SESSION 2.2

Traveling with EquityBerni Toy, Cisco Systems Inc.

Jean Wong, Sun Microsystems Inc.Julie Rumberger, PricewaterhouseCoopers.

Lydia Terrill, Chordiant Software Inc.

SESSION 2.2 Traveling with Equity

Berni Toy, Cisco Systems Inc. Jean Wong, Sun Microsystems Inc.

Julie Rumberger, PricewaterhouseCoopers. Lydia Terrill, Chordiant Software Inc.

Agenda/Contents

•  Company Profiles

•  Challenges of Global Equity

•  Inconsistent Tax Rules Between Countries

•  Tax Withholding Methodologies

•  Administrative Process

•  Employee Communications

•  Lessons Learned

Company Profiles

•  Cisco Systems, Inc. •  Headquarters: San Jose, CA •  Headcount: 60,000 •  Types of Plans: Stock Options, Restricted Stock Units and

Employee Stock Purchase Plan •  Mobile Employees: 3,100

•  Sun Microsystems, Inc. •  Headquarters: Santa Clara, CA •  Headcount: 28,000 (as of 31 Dec 2009) •  Types of plans: Stock Options, Restricted Stock and Restricted

Stock Units, Employee Stock Purchase Plan •  Mobile employees: +500

Company Profiles

•  Chordiant Software, Inc. •  Headquarter: Cupertino, CA •  Headcount: 300 •  Types of plans: Stock Options, Restricted Stock Awards, Restricted

Stock Units, Performance Restricted Stock Units •  Mobile employees: 13

Mobile Employees – Who are they?

•  Expatriates •  International Transferees •  Local Nationals •  Business Travelers

•  Example of Trailing Liability: •  John worked in the U.S., received RSUs, was relocated to the U.K.

where he vested in the first tranche, then to Switzerland where he vested in the second tranche. Is the RSU value allocated to countries where he resided?

Does your company track the movements of expatriates/cross-border employees from the time of grant of an award through settlement date?

0%

10%

20%

30%

40%

50%

60%

70%

80%

2009 All Companies 2007

All Companies Yes No

0%

5%

10%

15%

20%

25%

Excel spreadsheet Mobility

department Stock plan admin SW -

"snaphot" only SPA tracks

historic mobility Reconcile SPA SW to payroll stubs Other

2009 All Companies 2007

All Companies

If your company tracks the movements of expatriates/cross-border employees from the time of grant of an award through settlement date, how do you do so?

If your company does not track the movements of expatriates/cross border employees, why not?

0%

10%

20%

30%

40%

50%

60%

70%

Too few mobile employees to prioritize Still developing an

approach Number of shares granted to mobile employees is not

significant Waiting for SPA to provide Other

2009 All Companies 2007

All Companies

Does your company source equity income in relation to awards provided to expatriates or cross-border employees?

0%

10%

20%

30%

40%

50%

60%

70%

2009 All Companies 2007

All Companies 2006 All Companies

Yes No

Does your company consider trailing liabilities once an expatriate/cross-border employees leaves a particular country?

46%

53%

54%

47%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2007 All Companies

2009 All Companies

Yes, we track them No,

we don’t track them

Inconsistent Tax Rules between Countries

•  Timing of tax event varies (grant, exercise, exit or sale) •  Amount subject to tax varies

•  Italy: average price over the prior month •  China/Taiwan: closing price on date of transaction

•  Sourcing rules vary (location at grant/vesting, grant to vest, grant to exercise, treaty sourcing rules)

•  Withholding rules vary from income tax rules •  Sourcing of Social tax rules often different than income taxes. •  Reporting – when and how much

Inconsistent Tax Rules between Countries

•  Many countries tax a portion of the award even if employee is no longer present at taxable event (trailing liabilities)

•  Qualified or tax favored plans •  Chargebacks

U.S. Withholding Rules

•  Withholding is due at exercise, payroll taxes must be remitted in accordance with the company’s normal remittance timeframe. •  Federal Income Tax

Supplemental federal withholding rate: 25% if less than $1,000,000; 35% on any excess

•  State Income Tax •  State specific withholding requirements and supplemental

withholding rate •  Not all states follow federal sourcing rules

•  Social Security OASDI 6.2% on annual wages up to $106,800; Medicare 1.45% on all income. Consider state SDI

Foreign Withholding Rules

•  Most countries require some form of “real time” wage withholding

•  Most countries require withholding at individual rates depending on: •  Employee’s marginal tax bracket

•  Various deductions / exemptions / martial status, etc.

•  Social tax wage caps often applied on a monthly basis

•  Consequently, withholding rates vary by individual and may vary during the course of the year

•  Determination of “minimum statutory withholding” is challenging

•  Some countries do not require personal income tax withholding (e.g., Australia, France, Hong Kong); may still require reporting and impose social taxes

Tax Withholding and Accounting

•  Participant pays cash: Compensation/wage withholding determined at source, employee tenders cash for liability •  Requires pre-education, communication, employee readiness

•  Compensation/wage withholding determined at source, parent withholds shares using tax estimate and releases net shares •  Local true-up generally required

•  Potential conflict with accounting requirements for US companies

Tax Withholding and Accounting

•  Compensation/wage withholding determined at source, employer provides information to local payroll, local payroll provides withholding amount to parent and associated shares are withheld •  Precise withholding but delay in share release

•  Compensation/wage withholding estimated in advance by local payroll using estimated compensation amount •  Parent withholds shares using estimated withholding, minimal local

true up needed

•  Shares can be released immediately

Net Share Withholding

•  Employee receives the number of shares less the shares retained to satisfy the withholding taxes.

•  The employer pays, with company funds, the amount of tax equal to the FMV of the number of shares not delivered to satisfy withholding taxes via the local country payroll.

•  Actual shares retained by the employer are not issued (and do not become part of treasury stock).

•  Rounding? •  IFRS implications – Liability accounting in countries that have

adopted IFRS already

Net Share Withholding Considerations

•  Liability Accounting under FAS 123R

•  Liability Accounting also applies to hypothetical tax

•  Implications to qualified plan treatment

•  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?

•  When the company withholds in shares, the employee cannot elect a higher withholding amount

Trailing Liabilities Issues

•  Identifying affected individuals (expatriates, short-term assignees/permanent transfers, international transferees, business travelers)

•  Prior work/home location

•  Applying income tax withholding correctly to allocated awards

•  Remittance of taxes when employee is no longer on payroll and taxes due with non-resident tax return filing

•  Tax equalization

•  Employee communication

International Plan Administration

•  Tracking •  Coordination with vendors •  Tax withholding

International Plan Administration – Timing is everything

•  Process with Broker/vendor •  RSUs

•  Stock options

•  Communication with Payroll

•  Communication with HR

•  Communication with Employees

Sourcing – Recharge agreements & DTAs

•  Income allocation between countries

•  Impact of amounts recharged?

•  Impact on DTAs

Employee Communications

•  Cisco Systems, Inc. •  HR educates employees going on assignment

•  Sun Microsystems, Inc. •  Mobility Team educates employees on impact of assignments on

stock grants as part of overall mobile employee education

•  Tax advisor engaged by Sun provides support/assistance to employees while on assignment

•  Self-initiated country transfers – challenge as no formal process to track these employees

Employee Communications

•  Chordiant Software, Inc. •  Equity and Tax work together to educate and communicate with

employees and HR

•  Tax advisor engaged by Chordiant provides support/assistance to employees related to assignment

Lessons Learned

•  Cisco Systems, Inc. •  Tracking mobile employees needs to be “sponsored” by a global

executive •  Administration can never be fully automated (in this lifetime) •  One process does not fit all

•  Sun Microsystems, Inc. •  Functional limitations of Host and Home Country Payroll Systems

may require exception/manual processing for mobile employees •  Primary hurdle in implementing a global process

•  Under a distributive payroll organization, Global Payroll Executive must take active roll in driving processes through his/her organization

Lessons Learned

•  Sun Microsystems, Inc. (continued) •  Enlist support from Internal Audit Department to ensure compliance

by making tax compliance review as part of the regular country audit program

•  Start with a pilot program as proof of concept •  Establish a working team with major stakeholders managers (Stock

Team, HR, Tax, Global Payroll) to ensure operation compliance •  Forum to discuss issues and share new information

•  Accept that 100% compliance not may be cost effective or right business decision

•  Prioritize based on countries with the highest financial and business risk

•  Establish a Global Compliance team (Legal/HR/Stock team) to establish priorities and associated risks for non-compliance

Lessons Learned

•  Chordiant Software, Inc.

•  It is better to at least start tracking and getting compliant than to keep ignoring. Start somewhere…

•  While there are tools and tricks that help, presently it will remain mostly manual until features are added to the software and countries become more consistent with taxation practices

•  Check for updates frequently (rates, laws, addresses!)

Disclaimer

This presentation and underlying documents should not be relied upon as constituting tax advice to attendees and the materials were not intended or written to be used, and they cannot be

used, for the purpose of avoiding U.S. federal state or local tax penalties.

© 2009 PricewaterhouseCoopers LLP. All rights reserved. "PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopers International Ltd., each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP.

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