1. Bus 225D – International Transactions II Instructor: Carol Rutlen, CPA crutlen@rutlen.com 650-321-3999

2. 2 Review final Equity compensation –Understanding different types of equity comp –International tax ramifications –Other issues (e.g., securities law, labor law, currency issues, etc.) HP – tax effective structure Agenda for Class 10

3. 3 Equity Compensation Non-qualified stock option Incentive stock option (ISO) Restricted stock Restricted stock units (RSU) Stock appreciation rights (SAR) Stock purchase plans (§423) Goal – understand different equity vehicles and differences for US and non-US

4. 4 Non-Qualified Stock Option Offer to purchase a certain amount of stock from the company at a fixed price during a certain period –FMV –Vesting –Continued employment Financial statement implications –Old rules: grant at FMV, no compensation –New rules: expense as compensation, effective for first fiscal year beginning after June 15, 2005

5. 5 US Tax Consequences of NQ §83 – property transferred in connection with performance of services §83(e)(3) – excludes the transfer of an option without a readily ascertainable FMV – no tax at grant Taxation at exercise Sourcing

6. 6 Non-US Tax Consequences Taxed under local law Taxation point at grant, vest, exercise, or sale Belgium –Taxed at grant unless employee does not accept in writing within 60 days of “Offer Date” France –Taxed at exercise –French qualified plan Must hold 4 years from date of grant Grant price = avg. trading price 20 trading days preceding grant

7. 7 Collecting Payroll Tax Sell to cover –Normally sell 100% of shares –May require employee authorization to sell shares –Blackout periods Withhold to cover –Fewer shares issued –Payroll tax paid from company funds Collect cash from employee –Administrative complications Non-US tax consequences –Methods of collecting tax may be limited –Accounting issues associated with withhold to cover

8. 8 Equity Compensation for Global Workforce Impact on non-US employees –Complicated – do employees understand? –Options lapse unexercised Impact on company –Securities law –Employment law Acquired rights Employment definitions vary –Currency controls –Corporate deductibility

9. 9 Impact on Mobile Employees Each country where employee worked may want to tax How do you allocate gain? Exit tax (deemed exercise) –Hong Kong –Israel –Singapore

10. 10 Incentive Stock Options §422 ISO –Taxable at exercise for AMT, not regular tax, if hold for 2 years from date of grant or 1 year from date of exercise –$100,000 limit per year –No corporate deduction US qualified plan Not applicable to global workforce

11. 11 Restricted Stock Give employee stock –Employee owns stock, but can’t dispose of –Vests at future date –Employee may pay -0- to x% for the stock (similar to discounted option) US tax consequences –Taxable when substantial risk of forfeiture lapses §83(a)(1), i.e., vesting –Can make §83(b) election to include value in income Taxable at grant, not vest Starts the holding period

12. 12 Restricted Stock US tax consequences –Delay of release of shares causes administrative difficulties –Payroll tax deposit requirements Non-US tax consequences –Normally taxed when granted, not at vest –Employee reaction Performance awards

13. 13 Restricted Stock Units (RSU) Promise to give restricted stock Can defer release of shares (potential 409A issue) US tax consequences –Taxed as deferred compensation –Taxable for income taxes when shares released –Taxable for social tax when shares vest Non-US tax consequences –Taxed when receive stock, not at vest –Form over substance Performance awards

14. 14 Stock Appreciation Rights (SAR) Also known as phantom stock Promise rather than grant of option Form over substance Settled in cash or stock Usually taxed when receive cash or stock

15. 15 Employee Stock Purchase Plans (ESPP) §423 Simple way to purchase company stock –Payroll withholding –15% discount –Look back rules –Company match US tax consequences – if meet holding period, 15% discount taxed at sale Non-US tax consequences –Difference between FMV at purchase and purchase price taxed at purchase –Equivalent in other countries

16. 16 Resources Law firms and accounting firms –Baker & McKenzie country matrix –Updates Groups –NASPPhttp://www.naspp.com –Global Equity Organization http://globalequity.org Publications –GPS publications on internal controls, restricted stock, RSUs, and performance awards www.scu.edu/business/cepi/ –NCEO http://www.nceo.org/http://www.nceo.org/