Wednesday, June 12, 2019
4:00 – 5:30 PM, Eastern time

Global developments are consistently impacting employee equity awards for companies with non-US participants. Are you keeping up with these changes and setting yourself up for success?  From taxation changes to onerous filing requirements, learn the top ten most common “gotcha” errors and misconceptions that your company may be making right now - and how you can build processes and practices to help avoid these critical missteps.  The panel will reference the CEP Institute’s GPS publication, and a link to the publication will be made available for participants’ future access.

Featuring a panel of expert global practitioners:

• Denise Glagau, Partner, Baker McKenzie
• Andrea Kagan, Stock Administration, NVIDIA
• Marlene Zobayan, Partner, Rutlen Associates

 
Index
Background to GPS
Gotcha 1 – Timing of Taxation
Gotcha 2 – Onerous Local Requirements
Gotcha 3 – Missing the Opportunity to Tax Optimize
Gotcha 4 – Data Privacy & Security
Gotcha 5 – Errors Caused By Bad Data
Gotcha 6 – Local Payroll Education
Gotcha 7 – Tax Changes
Gotcha 8 – Award Agreement Challenges
Gotcha 9 - Recharges
Gotcha 10 – Tracking Mobility/Mobility Compliance
 
Kathleen Cleary, Education Director, NASPP:  Good afternoon everyone.  Welcome to “Ten Global Gotchas, Nuggets of Wisdom in the CEP Institute's Global Equity GPS”. Today, our panel will discuss global developments that are constantly changing and how you can build your processes to help avoid some critical mistakes.
 
First, we'll start with introductions.  My name is Kathleen Cleary.  I'm the Education Director for the NASPP.  I'm very happy to welcome an exceptional panel of industry experts today,  Denise Glagau, Partner from Baker McKenzie; Andrea Kagan, Stock Administration at NVIDIA; and Marlene Zobayan, from Rutlen Associates.
 
The slide presentation for the webcast is posted on NASPP.com, right where you found the link for the “live” session, so you can go there and download or print the slides, take notes on them if you like and then you can retain them for future reference.
 
If you are logged into GoToWebinar, you should be seeing the presentation slides move as we go through the webcast and you will also have an opportunity to ask questions throughout the webcast by typing them into your GoToWebinar panel.  We'll try and get to your questions today, but if for any reason we run out of time, I'll follow up afterwards by e-mail and I'll pull in the panelists to help with the responses as we need to. I will also be posting an archive of today's program in the next day or two and a transcript will be posted in the next few weeks.
 
Let's go ahead and get started with the webcast and I'll turn it over to Marlene to get us going on the agenda.
 
Marlene Zobayan, Partner, Rutlen Associates:  Thank you Kathleen and good afternoon everybody.  In today's session, we're going to spend a little bit of time providing the background to the GPS, because the Global Equity GPS really lays the groundwork for almost all the presentation that Denise, Andrea and I will be talking about today.
 
We're going to talk about the “global gotchas”.  The gotchas are things that sometimes catch even the most experienced practitioners unaware. Between the three of us, we've come up with the areas that we feel may need additional focus or energy or the most common areas where companies may stumble.  We'll round that out with some lessons learned right at the end and hopefully there'll be time for your questions.
 
With that, I'm going to take it to the next slide and we'll just look at the disclaimer.  I don't have to read it out, but this is obviously the slide that tells you that you cannot sue us for anything that we may say today.  Obviously, we plan to give you great information, but it's not specific to a situation.  It's more to educate you, so you can have an educated discussion with your own advisers regarding your situation.
 
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Background to GPS

 
Zobayan:  With that, let's go on to the next slide and talk a little bit about the GPS.  GPS stands for Guidance, Procedures and Systems and it was started by the Certified Equity Professional Institute who still publish the GPS Publications to this day.  It was started in 2007 to assess the risks and identify the best practices for the equity compensation administration profession.
 
The first GPS was published in 2007 and it covered stock options.  The Global Stock Plan GPS was first published in 2009 and there's a whole list of GPS Publications that are available.  The wonderful thing about the GPS Publications is that they can be downloaded for free from the CEPI website. It's right there.  You just have to put in a couple of details about yourself and then you can download all of them for free.
 
As we go through each of the gotchas today, we'll be giving you the GPS reference number for where you can find the topic we’re talking about in the Global Equity GPS.  There is a lot more in the GPS than we can cover today, but we got together and determined a “Top 10” where we're seeing companies flounder, but there is a lot more there and we would encourage you—if you haven't done so already—to go to the website, download the GPS and take a read for yourself.
 
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Gotcha 1 – Timing of Taxation

 
Zobayan:  Let's go to our first gotcha.  You’ll see for each gotcha, we've got the little red burst on the slide and the blue flag in the lower right-hand corner gives the GPS reference number.
 
The one that comes up quite a lot sounds so basic that I think companies tend to miss it—it’s the timing of taxation.  As I'm sure many of you know, equity awards are not taxed at the same time or the same point in every single country, and there are certainly still countries out there that might tax an award at the time of grant.
 
For example, Belgium—in certain situations—you can still have your stock options be taxed at grant where the employees accept the offer within 60 days.  Restricted stock awards are often taxed at grant and there isn't a year that goes by—I think sometimes not even a quarter goes by—without me having to explain to a U.S. issuing company that the RSAs they awarded to employees outside of the U.S. are taxable at grant and they either have to rescind the RSAs or have to find a way to help the employees pay the taxes.
 
There are still countries that tax equity awards at vest.  In fact, the one “sub-gotcha” here is Australia. Many of you remember, Australia taxed stock options that were granted between July 1, 2009 and June 30, 2015 at vest.  Many companies stopped granting options to employees in Australia as soon as the rules changed way back in 2009.  Some companies started moving people into Australia that had been granted stock options somewhere else and those options continued to vest, and they didn't catch that.  So, there is an issue where you might still have awards that are taxable at vest.
 
Certain countries tax upon exit.  When somebody is leaving the country to go work in another country, they might be taxed on the value of the awards that they are leaving with.  Singapore is the most famous example for this, but you also get a notional exit tax in Hong Kong and even Israel in certain circumstances.
 
Most countries, I'm happy to report, would tax typically at the same taxing point as the U.S., which would be at exercise for stock options or release for RSUs, but you should not take that for granted.
 
Then, finally, there are some countries that tax the sale of shares and that could be a qualifying plan for a particular country, or it could be a country that just taxes certain awards, like Israel.  Andrea, you had some experiences here I think you wanted to share?
 
Andrea Kagan, Stock Administration, NVIDIA:  Yes, thank you, Marlene.  As Marlene mentioned, it’s really important to make sure you're very clear in your communications about what type of award you're granting, because there can be a big difference in the timing of taxation between restricted stock awards, RSAs and restricted stock units, RSUs.
 
Units are typically subject to tax at a later point than restricted stock awards and I’ve worked in some companies where the terms were being used interchangeably.  This can have a very big impact on the timing of taxation and any employer requirements related to reporting and withholding, and also employee requirements around taxes they have to pay.
 
Just be sure, when you're talking about timing of taxation, that you're properly identifying what types of awards you're granting, so that if you're discussing with advisers, as an example, they can give you good information to be able to plan regarding timing of taxation.
 
Zobayan:  Great point Andrea, thank you.  Denise is going to talk about our second gotcha.
 
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Gotcha 2 – Onerous Local Requirements

 
Denise Glagau, Partner, Baker McKenzie:  Yes, thanks Marlene.  I was going to talk about our number two gotcha, which is dealing with onerous local requirements or I guess we could actually say dealing with local requirements, because sometimes they're onerous, and sometimes they're not.
 
As a preliminary point, assume that for whatever company you're at, you did your due diligence for your home country—I think probably for most attendees today, the home country for your company is the U.S.—but whether it's the U.S. or another country, presumably when implementing the plan in the first instance, you did whatever you needed to do to comply with the securities laws and other rules for granting in your home country.
 
But once you go outside the U.S., you then need to look at the rules in any country where they sometimes may vary.  As a general rule, you need to look at the rules in the countries where your employees or other grantees are located, whether they're working there or resident there.  That's the first thing that you need to do, recognize that there are local requirements you will need to understand and comply with.
 
We talk with a lot of companies where, if they have a number of people in country, it seems like it's worth their while to look at compliance.  If they have one or two employees, sometimes there is the hope that they can fall under the radar and that may or may not be true.  It depends on what the particular requirement is and what any exemptions are, and we'll get into more details in a moment.
 
I would say that no matter how many people you have in a country, it is always worth doing a bit of upfront due diligence to save a lot of hassle on the back end if you figure out that there was some noncompliance in the offer in the first instance. I think as an initial step, you want to look at what the rules are.  Sometimes you will be pleasantly surprised actually that either there are no rules or there are rules that are very easy to comply with.
 
A lot of times on the securities law front, there might be an employee share scheme exemption or a small offering exemption that you can rely on in countries where you have one or two employees.
 
Sometimes, there is simply a disclosure you can put in your award agreements to address whatever the concern is in the country.  For those types of countries, it's really worth doing the due diligence, taking the simple action, and voila, you're in compliance.  Those are the nice ones.
 
On the other hand, of course, there are some countries where once you look at what the requirements are, they are onerous and then you get into what are we going to do in that instance?  We'll talk in just a moment about dealing with those requirements, but just to flag a few countries that you probably have already heard of if you're dealing with global equity plans at all.  If you think about granting in China or Vietnam, I would say those two are on the top of the list of very difficult countries to grant in because of exchange control requirements, with virtually no real exemptions for equity awards.
 
Those are the top two and then there are a couple of other ones.  I just want to name a couple so that you have them on your radar if they come up.  I would say Australia, which Marlene mentioned for tax purposes, but there are also some securities law issues there that usually—at least for publicly traded companies—are easy to deal with, but you have to think about it and find an exemption.  Then Malaysia, Philippines, South Africa—I would say those right now are on the list of countries where you need to do a little due diligence and see if you want to grant there.
 
Flipping to the next slide, what do you do when you figure out what the requirements are and you're deciding whether to grant there?  I think the first thing to do is a cost benefit analysis—hopefully you’re not granting in a country without having done this—and as part of that, you would want to look at how many employees there are in a particular country and if it’s somewhat costly, or even if it's not a very costly filing, if there are some costs to doing a filing to come into compliance to grant in a country, you maybe want to consider whether it is worth it given the number of employees there.
 
Then, of course, what is the cost of compliance both initially—and here's another thing that I think a lot of companies don't always look at from the outset—what's the ongoing cost of compliance?  Sometimes with a filing that may need to be done, there’s a one-time filing fee that is nominal, you can do it and then you're set.  There is no other compliance in that country, unless you get a new plan or a new award.  Sometimes, they are ongoing.  Every year, you're going to have to do a filing or pay a fee and I think that should be part of your analysis.
 
Then the other big one, which is not so much a legal point but more of a practical point, is what are other companies doing?  Is it a country where all your competitors are granting equity awards and therefore you really need to do this to have a competitive edge?  I think those are the things we recommend and typically see going on with the cost benefit analysis.
 
Once you have the answer to those questions, you want to assess the risks.  What are the consequences of noncompliance?  Maybe you decided that the compliance cost is too much, you don't want to do it for a certain number of people or you can't do it because there are some countries where their securities law requirements make it simply impossible for a foreign company to comply.  We've tried to do a filing in Bangladesh for a few clients, and so far, we found it is not really possible, given U.S. rules and typical things that U.S. companies have to comply with.  We have not been able to do that filing in Bangladesh successfully.  So, you assess the risks.  What if I grant the awards, not in compliance, what are the consequences of noncompliance and the likelihood of the noncompliance coming to light with the authorities in the country?
 
As a lawyer, I will say, you should comply with the laws.  But in practice, I understand that there are business decisions that get made and you certainly want to go through the assessment before you proceed one way or the other.
 
Then the two prongs at the bottom, if you get to a difficult country, it's too expensive, but we don't want to be in noncompliance, then you have to make some tough calls sometimes.  You just say no, we won't grant there or consider some type of alternative award that does fit into the compliance scheme in that country—maybe cash or some type of cash-settled award.
 
My last comment before going on to the next gotcha is in the GPS, there are some good sections here that really go through the types of things you need to look at in other countries.  I mentioned securities laws and exchange control laws, but there are some other ones that you need to think about outside the U.S.  There's a good listing of those in the GPS and a really great "key considerations" checklist of questions to ask yourself.  The great thing about the GPS is although it is also not a replacement for legal advice, it's a great starting point to get you fairly far along the way to figuring out what you need to do if you're going to be granting globally.
 
Then in the Appendix, there are some really great resources including the Country Administration Guide that helps you kind of tick the boxes on some of the decision points as you look at various countries.
 
Kagan:  Denise, if you don't mind, before we move off this slide, when I think about onerous local requirements, I certainly think first about the securities laws issues that you were talking about, and foreign exchange.  But I think to tieback a little bit to gotcha number one, I think there can also be some onerous local requirements with how you structure the type of award you are granting.  As an example, in Canada, depending on the vesting period of the award, taxation could be accelerated to grant if it falls under the salary deferral arrangement rules.  I think most U.S. based companies are now very comfortable with drafting plans and award types to be in compliance with the foreign securities regulations, but that's another example of a tax-based potentially onerous local requirement.
 
Just be sure that you’re considering local securities and tax requirements structuring your awards.  This will help minimize inadvertently triggering onerous local requirements.
 
Glagau:  Yes, that's a great point Andrea and a good example of how you can structure around and possibly avoid a lot of hassles.  If you structure the award at the outset to comply with the Canadian rules, then you don't have what could be a big headache.  I think that's a great tieback to conduct the due diligence upfront before jumping in.  Now, back to you, Marlene.
 
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Gotcha 3 – Missing the Opportunity to Tax Optimize

 
Zobayan:  Thanks, Denise.  Continuing on the same topic—know before you leap—our gotcha number three is missing the opportunity to tax optimize.  This actually is topical for me right now.  I had a long-time client call me about a week or so ago.  They used to have an office in the U.K., but they shut it down.  They had other countries that they were dealing with and they made an acquisition.  They made a grant to acquisition employees and found out after the grant date that some of these employees were actually in the U.K. Many of you will know that in the U.K., it's possible to transfer the employer's social security charge, NIC, to the employee and have the employee pay it.  I know it sounds very draconian when I say it quite like that, but it is a great tax saving tool for the employer and sometimes companies can make it up by issuing a few more awards to make up for the difference.
 
Anyway, they didn't have a chance to get ahead of it.  Some of the grants were made and we had to then seek legal counsel in the U.K. to see what could be done—if anything—and we're going through that now.  So, it seems very “top of mind” to talk about missing the opportunity to tax optimize, and there's really three types of tax optimization that I want to cover today.  And one of these, you need to do right up front.
 
The first one is along the lines of what I talked about, the U.K. NIC transfer, which is the tax saver awards—awards that may have a tax efficiency built in them based on the way you grant the award or the grant documentation and terminology, but may not in and of themselves go as far as being a qualifying plan.  In addition to the U.K. NIC transfer—which typically should be made at the time of grant for very convoluted reasons I won't go into right now—there is a possibility of getting a 50-percent deduction from the taxable spread for your participants in Canada, if stock options meet certain requirements.  Those requirements are typically easily met in by U.S. public companies, but sometimes, they need a little bit of tweaking in the wording of the stock option agreement.
 
There is making sure you get the Circular 35 filed in China, so your employee might be able to be taxed at better tax rates.  Italy and Spain have deductions as well that might offer the employees a little bit of a benefit if you set things right from the get-go.  All of these, you can probably do after the fact, but the chances are, you may not have the right wording or the right set up in your award agreement.
 
There’s also qualifying plans and those are plans that are akin to a U.S. incentive stock option (ISO) that typically is not taxed in the country where you're granting it until the time that the employee sells the shares.  Often capital gains tax is subject to a more favorable tax rate and may even be subject to annual exemptions in the other country.  Qualifying plans are typically only available for the country that they are in, similar to how an ISO is only tax exempt for U.S. purposes.  A U.K. qualifying plan is only exempt from U.K. tax or U.K. income tax.
 
Most other countries would tax those qualifying plans as if they were regular equity awards.  But there are qualifying plans available in a handful of countries—the U.K., France, Denmark, Israel and a few others.  They are worth considering. Sometimes the administration hurdle isn't worth the benefit that the employee might get, but the point of this slide is that once you miss the boat, you’ve missed the boat on some of these.
 
Then finally there are recharges, which is where the company can get an opportunity to get the corporate tax deduction for the spread that the employee is recognizing.  That one can typically be done after the fact, but not always.
 
Again, with all of these, look before you leap.  And I should just mention, we'll provide more details on recharges in a later gotcha.  With that, I think Andrea wanted to talk a little bit about mobility.
 
Kagan:  I think any presentation about global gotchas certainly needs to include employee mobility; it's important to consider the opportunity to tax optimize not only with respect to your domestic populations around the world, but also with respect to your mobile employee population.
 
Knowing in advance of an international assignment or move whether preferential tax treatment is going to be available in the destination location enables you to set the employee's expectations appropriately and think through the type of award you want to grant to a participant that's mobile.
 
It is also helpful to consider if there is an opportunity to do tax planning related to the date of the transfer?  Is there an opportunity to perhaps shift the dates to potentially scope out taxation of the equity award in the former location based on timing of when that award might be granted or when that award will be vesting?
 
Try to be involved in the process to be able to tax optimize these tax events that are going to happen to the mobile employees.  Is there an opportunity to intervene either from a granting perspective or from a timing of transfer perspective to minimize the possibility of the award being subject to tax in multiple locations?
 
Zobayan:  Thanks, Andrea.  That's a really good point.  Denise?
 
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Gotcha 4 – Data Privacy & Security

 
Glagau:  I was going to spend just a couple of minutes on this gotcha number four about data privacy.  Obviously, this is a topic that has been in the news in a huge way in the last couple of years, so we can't really do it justice in five minutes.  If you haven't attended a presentation on data privacy related to your equity awards in the last year or so, I would encourage you to do so.
 
But what I will say about it, in our brief time now, is just that this is definitely a consideration you should be paying attention to in relation to your equity plans.  If you’ve got employees working for your company or subsidiaries of your company around the world, what is being done with those individuals' data is something you’ve probably looked at or hopefully someone in your company has looked at, just simply in the employment context if someone has been hired to work.
 
There are other things—before we ever get to the equity awards—that data is being collected, processed and transferred for.  I think what happens with equity that causes it to be a little bit outside of what might otherwise be going on in the employment context is you may need to collect different types of data than you're collecting for simply the employment arrangement.
 
Then importantly, you are probably transferring that data to different recipients than you would for other data and I would say primarily for U.S. public companies, to your broker.  There are different data recipients, and whatever is being done in the local employment context might not take that into consideration.  It's worth talking to others in your company more broadly to make sure that you know what has been done in other contexts and then figuring out whether or not that same thing works for the equity plan data and data recipients.
 
One big thing that's happened in the last year, and why this has come to the forefront, is the European Union implemented a new general data protection regulation.  It had a pretty stringent data protection regime before under the data privacy directive, but what happened in May 2018 when they implemented this regulation, was that the consequences of noncompliance really went up.  The laws there really got some “teeth” to them.  We've seen companies revisiting what basis they're relying on to collect, process and transfer data from participants in the EU and the European Economic Area.
 
But then there is also the rest of the world and other countries have implemented stringent regimes.  Canada has quite a stringent regime and there are other countries now proposing new laws.  India has proposed a new data privacy law that actually looks a lot like the GDPR in the EU, so it's not only Europe that you need to pay attention to in this regard.
 
That leads to this last point here, one approach might not work in every country, because the countries that are implementing these data privacy laws may have a different basis that companies can use to collect process and transfer data.  It is definitely getting to be increasingly a challenge to figure out the strategies if you're operating your plan in multiple countries.
 
I think it is something that, given the heightened attention and all the different legislation going into effect around the world, it's worth revisiting and making sure you know what is going on with your equity plans and what you're relying on for use of the data in that context.
 
Kagan:  Denise, can you share a little bit more about looking at data privacy through the equity lens?  As an example, if the company already has data privacy language in the employment agreement, is it also necessary in the equity agreements?
 
Glagau:  Yes, that's a good question, we have been dealing with that a lot in the last year.  I would say especially for Europe, I think the basic thing you need to make sure is that you know what the language says and depending on your company, you may or may not have insight into what is being done in the employment agreements or other onboarding agreements for employees.
 
You need to understand what those documents say and then understand whether or not what you need for the equity plan is covered there.  Sometimes it is very clearly laid out, sometimes it's less clearly laid out, so that's something that you just need to make sure to look at.
 
To answer your question, it really does depend, because there are some companies we've worked with that we looked at what is being done, either actually in the employment agreement or other kinds of ancillary documents that are being used for onboarding employees, and it's covered.  Then maybe in the equity award agreement, there is just a reference to the separate data protection privacy notice that the employee received, just something like that.
 
Sometimes what is being done in the other documents is not sufficient and we may need to build something into the equity award agreement or into some other separate data privacy notice dealing with the equity plans.
 
Zobayan:  Thank you.  And Denise, one of the things that I was thinking about is very often smaller companies tend to use contractors in a particular country, before they open up their subsidiary there, and hire either those individuals or other individuals on as employees.  It seems the rules would apply the same way for contractors as well.
 
Glagau:  Yes, good point.  I think it's really any service provider that you have in any location that has any of these data privacy rules that I think you need to look at.  Contractors, and yes, we certainly see a lot of that with smaller companies, and individuals employed through third-party agencies as well as non-employee directors outside of the U.S.
 
On that note, I will say it's not only outside of the U.S.  We are starting to see some states drafting legislation on data privacy that I think companies should be aware of.  I think it's really any service provider you need to look at the issues for and figure out what you're relying on and that it holds up in whatever jurisdiction you're in.
 
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Gotcha 5 – Errors Caused By Bad Data

 
Kagan:  Our gotcha number five is errors caused by bad data.  I think that probably everyone on the webcast has had a hiccup or two in their plan or plan administration related to bad data, so we wanted to talk about some of the most common events or pieces of information that could be prone to bad data and the cascading effect to having errors downstream.  Things like incorrect withholding rates—are your employer compliance obligations being met with respect to the withholding rates that you're using?  Is there some potential exposure there?
 
Make sure that the employee location, either from a local employee perspective or more typically from a mobile employee perspective, is that location correct?  In some countries, such as India and Italy, there can be a specific fair market value that needs to be used to determine the amount of income from a particular transaction.  If the employee location is wrong, then potentially what's being calculated as income is wrong, which then flows downhill to the income the employer needs to withhold on, the income reported for the employee. 
 
There can also be errors that arise as a result of M&A activity.  Are there changes to the vesting schedules?  The number of awards may be affected by the conversion ratio, which then impacts the number of awards which vest per tranche and how are those rounding amounts calculated.  Particularly if there are ISOs that had been granted and there's a conversion ratio that's attached to those, be sure to review the annual vesting limit.
 
Looking at the new number of awards that had been converted, has the annual ISO vesting limit changed?  Does that potentially disqualify some of the awards as ISOs and then change the ratio of ISOs to non-qual as a result of the conversion tripping over the annual ISO vesting limit?  Has that been calculated correctly?  I would say that, with respect to M&A activity, it's a particularly tricky calculation to get right.
 
Going back to some of the information that Marlene shared, is there or is there not a local tax structure in place for the equity awards?  It's important to make sure that if there is, the election that Marlene was speaking of in the U.K. where the employee pays the employer portion of U.K. Social tax, the NIC transfer, that you have properly identified those employees that have the election and those that don't.  It could be a difficult discussion if an NIC transfer gets applied to a participant who has not signed up for that or alternatively, if the company ends up paying more out-of-pocket than they're expecting because the amount was not collected from the employee.  I would say employees of the same name, that can be tricky. 
 
As an example, I recently encountered a situation where there were two employees who had a non-traditional U.S. name.  Not only did they both have exactly the same name with exactly the same spelling, they were both hired on exactly the same date.  As we went through that the granting process, we had to make we were not confusing one for the other.
 
As an example, with mobile employees, we had record information that said the participant had gone from the U.S. to Australia; however, the participant said I've never been to Australia.  Particularly with mobile employees, it's important to be able to track and make sure that you know where your employees are.
 
Marlene, did you have any additional comments on that?
 
Zobayan:  Yes, thank you, Andrea.  I did want to just talk about, along the lines of your comment on Australia.  I had a client who had an employee move to another state, so a domestically mobile employee, not globally mobile employee.  They allocated the income, we helped them do that for RSUs.  Payroll switched over, we helped roll state withholding over to the new state.
 
It wasn't until March of this year when the employee was filing his tax return did a double take on the W-2 and said, “Wait a minute, I never moved.”  The company doesn't know how the state changed in the employee's record.  It was clearly a mistake and I just wanted to say mistakes do happen, domestically as well as globally.
 
And you can't rely on the employee to catch it themselves.  Their record changed from a low tax state to a high tax state, so you’d think they would have noticed the difference in their net pay on their next paycheck.  But they never did until it came to doing their tax return.  So, it's always worth looking out both domestically and globally.
 
Kagan:  It is also important to consider whether the company has any practices to be able to reconcile information from the equity system to the HR system?  To the point about U.S. states, and comparing data from the equity system to the payroll system with respect to employee location, putting in those types of reconciliations can really help minimize errors caused by bad data.
 
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Gotcha 6 – Local Payroll Education

 
Kagan: Local payroll education is Gotcha number six.  All of these gotchas are critical, but it's really critical to ensure you’ve got really good communication and education in place with your payrolls around the globe.  As it says in that first bullet, implementations of the best systems in the world are meaningless unless they can be used by local payroll.  And while the payroll systems are used for income from regular salary and bonus, equity continues to be a challenge around the globe, not only for mobile employees but also for domestic employees.  I think it starts with ensuring that local payroll understands what an equity award is and why there is a tax, and if it's being delivered in shares, to help the local payrolls understand that it's memo reporting that needs to be done.
 
The employee needs to be taxed on the income from the share settled equity award, but the employee is not actually receiving any cash benefit.  Starting with ensuring that the global payroll teams around the world understand what the award is incredibly helpful in ensuring that payrolls are, in fact, processing through the income from the equity events that happen.
 
I think when we then move to mobile employees, that’s one additional level of complexity and questions and potential noncompliance, because the payrolls don't understand sourcing of equity income or say that the systems will not be able to take an amount which is, potentially different for reporting purposes than for tax withholding purposes.
 
Be sure to really talk through and confirm that after the payroll teams understand what the award is, can the payroll systems can handle income from equity?  And if not, talk through what are the ways that we can solve these issues to be sure that the employer is in compliance globally around the world.
 
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Gotcha 7 – Tax Changes

 
Zobayan:  We’ve spent a lot of time talking about the Gotchas that happen, the “look before you leap” kind of Gotchas at the start of the presentation.  Now we’re into another type of Gotcha which is the Gotcha that happens when things change.  You have something in place and you may have done all the right things upfront and something changes.  Then you’ve gotten yourself into a Gotcha situation where you didn’t expect to be. 
 
The changes can take place in a variety of ways.  They can be a change in the underlying taxation of the award based on the country changing its rules like Chile just did.  It can be a change in the employer compliance requirements such as what happened in Belgium and France earlier this year, starting January 1, 2019—actually March 1 for Belgium—with withholding, the compliance requirement changed.
 
The taxation is exactly as there was before, but now, withholding was introduced for these two countries.
 
Then the withholding rates change, and I think most companies periodically look at the withhold rates, but I've come across situations where companies are withholding at a rate that had been outdated many, many years ago.  So, make sure that you are keeping up on all the different changes.  That could be through news alerts from your vendor, from quarterly or pre-grant meetings with your vendor advisor, or it could be going to the NASPP Conference and networking, going to the CEPI Symposium, et cetera—but it's really important to stay on top of changes.  In addition to legislative changes, there are also changes that the company can make that could have a profound effect on the way that you manage your stock plan.
 
Andrea talked earlier about the importance of educating payroll and that is true, but you need to also keep it up as you may have new payroll personnel potentially coming in.  I had a client a while ago that we'd gone through a major payroll education.  We had even done testing to make sure that all the different payrolls in the countries they were in—they were in about 20 different countries—were doing the right things.  Everybody had passed the test and then they had a personnel change that consolidated their Canadian payroll with the U.S. payroll.  It didn't hit any flags and then a year later, their payroll person came back and said, “I just attended this webinar on Canadian payroll, and they say, ESPP isn't qualified in Canada.”  And we were all surprised.
 
We never knew that the payrolls were consolidated and the person who had been responsible for Canadian payroll—who was educated and trained—had been let go and that role had been consolidated with the U.S. person role.  It never occurred to that individual that ESPP is a not tax beneficial plan in Canada.  So, you’ve got to be aware of personnel changes as well.
 
Then, you’ve got to be aware of corporate tax structure changes. Sometimes going from a branch to a fully-fledged subsidiary or a Tier 1 subsidiary to a Tier 2 subsidiary can make a lot of difference to the implications of your stock plans, particularly on the securities side. 
 
Sometimes companies enter into new intercompany agreements and implement recharges that fundamentally change the way their awards should be taxed or administered.  And somebody at the stock admin levels did not catch this.
 
You’ve got to be aware of changes, both externally and internally, as well within the company.  Andrea, I know you’ve had some experience with those.  Do you want to share?
 
Kagan:  Thanks Marlene.  I think that it has to do with looking at what the taxation change is.  Marlene spoke earlier about the changes in Australia with respect to options and the tax point being at vest.  How that trickles down to what has changed for the employer, with respect to what they need to do from a reporting and perhaps withholding perspective?  And how does that then also change the employee income reporting and tax remittance requirements as well?
 
I think we're certainly seeing a shift in that governments—as indicated here in Belgium and France—are moving more toward making sure that the employer has some reporting and withholding requirements, and to ensure that the employees are also taking action on their compliance requirements as well.
 
Glagau:  Marlene and Andrea, I just wanted to also add one point here, which is that besides tax changes, there are some countries that have some, I'll say “tax uncertainties”, where, depending on different factors—and folks may disagree on the impact of those factors—it's not 100 percent clear in a country whether or not withholding or reporting or social security contributions should be due.  To tie that to the point about the communicating with payroll, I think it's really important to make sure that the folks sitting in the U.S. company, and managing the stock plan here, are talking to payroll and the local entities about the positions in those countries where there is some uncertainty.  You want to make sure that everyone is on the same page about whether or not withholding or social security is required in a country.
 
I would say, wrapping up the local payroll and the tax changes with the tax uncertainty, I think it's important to make sure everyone’s on the same page.
 
Zobayan:  It's a good point, thanks Denise.  And I think it's over to you to talk about award agreement challenges?
 
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Gotcha 8 – Award Agreement Challenges

 
Glagau:  Award agreement challenges—I think the slide here lays it out and this is also very clearly laid out in one of the sections of the GPS that is referred to here on the blue flag.  There are a few different approaches that we see companies taking and there are definitely different approaches that may work for different companies, and different populations within the company.
 
I'll just talk through these three approaches a little bit, and why one or more of them might be better for your company.  U.S. agreements or - I’ll say - home country agreements: you may put together an agreement that complies with all the requirements in your home country.  Andrea made the point earlier that U.S. companies have, over the years, gotten quite good at making sure awards are structured to address US issues.
 
I think what sometimes falls apart is that once you start granting in a new country, that U.S. agreement may not necessarily be the best agreement to give to employees in another country as is.  There might be references in there, for example, the 409A references, that are not relevant outside of U.S.  I don't think that they're harmful necessarily, but sometimes there may be some more restrictive language than necessary to deal with some U.S. issues such as 409A.  At the same time, to make the point about the mobility that I know we touched on, you never know where there are U.S. people working outside the U.S.
 
I think - while those types of references might not be relevant to a lot of your non-U.S. population—my view is they're not really harmful.  You may want to add some comments that this applies to U.S. taxpayers or something like that.  But I would say the bigger issue with using U.S. agreements outside U.S. is that they usually don't have enough provisions in them to address local country issues.
 
One of the biggest ones we talked about earlier, data protection.  Depending on your approach, you may or may not want to or need to have something about data privacy in your award agreement, that's a big one. 
 
Another big one is some provisions to deal with labor law issues outside the U.S.  In most countries outside of the U.S., the labor laws are much friendlier to employees than we have here in the U.S.  They're either friendlier or at a minimum, they're different.  Employees outside the U.S. may have many more rights than employees in the U.S. when it comes to their equity.  There are a couple of things here about termination payments, for example, vesting during a long notice period.  We don't really have required long notice periods here in the U.S., but in some countries—Canada is a good example—employees can have many, many months of notice where they're still considered an employee but they're no longer going to the office.  They're not actually performing services, they're in a long notice period before they're actually terminated.  If you granted an equity award to someone who ends up on one of these notice periods, you may not want them to continue vesting during that whole long period of time, because the reason you've given them the equity award really doesn't exist anymore.
 
There is some language that will work in some countries to say that, look, when you're no longer actively providing services, depending on the country, that's when your vesting is going to cease.  That's when, in the case of options, you'll begin your post-termination exercise period—that's one example.
 
The other thing is that employees outside the U.S. can very quickly become entitled to whatever you are giving them on a regular basis.  You may think that your equity awards are completely discretionary, if the board decides to grant them one year, they don't have to decide to grant them the next year.  But for employees in some countries, if they've gotten equity awards year after year and, in particular, if their equity awards are mentioned in their employment contract or employment offer letter, it actually can be very difficult to decide one year that you're not going to grant them equity awards or that they're going to get a reduced amount than they had gotten in past years.
 
We don’t typically worry about putting provisions into a U.S. agreement to deal with those things, but I think it's really important outside the U.S. 
 
The other alternative is to tailor your agreement for every single country you're in and address that country's particular issues.  That is obviously very administratively burdensome to do that for every country, depending on how many countries you're in.  And then, very significantly, it doesn't address the fact that employees may move around.
 
This last one here, the global agreement, I think is quite a good approach.  I would say we're seeing it used more and more where you have one agreement that has your normal provisions for the U.S., if you're a U.S. company.  Then built-in provisions that are applicable around the world, usually in sort of an appendix format, so that it says, here are the provisions for Australia, here are the provisions for Germany or whatever countries you're in.
 
Of course, that makes for a very long agreement and I think, Marlene, you mentioned an issue to me one time about getting some employee comments on that type of agreement that doesn't necessarily apply to them.
 
Zobayan:  We're not getting employee pushback on those sorts of agreement.  I'm actually stunned because several of my clients have global agreements.  I'm just always surprised that when someone gets assigned to another country and is told that they have some restriction, they will not say, “Well wait a minute.  I didn't realize, I didn't read that appendix, I didn't know.”  I've never experienced that or at least if my clients have experienced it, they haven't told me about it.  What are your experiences with that?
 
Glagau:  I have also not heard of specific employee pushback.  I definitely hear it from companies and individuals in various parts of the company that the employees already don't read the agreement, they're not going to read a longer agreement.
 
But, I think to your point, if a situation arises where someone is moving and you need to apply different terms and conditions for their new country, even if they didn't read it in the first instance, it's very helpful from the legal standpoint that it's there and you can say, “Look, that was part of the agreement that you signed in the first instance.”  I really think that for companies with a lot of mobile employees, the global agreement is a really useful tool.
 
There's a lot of different ways to structure that, so you don't have to have it bog down employees that it might not apply to with putting provisions into an appendix and structuring it that way.  It's a useful way to go, and in the GPS, there's a great list of the types of provisions to at least think about.  Maybe you’ll decide you don't need them for your countries or for your population, but there's a really great list of typical provisions that we don't really see in U.S. agreements and can be really helpful outside the U.S.
 
Kagan:  It’s important to realize not only equity award agreements but also employment agreements and how far those can stretch.
 
I was part of a company where there was a participant who was in Germany on assignment and the company decided to terminate him while he was on the ground in Germany instead of repatriating him back to the U.S. before terminating his employment.  As a result of terminating him while he was still in Germany, he was able to take advantage of the labor law regulations in Germany in a way that was very beneficial to the employee and not so beneficial to the employer.
 
He made the case for quite a lengthy list of benefits which he ultimately received as a result of terminating him on the ground in Germany.  It's important to look at equity awards, but I think when you're talking about mobile employees, it's also important to step back and also look at the broader picture around employment and labor law issues.
 
Glagau:  Yes, that's a really good point, Andrea, and that actually just triggered another thought about this.  We're talking about award agreements here and there is a lot that you can do to protect the company and put your company in the best position with respect to what you want to do with the equity upon a termination.
 
Most termination situations have some unique issues and I would say it's always good to look at each one and figure out whether you can actually do what you want to do right now.  To your point, Andrea, can you enforce the provisions in the equity award agreement that was so carefully drafted.
 
There are some times that, even if you have all the perfect language in your award agreement and are really in a good position in a country, you might decide that a particular termination situation calls for something different because you always want those to go as smoothly as possible.
 
Sometimes the equity can be used as a tool and I would just say, if you're going to do something different than what you so carefully drafted into your agreement in the first instance, make sure that you take the right corporate action.  These award agreements, and whatever special terms that you build in for your non-U.S. employees should be, under most equity plans, blessed by your committee and approved.
 
If you stray from the treatment set out in the agreement in operation, you need to have the proper corporate action by the committee or its delegate to do something different.  So that I would say is the key thing about all these great things you want to do with the award agreement: don't forget about taking the right action to make sure those get blessed by the right folks within the company.
 
And now for the long-awaited recharge section, Marlene.
 
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Gotcha 9 - Recharges

 
Zobayan:  I feel like at this point everybody has waited so long, thanks, Denise.  We'll start with a couple of basics, for example, what is a recharge?  The basic foundation of a recharge is to enable a non-U.S. company to get a tax deduction for the spread of the equity recognized by its employees.
 
Most of you know that when a U.S. company offers equity to its own employees, there is a statutory tax deduction that the U.S. company can avail of.  That deduction is not available for employees working outside the U.S. unless the employees are working for the benefit of the U.S. company.  And that would be true if, for example, the employees are working for a branch of the U.S. company or a “check the box entity” which is a corporate tax term we don't have time to go into now.
 
Generally, when you have employees working outside the U.S., the U.S. company is not entitled to a U.S. corporate tax deduction for the equity that it gives to those individuals.  Other than the U.S., there are only two countries that allow a statutory tax deduction for the spread—the U.K. and New Zealand.  For every other country, you would have to set up a recharge agreement, and we have a diagram up on the next slide showing how this would work.
 
Here, you have a U.S. company granting an equity award to the foreign subsidiary employee right at the bottom of the slide.  That foreign subsidiary employee works for the foreign subsidiary, so where is the award transaction takes place between the U.S. company and the subsidiary employee, the employee is working for the benefit of the foreign subsidiary, the foreign subsidiary is then charged or given an invoice for the spread of the equity.
 
When it reimburses the U.S. parent company for that spread, it's deemed to have taken a compensation expense for the benefit of its employee and therefore can get a deduction for the spread.  On the U.S. side, the money that it receives from the foreign subsidiary is not taxable as a dividend.  It's actually a transaction in the U.S. parent company stock.
 
If all goes well, the U.S. should get funds from the foreign subsidiary tax-free, not taxable as a dividend and the local entity, the subsidiary, should get a deduction for the income recognized, the compensation recognized by its employee.  Before we go on to the pros and cons of these arrangements, Denise, you had a concern about something you see happening with recharge arrangements.
 
Glagau:  I was just going to ask you about it.  I know when you've been talking, you've been referring to the spread and the slide talks about the cost of the equity.  What I have seen in the past is that, with recharge arrangements, it really was the spread that was being charged or the difference between the value of the shares when they're issued to the employee minus any price the employee pays.
 
In the last couple of years, I've heard more about the accounting cost being the charge used.  Just wondered about your take on that, are you seeing that more as well?  Is this diagram relevant if we're talking about a different cost other than the spread?
 
Zobayan:  At the risk of trying to give a succinct answer to a very complicated topic, I really have concerns where people recharge the cost, the Black-Scholes value of expense to a foreign subsidiary.  The money that comes back to the U.S. parent is free from a U.S. taxation as it is a protected transaction in the U.S. company's own stock, under section 1032.
 
That 1032 protection is only available if it’s a stock that's being transacted.  When you're recharging the Black-Scholes value or some other value before any stock has been given to the employee, I think you're in danger of making any money that comes back to the U.S. be taxable as a dividend instead of being a tax-free repatriation.
 
That's something a very complicated topic and I tried to provide a succinct answer, but I would advise anyone in that situation to talk to their corporate tax department and make sure that they are not inadvertently exposing themselves to corporate taxation that they don't necessarily need to.  That would be my concern on that topic, Denise.
 
Glagau:  All right, thank you.
 
Zobayan:  Often when we do these presentations, we have people say, "Well, why isn’t everybody doing recharges?"  Well, there are some pros and cons.  Some of the pros would be tax repatriation of funds to the U.S., as well as a local tax deduction.  And on the con side, such a recharge does put a cost to the local employer which is how we get the local tax deduction.  However, there are some countries outside the U.S. that may tax the employee based on the cost to the employer.
 
Sometimes, if there's no cost to the employer, the benefit the employee is getting is not deemed to be an employment-related benefit, and it may not be subject to tax, it may not be subject to withholding, and it may not be subject to employer reporting.  You do need to look at the employee impact when you do a recharge.  There are some countries that would inhibit a recharge because of their own foreign currency limitations.
 
I don't think I can say foreign currency these days without everybody instantly thinking of China, but there are a few others out there, such as India, that might be problematic to get the recharge through the foreign currency restriction.  It does have an impact in some countries on the labor relationship.  Denise, do you maybe want to comment on the labor law issues related to a recharge?
 
Glagau:  Yes, I think some of those same issues I talked about before—in some countries there may be increased risks, if the employer is locally bearing the cost.  In some countries it doesn’t, and it is really recognized as simply a financial arrangement between the parent company and the local company.
 
But I think it's always worth looking at, and if you're thinking about implementing a recharge agreement, consider whether or not you're going to make the labor issues in a country even worse for the local employer.
 
Zobayan:  Thank you.  Andrea, I know you had a concern about the U.K. and recharges?
 
Kagan:  Thank you, Marlene.  I think it ties back to Gotcha number 7 on tax changes.  You had mentioned at the beginning of this recharge Gotcha section on the slide that had the red Gotcha number 9, you had mentioned that the U.K. allows a statutory deduction for the U.K.
 
A recharge arrangement is not needed to get the corporate deduction in the U.K., but my understanding is that there's been some ground shifting.  With respect to the amount of that deduction, to the extent that the company is undertaking net share settlement, such that the employees are not receiving the full number of shares as an example of awards at the date of vest or release. 
 
The U.K. may increasingly be only allowing that statutory deduction with respect to the value of the shares that the employee actually receives in the net share settlement situation, rather than 100 percent of the value of the shares that were being released to the employee.
 
Going back to the gotcha, it's important to keep abreast of tax changes.  I think that's one additional example.
 
Zobayan:  Great, thank you.  I think we're unto our final gotcha.  Andrea?
 
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Gotcha 10 – Tracking Mobility / Mobility Compliance

 
Kagan:  We are indeed, and I think everyone on the webinar will know that we can't possibly do justice to mobility and mobility compliance in a short period of time.  But I think this is an area that all companies really struggle with.
 
I don't think that any company feels like they've really gotten their arms around it and are compliant with their mobile employee population 100 percent of the time and at 100 percent of the locations.  So, know that everyone struggles with this.  It can be an area where, as an example, not all of the mobile employee population is even known.
 
I think increasingly it is important to be able to expand that group of mobile employees to include business travelers, whether US domestic or intra-Europe.  It's hard for companies to get their arms around even who the population is to be able to then take steps to be in compliance with employer payroll obligations.
 
Corporate culture is important with respect to mobility compliance and what populations will be included in the definition of mobile employee.  I think we've definitely seen in the past, probably five years a big shift of the type of mobile employees, from your traditional expatriates to just folks who permanently transfer from location to location.  Is the corporate culture recognizing only those permanent transfers as mobile employees where there needs to be some review of employer compliance?  Or, does it envelop the entire scope, including groups such as business travelers?
 
As I mentioned previously, payroll is really key in ensuring employer compliance and many companies struggle with how to manage this.  I have been part of companies who managed most of the process on spreadsheets, from tracking employees, to be able to source income on spreadsheets.  I have also been part of companies who have implemented a fully automated calculation system.  There are a number of different systems that can help with this.
 
We're sort of all familiar with the risks for noncompliance.  Reputational being the one I think potentially can be the most damaging, but it is very hard to quantify until it actually happens.  That's tracking mobility, in a nutshell.
 
In wrapping up, I wanted to share a few lessons learned.  For bad data errors, as I mentioned earlier, implement periodic audit processes of data in the HR system, data in the payroll system.  For Payroll education—you can't possibly overcommunicate with payroll, communicate early and often.  Potentially with payroll education, you might need to highlight columns on the spreadsheets that they receive, so they know which columns to pay attention to.  Or, hold periodic trainings for payroll in order to help them ensure that they can get their job done. 
 
Mobility compliance, again, you can't boil the ocean.  I think you look at your population, look at your corporate culture and decide what's the right approach for you to be compliant with your mobile employee population.
 
Glagau:  Thanks.  Those are all great lessons learned.  I had a few others that I wanted to highlight and I think these have come out throughout the webcast today. 
 
Do your homework first and that goes to the due diligence point we talked about for tax optimization and for dealing with the local requirements and the award agreement challenges. Make sure you know what you're getting into before you get into it and then work with the other folks involved, recruiters, other people in the company. 
 
Be flexible and open minded.  I think this is really important once you're granting equity globally, because one size does not fit all.  But if you can be a little bit flexible, you can have your program be easier to manage and more cost effective.  One example of that is, if there's a really horrible filing for options in a country, but your plan allows you to grant restricted stock units, think about granting restricted stock units.  Or, as Marlene and Andrea talked about the restricted stock award versus restricted stock units - think about what makes sense and try to be flexible in what you're offering.
 
Regarding these next two points: Once you have made decisions, keep a list of what your decisions were, why you made them and return to those, especially as you go through changes. 
 
Then you do need to review these things periodically.  There are changes constantly in one country or jurisdiction or another. Sadly, you can't just look at this one time and forget about it.  I think if you are reviewing regularly and keeping some of these other points in mind, you can have a manageable global equity program without tearing your hair out or staying up all night worrying about things.
 
Marlene, I don't know if you had any closing comments?
 
Zobayan:  Yes, thanks Denise.  I just wanted to just remind the audience that the GPS is out there.  It's available, free of charge and can be downloaded from the CEPI website.  What we covered today is just part of what's in the overall document, so do go out there and take a look.
 
Kathleen, I believe it's back to you.
 
Cleary:  Thank you, Marlene and we are right at time.  I will just share a couple of comments that came in when we were talking about bad data.  Andrea, I believe you mentioned an employee with the same name and date of hire and the comment that came in was to use an employee ID to be sure to distinguish the correct employee.
 
A question that came in and I think would be beneficial for everyone to hear, if any of the panelists have a good answer.  Is there a good resource for country withholding rates?  It seems like I've been asked that question a number of times.  Anybody have anything to suggest?
 
Zobayan:  I'm not aware of something that's available on the internet that is up-to-date and has all the rates on it.  There are some websites like taxrates.org, but I've often found their rates to be out of date.  What's more, those websites can be a little dangerous because they might not apply to equity.
 
For example, in some countries, you might have a social tax, but it doesn't apply to equity, only income tax withholding does.  You just need to be really careful.  Unfortunately, other than using an advisor, I don't really know a robust source.  Andrea or Denise, hopefully you might have something?
 
Kagan:  Marlene, I would echo what you're saying.  In the companies where I've been “in-house”, we worked very closely with payroll on those withholding rates.  I think in part it goes back to company culture, particularly if you're doing net share withholding and whether the company wants to maximize the number of shares that the employee is holding is another reason to really partner closely with payroll for that information.
 
Glagau:  I don't know of any particular resource that's out there for the public either, but I would say most advisors will have some sort of product that they can put together for you.  I think some brokers will have something that companies can use.  It's probably worth just a question to your tax advisor on, if they have something or what they recommend, knowing your plans and countries.
 
Cleary:  Yes, thank you.  I don't have a particular answer for that one either, I'm sorry.  I thought maybe there was something new since I last asked this question, I believe, of you, Marlene, maybe in another webcast.  But there are a couple of other questions, I'll reach out to you separately after this webcast.  And all of the speakers were generous and gave you their contact information as well.  So you can reach out to them directly with questions, always feel free to reach out to me as well.  I hope that all of you listening learned some of the pitfalls and hopefully some solutions for preventing those errors when you're dealing with your global challenges.  Be sure to download the GPS as well, it will be a great resource for you.
 
If you missed any part of the webcast, we will be posting an archive in the next day or two.  Feel free to listen back to any part or all of the webcast as many times as you need to and make sure that you get a complete understanding of the topics presented.  We'll also post a transcript within the next few weeks.
 
I want to say a huge thank you to Denise, Andrea, and Marlene for all their time preparing for and presenting this webcast today.  I really appreciate all of them sharing their knowledge and their expertise with us.  They are really the experts that I've turned to many times, so thank you very much.
 
I want to thank our audience for joining us today and I hope that I will see you all in New Orleans on September 16th. 
 
Thank you, everyone and that ends our webcast for today.
 
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