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SESSION 7.1
International Best Practices: A Collection of Practical Solutions to
Real Global Stock Plan Problems
Barbara Richley, E*TRADE Corporate Services (US)
Brian Ruff, Eli Lilly and Company (US)
Jewon Wee, ISP Advisors, LLC (US)
B
Session 7.1 International Best Practices:
A Collection of Practical Solutions to Real Global Stock Plan Problems
Today’s Panelists
Jewon Wee (US) ISP Advisors, LLC
Share plan consulting firm founded in February 2009
ISP Advisors offers affordable and practical guidance for global employers in the following areas:
Global equity & incentive plan optimization
Compliance risk management
Plan operational excellence
We also offer strategic business and product consulting services for stock plan solution providers
Brian Ruff (US) Eli Lilly and Company
(NYSE:LLY)
Founded in 1876, and are now the 10th largest pharmaceutical company in the world
Approximately 40,000 employees worldwide (roughly 50% outside the US)
Performance Units and Restricted Stock Units granted globally to over 6,000 participants in 60 countries (roughly 40% non-US participants)
Today’s Panelists (continued)
Barbara Richley (US) E*TRADE Corporate Services
For more than 25 years, E*TRADE Corporate Services has helped companies manage and administer their equity compensation plans
E*TRADE remains at the forefront of the industry by providing end- to-end support for all equity vehicles
With one-quarter of the S&P 5001 – E*TRADE sets the standard for innovation in an environment of regulatory change and workforce globalization
1 Data as of 12/31/2009. Compiled by E*TRADE Financial Corporate Services, Inc.
Today’s Panelists (continued)
Nine Global Stock Plan Problems & Solutions, plus Other Pitfalls
General Problems 1. Data management 2. Payroll tax withholding
process 3. Annual reporting
management 4. Mobile executives 5. Currency issues 6. Dealing with Regulatory/Tax
Position Changes
Country-Specific Problems 7. China – SAFE filing/compliance 8. Denmark – Acquired rights 9. Russia – Emerging securities regulations
Other potential pitfalls Unique FMVs for tax purposes Israel: Withholding upon sale UK: NIC approval caution US: Preparing for IFRS2
Problem #1: Global Participant Data Management
What: Consolidate, house, and maintain participant data needed for stock plan transactions for a global workforce (e.g., payroll country, tax withholding rates, etc.)
Why you should care: The more global a company is, the more challenging and important it is to ensure that the information tracked on participants is complete and accurate, especially as it relates to terminations and movement between countries for taxation purposes
Problem #1: Global Participant Data Management (continued)
Analysis/Alternatives: Stock Administration must work with Human Resources and/or Payroll to receive complete and accurate participant information in a timely fashion Common approaches are: Centralized – if all employee information is stored in a single database, it will not be necessary to consolidate the information and procedures can be established to automate import files De-centralized – if each country maintains their own employee information, it will be necessary to coordinate the consolidation of information and import files may require human manipulation
Problem #1: Global Participant Data Management (continued)
Solutions/Best Practices: Participant personal and tax information should be updated in your recordkeeping software after each payroll cycle If possible, only get delta information to make it easier for you to identify changes that may require special handling
Problem #2: Payroll tax withholding
What: Determine appropriate tax rates to apply when deducting withholding taxes from taxable equity award gains recognized by non-US participants, and ensure correct amount is reported to the appropriate tax authorities and the withheld taxed remitted in a timely manner
Why you should care: Most countries conduct routine payroll audits and some have begun to focus on equity compensation related non-compliance opportunities; penalties can be severe
Problem #2: Payroll tax withholding (continued)
Analysis/Alternatives: Available alternatives depend on the equity programs utilized and withholding methods permitted under the plan rules Common approaches are: Centralized – Collect and apply “effective” or “marginal” tax rates to calculate and deduct withholding taxes De-centralized – Deduct nothing and have local entities calculate and collect withholding taxes due
Problem #2: Payroll tax withholding (continued)
Solutions/Best Practices: Use a centralize payroll compliance approach with localized accountability Clearly understand of your software/vendor capabilities on tax withholding services and design a compatible process Create a tax withholding/rates table for all countries in which you have participants (collaborate with local country payroll) Create a country-specific “payroll procedures” to be shared with local countries (Who does What, When, How and WHY!)
Problem #3: Annual reporting & filings
What: Recurring annual reporting and filings responsibilities can become easily forgotten, especially if you rely on a local resource and he or she transitions out of the role
Why you should care: Failure to comply with local reporting and filing requirements may result in costly fines, restrictions on your ability to offer future awards in the respective country, and negative publicity inconsistent with your company’s desired branding strategy
Problem #3: Annual reporting & filings (continued)
Analysis/Alternatives: Evaluate affiliate resources, data sources, deadlines, and the complexity and stability of ongoing requirements; centrally manage or oversee local compliance Examples include: French Qualified Plan – 10% social tax Hungarian Financial Supervisory Authority – notification of offering Philippines year-end reporting of option and share purchase activity Pakistan foreign exchange application – App. V-95, detailed cover letter Australian Addendum
Problem #3: Annual reporting & filings (continued)
Solutions/Best Practices: Provide clear expectations and local resource accountability for simple, stable requirements Use centralized management of complex filings that require information from corporate, partnering with local teams as needed If in doubt, manage centrally, relying on global equity service partners
Problem #4: Mobile executives
What: Executives who travel with outstanding equity awards while on international assignments can pose additional complexities and risks for the company
Why you should care: Due to the “cross-border” nature of this problem, it is complicated; a small number of mobile executives can trigger considerable exposure to both monetary and non-financial risks
Tax authorities around the world have become more aware of the non-compliance in this area and have begun to implement measures to identify opportunities to impose fines and penalties on both the executives and their employers
Problem #4: Mobile executives (continued)
Analysis/Alternatives: There is no comprehensive solution you can buy to solve this problem (technology is emerging, but costly to implement); each company’s facts and circumstances will determine the best course of action Key decisions to consider: Manage initiative with in-house resources vs. seek expert guidance Automated vs. manual income sourcing and withholding tax calculations What to do with past non-compliance
Problem #4: Mobile executives (continued)
Solutions/Best Practices: Evaluate how mobile stock plan participants are identified/tracked and roughly quantify exposure by calculating outstanding equity awards held by affected population Group mobile participants into “groups” (e.g., tax equalized expats, TCNs, short-term assignees, business travelers, cross-border commuters, etc.) Develop a strategy to sequentially address each group over a realistic time frame
Problem #5: Currency issues
What: When the base currency of equity awards fluctuates in value relative to the currency of the participant, the ultimate value delivered also fluctuates
Why you should care: Currency translation can result in unintended level of equity compensation for participants located outside the HQ country where the underlying stock is traded
When coupled with additional “costs” (conversion spread markup + international bank wire fee) paid by the participant to convert the proceeds into the participant’s home currency, company may end up delivering substantially less equity compensation value than intended
Problem #5: Currency issues (continued)
Analysis/Alternatives: Often companies do not consider how currency translation can result in unfair grant levels between HQ country participants and non-HQ country participants Currency risk is real and can be considerable to overseas participants who get shares of their HQ company as part of his compensation package
Problem #5: Currency issues (continued)
Solutions/Best Practices: Evaluate current equity grant practice and determine whether currency fluctuation has created unfair grant levels between HQ and key overseas countries Compare the net cash benefit (after all costs) realized by HQ participants and non-HQ participants on a per-share-granted basis Assess whether currency risk is adequately disclosed in participant communications and take corrective measures to increase awareness and transparency of the risks and costs involved
What: Regulatory and tax positions taken by governments can change
Examples include India’s fringe benefits tax, and more recently, Australia deciding to tax stock options at vesting
Why you should care: With the current economic situation and as knowledge about and understanding of equity compensation plans improves, more countries are changing their securities and tax regulations to cover these plans and taking more pro-active steps to enforce compliance
Problem #6: Dealing with Regulatory/Tax Position Changes
Problem #6: Dealing with Regulatory/Tax Position Changes (continued)
Analysis/Alternatives: Companies must determine the extent to which they will monitor and comply with international regulatory and tax changes The level of compliance may be related to how much equity compensation is granted within the country, the number and level of the participants to which it is granted and the potential penalties for non-compliance
Problem #6: Dealing with Regulatory/Tax Position Changes (continued)
Solutions/Best Practices: Each company must do their own cost/benefit analysis to determine their risk tolerance Some of the things to consider are: Where compliance is absolutely required Which countries enforce most aggressively Cost for not complying Current vs. future costs Internal vs. external costs
Problem #7: China – SAFE Filing & Compliance
What: While the Chinese foreign exchange control regulations now provide a facility to obtain an approval to award shares of non-Chinese companies to Chinese nationals, the approval process is costly, lengthy, and the outcome uncertain
Why you should care: Many companies, especially those involved in manufacturing have long been invested in China as a source of labor
Equity compensation is becoming more a part of the total compen-sation package necessary to attract and retain Chinese employees
The Chinese government has made it clear, now that the regulations are well understood, that they will require compliance
Analysis/Alternatives: Generally, SAFE approval must be received before equity plans can be implemented and the special-purpose foreign exchange account is opened All cash proceeds from the sale of equity compensation plan shares must be repatriated to China – and it is the company’s responsibility to ensure this occurs Participants are allowed to hold shares, but it may be difficult to track them and meet the repatriation requirements
Problem #7: China – SAFE Filing & Compliance (continued)
Solutions/Best Practices: The easiest way to enforce repatriation is to require same-day sale exercises and immediate sale for restricted stock and stock purchase shares Work with broker to ensure all proceeds from these transactions are sent to the corporation instead of the participant
Problem #7: China – SAFE Filing & Compliance (continued)
Problem #8: Denmark – Acquired Rights
What: Some countries are more protective of the employee’s rights and may over-rule equity award terms and conditions concerning forfeiture in case of termination (Denmark has been such a country)
Why you should care: Company may be required to settle equity awards in unfavorable situations
In addition, risk incenting undesirable employee behaviors
Problem #8: Denmark – Acquired Rights (continued)
Analysis/Alternatives: Inaction allows risk to remain unchecked However, taking precautionary steps to avoid issues does not guarantee success Danish Contracts Act indicates that specific contract terms may be set aside by Danish courts if deemed unreasonable
Problem #8: Denmark – Acquired Rights (continued)
Solutions/Best Practices: Include explicit language in grant agreements stating:
• Grants are not customary, but are voluntary, occasional and do not create any contractual or other right to receive future awards even if awarded repeatedly in the past,
• Employment through the entire vesting period is a condition of the award, • No claim or entitlement to compensation or damages shall arise from forfeiture of the Award resulting from termination and that grantee waives the ability, if any, to bring any such claim.
May limit risk by including a performance-based vesting element Require explicit acceptance of grant agreement terms & conditions Partner with affiliates to ensure local employments contracts do not conflict with the terms and conditions of grant agreements Work with legal counsel on specifics
Problem #9: Russian Federation – Recent Securities Regulations
What: Historically, many non-Russian companies have relied on the fact that grants were not supported by underlying Russian shares nor traded on a Russian exchange as rationale that the grants would not be governed by Russian securities law
However, in 2009, the Federal Service for Financial Markets (FSFM) indicated registration may be required even if the shares were not “Russian” company shares
Why you should care: To date, though verbal guidance has been provided, no formal guidance to the contrary has been provided by FSFM. In this context, the FSFM could exercise significant discretion in evaluating the legality of foreign issuers granting to Russian employees, and as a result, And as a result, granting in Russia could lead to undesired consequences
Problem #9: Russian Federation – Recent Securities Regulations (continued)
Analysis/Alternatives: Some foreign companies have found sufficient comfort in the head of FSFM’s verbal (hence, unofficial) guidance that the May 2009 amendments do not apply to employee share plans A publication of said clarification was promised but never delivered, leaving room for interpretation to the contrary Place equity awards in Russia on indefinite hold Operate under the “old” assumptions Mitigate potentially adverse consequences Obtain a private ruling from the FSFM
Solutions/Best Practices: Though all options may be viable, when operating within a highly regulated industry, it is advisable that a private ruling be obtained
Other Potential Pitfalls
Determination of various FMVs for tax purposes Italy, Malaysia, Russian Federation, Thailand Regardless of obligation to withhold Depending on volatility of company stock price, may be significant
Israel: Withholding required upon sale of shares Nearly impossible to manage, especially with former employees Israeli Tax Authority (ITA) Ruling to tax at vest, lapse or payout
Other Potential Pitfalls (continued)
United Kingdom: Complying with requirements of NIC transfer If making changes to Plan, may need to obtain re-approval of
joint election from HMRC
United States: Preparing for IFRS2 Consider length of vesting period now Avoiding liability accounting with sell-to-cover Explicit acknowledgement of Grantee acceptance
Thank you!
Barbara Richley, [email protected] Brian Ruff, [email protected] Jewon Wee, [email protected]
Disclosures
Eli Lilly, E*TRADE and ISP Advisors are independent companies and are not affiliated.
The information contained in this presentation has been prepared by ISP Advisors, LLC, Eli Lilly & Company and E*TRADE Financial Corporate Services, Inc., each of which is responsible for their own content. E*TRADE Financial Corporate Services does not recommend or endorse these companies or their product and service offerings.
The E*TRADE FINANCIAL family of companies provides financial services that include trading, investing, related banking product and services to retail investors, and managing employee stock plans. The E*TRADE FINANCIAL family of companies provides financial services that include trading, investing, related banking product and services to retail investors, and managing employee stock plans. Employee stock plan solutions are offered by E*TRADE Financial Corporate Services, Inc. Securities products and services offered by E*TRADE Securities LLC, Member FINRA/SIPC. E*TRADE Financial Corporate Services, Inc. and E*TRADE Securities are separate but affiliated companies. The laws, regulations and rulings addressed by the products and, services and publications offered by E*TRADE Financial Corporate Services, Inc. are subject to various interpretations and frequent change. E*TRADE Financial Corporate Services, Inc. does not warrant these products, and services and publications against different interpretations or subsequent changes of laws, regulations and rulings. E*TRADE Financial Corporate Services, Inc. and its affiliates do not provide legal, accounting or tax advice. Always consult your own legal, accounting and tax advisers.
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