in place for them, someone that they can reach out to when they have questions, maybe pamphlets or fliers.
 
I think it’s a good idea to have local country specific FAQs for participants specifically related to taxation, letting them know, just in case maybe it gets missed that someone is going to move from Singapore or somewhere with an exit tax, to another country.  If you have given them a country-specific FAQ that says, “If you leave this country you will get taxed at exit”  or some countries tax at grant, just letting them know what their country specific situation is to empower them to make decisions about whether or not it is advantageous for them to transfer to another country, and maybe they need to ask more questions or ask for support.
 
I think we can move on to the best practices to recap some specifics around these items.  Definitely establish a manageable tracking system bringing into play how all of your systems around the globe interact with each other, making sure that the tax policy can be accommodated and it’s manageable.
 
Nicole mentioned documentation, if you document something that is extremely complex and you don't understand it, that may cause the tracking itself to be complex and unmanageable to the point where we see that participants get double taxed.  Everything is done correctly, but nobody can quite explain it, because the decisions were made so long ago, and even though it's documented, it's confusing to go through and really understand the inter-country implications.  Make sure that everything, not just the tracking system itself but everything—end to end—is manageable.  We don't want to create a monster, a Pandora's Box of taxation and compliance, which I think in this arena is easy to do.
 
Establishing a de minimis threshold is appropriate, you can support that, documenting the tax policy as well, both for your reference but then also for auditability.  Then communicating in advance that an employee moved instead of after the fact, that is critical. 
 
Having a global mobility team if it's at all possible, who can be really supportive in monitoring and communicating.  Then do some audits of your mobility populations and compare them to your policy as you are able to.  I would suggest revisiting your policy at least once a year, having a good tax advisor in place that you really trust and is available for you to go and ask questions regularly, check in with them once a year to see what has changed around the globe that you might need to take into consideration for your global taxation and implement into your policy.
 
It would also be really beneficial to monitor regularly so that you don’t have a situation where things change and your policy doesn’t, then you audit and there are fees or liabilities you haven’t planned for, or aren’t accurate, because of the rapidly changing environment for global taxation and global compliance.
 
Those are some key tips that can help you all get started with the equity compliance and the mobility taxation space.  We are going to open it up and we are available to answer your questions.
 
Cleary:  I do have a question that came in and I think even just reading the text I can sense some frustration from this member.  She's asking, "Is it realistic to think that companies notify their stock plan professionals of employee transfers?"  Wendy, I know you have a lot of industry experience.
 
Jennings:  Yes, I will take this one.  I think it is reasonable to request that the HR group notify the stock team of a move or an upcoming move.  One way you can do it is if your HRIS system is sending data to your stock recordkeeping system, you should be able to track when a move occurs, if the state changes or if the country changes.  If you are using one of the main recordkeeping systems out there, you should at least get that, and you can typically build rules around flagging those types of changes.
 
It would only be cumbersome if you had hundreds or thousands of people moving around, but you should be able to have a system in place to do that if your company is big enough.  I do think it's reasonable, whether or not they can do it ahead of time for those types of employees, where the company is asking them to do a move, they are probably arranging some sort of tax equalization program with them, so I think you would just need to engage your HR team to come up with a practice that works for both of you.
 
All the companies I’ve been at—smaller companies and bigger companies—they've all had a way to do it.  It is a reasonable thing to ask so that you can become compliant in this area. 
 
Cleary:  That's helpful, thank you.  I know from my past experience, it can feel like you—meaning stock admin—are the last to know when someone has moved, or even terminated, especially in foreign jurisdictions where maybe the communication is a little slower or the payroll people are not aware that they need to let you know.
 
Jennings:  That's where engaging your stakeholders comes in.  If you find that you are not getting information, this is a good time to do a check-in with all your stakeholders.
 
I have a list of stakeholders that I regularly check in with, either monthly or quarterly, and let them know what's going on for the stock team.  They let me know what is going on in their space, anything that might be changing for them, are either of you getting a new tool or trying to implement a new process? Let them know what you are working on and they can let you know.  Start to build a relationship with them if you haven't already, so that you can work together to improve your compliance especially in this area.
 
Cleary:  That's great guidance, Wendy, thank you.  Just one more question that came in and I think this is maybe more of a recommendation, have you seen this kind of thing in your experience?  To any of the panelists, this member is asking if you grant RSUs to someone maybe when they are in the U.S. and they move to a country where the company doesn't grant RSUs, is there anything in particular that you might have seen companies do in that type of a situation that you'd like to share?
 
Crofoot:  I will take that one, this happens all the time, and particularly if you are a company that does not do broad-based grants.  If you are going from the US to a non-US country where they don't typically grant awards, not only would you have mobility issues, you might now be in a new country that if that person is going to continue to get awards or have transactions in that country, it would have an impact on other types of compliance reporting.  There's that piece of it.  Then there’s the fact that now you've got an employee in country A where none of the other employees in country A have an award.  You have to balance how that will work.  If they are a U.S. person and they are still going to be subject to worldwide income, then you've got a person who still needs to be reporting income in the U.S. and likely where ever they move to.
 
That creates more compliance requirements in my opinion.  I've also seen situations where employees, if they are in the ESPP plan, for example, move to another country and that country is not an approved country for your ESPP.  You'd have to remove them from participating in the plan.  Or maybe they are moving to a new country where they don't grant equity, so maybe they are not going to get any more awards.
 
You can't take away the award if you've already granted it, because that's now a contract between the employee and the company.  I think it depends on the situation, but if future participation for that employee changes because of where they move, that's part of the communication you would have to have.  If the move would have an impact, particularly if it would impact whether or not they go there—sometimes employees get asked to move and they just have to.  Maybe the company will say, “This is where we need you”, or you get asked to leave.  It really depends on the situation, but that kind of thing does happen, and you need to be prepared for it.
 
Jennings:  I think that brings up a great point for a multitude of award types—it would be worthwhile to get together with a team internally, maybe even with an external consultant to look at what types of awards you are issuing around the globe, and where certain awards could become problematic because of the award type.
 
For instance, if you are granting a tax qualified award like an ISO in the United States and there’s a possibility that an individual participant holding the ISO can move overseas where the incentive stock option is no longer tax qualified, what is the company going to do?
 
If you do hypo tax or tax equalization, are you going to tax equalize considering the loss of the incentive stock option status?  What will your response be in these situations?  Or if employees live in a country that has an exit tax, and they move to a country that fully taxes current residents; if those jurisdictions don't have tax agreements between them, the individual could be 100 percent taxed on their award or even more.
 
What will the response be?  The reason I mention talking to consultants about that is to consider, in these cases, what are allowable options in these jurisdictions.  Could we accelerate the awards, could we do a cash payout instead to mitigate some of these issues?  What are the legal and appropriate options, and then choose the company policy based on that, to best accommodate the participants in this situation.
 
I think that's a really good question.  And definitely something to think about as far as granting policies are concerned—communication and then just analyzing the participant impact.
 
Howell:  This won’t necessarily address every situation, but one thing I have seen companies do is to have in their policy, when someone is hired—say in Israel—and the idea is that they might be relocated to the U.S. within three to six months of when they are first hired—one company I work with waits until the employee is actually in the U.S. to grant them the award.  This may not necessarily address your situation, but I think it does help with some of these trickier situations and it certainly cuts down on some of the mobile employee headaches if you just wait until the individual is in the country before you make the award.  Something to think about.
 
Cleary:  All right, let’s see if we can squeeze in one more.  This one is a little more specific, so we may want to take this offline, but I will just put it out there, "If you granted an award, say, with a one-year cliff and the employee was in the U.S. and then after six months moved to the UK, do you see companies pro-rate the income between those two countries?"
 
Jennings:  I would say yes.
 
Crofoot:  I would say yes as well.  With those two countries, the good news is, the UK allows you to pro-rate and only withhold and report on the pro-rated income.  The U.S. is its own animal.
 
Cleary:  Yes, thank you.  The last question I will address and I get this one quite often recently, "When will this webinar be on the CEPI's list of continuing education?"
 
We do provide the information to them, and I would just encourage you to reach out to the CEP Institute directly if you are not seeing a particular webcast or local chapter events.  They have had quite a turnover, so I think they are still getting some of their procedures in place.  If you don't see it soon you might want to contact them directly.
 
Well, I hope that everybody listening today got some great tips for implementing new policies or tweaking your existing mobility tax policies.  I learn something new in every webcast.
 
I just want to say thank you to our expert panelists Wendy, Nicole, Virginia and Melissa for participating today.  Thanks for braving the weather to our panelists who are experiencing issues and also our listeners.  I know there were some issues across the country with weather and we had sound quality issues occasionally, but I appreciate you all hanging in there.
 
If you do have a question that didn't get answered feel free to reach out, email me or our panelists, who were very brave and provided you with their email addresses back on slide two, so you can reach out to them directly.
 
If you missed any part of the webcast or if you need to listen to a particular portion again, I will be posting an archived version just as soon as it gets converted.  You will be able to access it from the webcast page, just as you did for today's live session.  There will also be a transcript posted within the next few weeks.
 
Thank you again to everyone.  I hope you will join us next month, on April 25^th, for “Change Service Providers Like A Pro”.  That ends our webcast for today.
 
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