Successfully reported this slideshow.
Global Withholding on Restricted Stock and Restricted Stock Units NASPP Ohio Chapter Meeting February 6, 2007 Geoff Hammel...
Agenda <ul><ul><li>What is required? </li></ul></ul><ul><ul><ul><li>US accounting rules  </li></ul></ul></ul><ul><ul><ul><...
What is Required? <ul><ul><li>Because there is no cash readily available upon vesting or delivery, most companies prefer t...
What is Required? <ul><ul><li>Accounting guidance </li></ul></ul><ul><ul><ul><li>In order to avoid variable accounting, FI...
What is Required? <ul><ul><li>In the US, relying on the supplemental federal withholding rates will satisfy the accounting...
What is Required? <ul><ul><li>In the US, employers have two choices: </li></ul></ul><ul><ul><ul><li>Withhold based on an e...
What is Required? <ul><ul><li>Most other countries require companies to withhold at individual rates depending on: </li></...
What is Required? <ul><ul><li>There are differing views in the marketplace: </li></ul></ul><ul><ul><ul><li>Is the suppleme...
Vendor Considerations <ul><ul><li>Possible Tax Payment Elections </li></ul></ul><ul><ul><ul><li>Participant pays cash </li...
Potential Solutions <ul><ul><li>Withhold in cash </li></ul></ul><ul><ul><ul><li>From regular paycheck </li></ul></ul></ul>...
Potential Vendor Solutions <ul><ul><li>To avoid the accounting concerns, use two tax rates </li></ul></ul><ul><ul><ul><li>...
Withhold in Cash Some countries restrict amount of withholding from paychecks May cause timing problems with local deposit...
Automatic Sale With Withholding From Sale Proceeds Requires an authorization to trade May require changes to plan document...
Pre-Code Actual Individual Tax Rates Relatively labor-intensive May not be feasible for broad-based population Inherent ri...
Two-Step Share Withholding Will cause the administrator and payroll to make two tax journal entries per vesting event Requ...
How Do You Decide? <ul><ul><li>What does your plan document permit or require? </li></ul></ul><ul><ul><li>Is your populati...
Other Considerations <ul><ul><li>Share withholding will result in a cash drain on the company </li></ul></ul><ul><ul><ul><...
Other Considerations <ul><ul><li>Create or participate on a task force </li></ul></ul><ul><ul><ul><li>HR, Legal, Accountin...
Questions
Upcoming SlideShare
Loading in …5
×

Global Withholding On Restricted Stock And Restricted Stock Units - Ohio NASPP Chapter Meeting - 2/6/2007

3,429 views

Published on

Published in: Business, Technology
  • Be the first to comment

  • Be the first to like this

Global Withholding On Restricted Stock And Restricted Stock Units - Ohio NASPP Chapter Meeting - 2/6/2007

  1. 1. Global Withholding on Restricted Stock and Restricted Stock Units NASPP Ohio Chapter Meeting February 6, 2007 Geoff Hammel, PricewaterhouseCoopers
  2. 2. Agenda <ul><ul><li>What is required? </li></ul></ul><ul><ul><ul><li>US accounting rules </li></ul></ul></ul><ul><ul><ul><li>Global tax considerations </li></ul></ul></ul><ul><ul><li>Potential solutions and practical considerations </li></ul></ul>
  3. 3. What is Required? <ul><ul><li>Because there is no cash readily available upon vesting or delivery, most companies prefer to withhold shares on restricted stock (RS) and restricted stock units (RSU) to satisfy their payroll withholding requirements </li></ul></ul>
  4. 4. What is Required? <ul><ul><li>Accounting guidance </li></ul></ul><ul><ul><ul><li>In order to avoid variable accounting, FIN 44 provided that when a company withholds in shares, it may not withhold more than the “minimum statutory withholding” </li></ul></ul></ul><ul><ul><ul><ul><li>Minimum statutory withholding includes federal, state and payroll taxes </li></ul></ul></ul></ul><ul><ul><ul><li>FAS 123R follows the same rule as FIN 44 </li></ul></ul></ul><ul><ul><ul><ul><li>No longer a concept of “variable” accounting, however, liability accounting would result under FAS 123R </li></ul></ul></ul></ul><ul><ul><ul><li>Industry advocates requested that FASB allow “hypo” tax for expatriates to be withheld in shares – FASB declined </li></ul></ul></ul>
  5. 5. What is Required? <ul><ul><li>In the US, relying on the supplemental federal withholding rates will satisfy the accounting requirements </li></ul></ul><ul><ul><ul><li>Be cautious of state withholding requirements </li></ul></ul></ul><ul><ul><ul><li>Some states have supplemental rates </li></ul></ul></ul><ul><ul><li>Very few countries outside of the US have supplemental or flat withholding rates that apply to equity compensation </li></ul></ul><ul><ul><ul><li>Most US companies will have withholding requirements in 1/3 to ½ of the countries in which they make grants </li></ul></ul></ul>
  6. 6. What is Required? <ul><ul><li>In the US, employers have two choices: </li></ul></ul><ul><ul><ul><li>Withhold based on an employee’s Form W-4 </li></ul></ul></ul><ul><ul><ul><li>Withhold based on the supplemental withholding rates (25% / 35%) </li></ul></ul></ul><ul><ul><li>Using the supplemental rates has been interpreted to satisfy the “minimum statutory withholding” </li></ul></ul><ul><ul><li>FICA / Medicare withholding is also required </li></ul></ul><ul><ul><li>States can be challenging </li></ul></ul><ul><ul><ul><li>Some have supplemental rates </li></ul></ul></ul><ul><ul><ul><li>If not supplemental rates, then treat like the foreign countries </li></ul></ul></ul>
  7. 7. What is Required? <ul><ul><li>Most other countries require companies to withhold at individual rates depending on: </li></ul></ul><ul><ul><ul><li>The employee’s marginal tax bracket </li></ul></ul></ul><ul><ul><ul><li>Various deductions / exemptions / martial status, etc. </li></ul></ul></ul><ul><ul><ul><li>Social tax wage caps often applied on a monthly basis </li></ul></ul></ul><ul><ul><li>This means that withholding rates vary by individual and may vary during the course of the year </li></ul></ul><ul><ul><li>This poses a challenges in determining “minimum statutory withholding” </li></ul></ul>
  8. 8. What is Required? <ul><ul><li>There are differing views in the marketplace: </li></ul></ul><ul><ul><ul><li>Is the supplemental rate always okay? </li></ul></ul></ul><ul><ul><ul><li>What if an employee can influence the withholding rate? </li></ul></ul></ul><ul><ul><ul><ul><li>Filing status </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Number of exemptions </li></ul></ul></ul></ul>
  9. 9. Vendor Considerations <ul><ul><li>Possible Tax Payment Elections </li></ul></ul><ul><ul><ul><li>Participant pays cash </li></ul></ul></ul><ul><ul><ul><li>Company withholds shares </li></ul></ul></ul><ul><ul><ul><li>Participant sells enough shares to the open market to cover the tax obligation </li></ul></ul></ul><ul><ul><li>System Functionality </li></ul></ul><ul><ul><ul><li>How might system functionality limit/broaden your alternatives? </li></ul></ul></ul><ul><ul><ul><ul><li>Use of default election </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Support of open market transactions </li></ul></ul></ul></ul><ul><ul><li>Reporting Limitations? </li></ul></ul><ul><ul><ul><li>Ensure all “necessary” information is available to plan sponsors and transfer agents </li></ul></ul></ul>
  10. 10. Potential Solutions <ul><ul><li>Withhold in cash </li></ul></ul><ul><ul><ul><li>From regular paycheck </li></ul></ul></ul><ul><ul><ul><li>Collect a check from the employee </li></ul></ul></ul><ul><ul><li>“ Automatic” sale with withholding from sales proceeds </li></ul></ul><ul><ul><li>Pre-code individual tax rates </li></ul></ul><ul><ul><li>Two-step share withholding </li></ul></ul>Before implementing any of these solutions, we recommend that you discuss the process with your independent auditor
  11. 11. Potential Vendor Solutions <ul><ul><li>To avoid the accounting concerns, use two tax rates </li></ul></ul><ul><ul><ul><li>The first tax rate would be used for non share withholding taxation. The second rate would be used for share withholding taxation </li></ul></ul></ul><ul><ul><li>Provide the client the ability to limit the tax payment methods based on participant locations </li></ul></ul>
  12. 12. Withhold in Cash Some countries restrict amount of withholding from paychecks May cause timing problems with local deposit requirements Could cause impermissible loans and/or interest charges Next paycheck may not be sufficient to cover withholding Employee has all shares available to hold or sell Collecting checks is nearly impossible with a large population Avoid the accounting issue entirely Cons Pros
  13. 13. Automatic Sale With Withholding From Sale Proceeds Requires an authorization to trade May require changes to plan document and/or grant agreements Some legal counsel have said “no” Relatively low time commitment to establish and maintain May result in the sale of more shares than are required to meet the withholding obligation Settles the employee out of the transaction quickly May not be available for currently outstanding awards, or may require agreement by the employee Should avoid the accounting issue, but title to shares must transfer to employee Cons Pros
  14. 14. Pre-Code Actual Individual Tax Rates Relatively labor-intensive May not be feasible for broad-based population Inherent risk of error Consistent with the general approach many companies are currently using Requires close coordination with local payroll Settles the employee out of the transaction quickly Requires substantial real-time maintenance of individual rates May work well for executive only plans Cons Pros
  15. 15. Two-Step Share Withholding Will cause the administrator and payroll to make two tax journal entries per vesting event Requires additional coordination between company, the transfer agent, the plan administrator and the broker Likely to cause a delay in the employee’s access to a portion of their shares Relatively little up-front development / maintenance required Requires timely and accurate coordination with foreign payrolls at the time of the taxable event With proper administration, we expect that it will satisfy the accounting requirements, however, different Firms may have different views Cons Pros
  16. 16. How Do You Decide? <ul><ul><li>What does your plan document permit or require? </li></ul></ul><ul><ul><li>Is your population executive or broad-based? </li></ul></ul><ul><ul><li>What is the size of your population? </li></ul></ul><ul><ul><li>What is HQ’s relationship with foreign payrolls? </li></ul></ul><ul><ul><li>What will your independent auditor accept? </li></ul></ul><ul><ul><li>How often are your vesting events (accelerations)? </li></ul></ul><ul><ul><li>Would you consider different approaches in different countries? </li></ul></ul>
  17. 17. Other Considerations <ul><ul><li>Share withholding will result in a cash drain on the company </li></ul></ul><ul><ul><ul><li>For foreign operations, will this be funded locally or through contribution to capital by parent? </li></ul></ul></ul><ul><ul><ul><li>Amounts can be significant </li></ul></ul></ul><ul><ul><li>Generally shares withheld to satisfy taxes will come back into the share pool </li></ul></ul><ul><ul><li>When you withhold in shares, the employee cannot elect a higher withholding amount </li></ul></ul><ul><ul><li>Rounding Issues: </li></ul></ul><ul><ul><ul><li>Get it in writing from your auditors whether you round down or up </li></ul></ul></ul>
  18. 18. Other Considerations <ul><ul><li>Create or participate on a task force </li></ul></ul><ul><ul><ul><li>HR, Legal, Accounting, Payroll, Treasury, Tax </li></ul></ul></ul><ul><ul><ul><li>Domestic and regions </li></ul></ul></ul><ul><ul><li>Understand the plan(s) </li></ul></ul><ul><ul><li>Be aware of both domestic and international issues </li></ul></ul><ul><ul><li>Develop phases </li></ul></ul><ul><ul><ul><li>Prioritize critical vs. important </li></ul></ul></ul><ul><ul><ul><li>Design vs. implementation vs. routine </li></ul></ul></ul><ul><ul><li>Determine roles and responsibilities </li></ul></ul>
  19. 19. Questions

×