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