1. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Mobile Employees – Practical International Considerations Magdala Cruz, CEP Financial Reporting Product Manager

2. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. 2 Disclaimer The laws, regulations and rulings addressed in this presentation and by the products and services offered by E*TRADE Corporate Services are subject to various interpretation and frequent change. Product descriptions and instructions in this presentation are general in nature and are not intended to replace documentation and instructional materials distributed by E*TRADE Corporate Services. E*TRADE Corporate Services and its affiliates do not provide legal, accounting or tax advice. Always consult your own professional advisers.

3. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Agenda  Defining Mobile Employees  The Issues  Taxation  Tracking and Compliance  Preparation  Are you at risk?  Practical Guidelines  IFRS  Question and Answer  References/Resources

4. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Mobile Employees  Who are they?

5. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Mobile Employees  Those employees that work in multiple tax jurisdictions between the time a grant is issued and when the taxable event occurs. This can include:  Employees that permanently move from one location to another  Employees that move from their home location to another location for some time period and then return to their home location  Employees that work concurrently in more than one location  Business travelers  The move may be international or domestic.

6. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. The Issues  A variety of issues arise when you begin dealing with mobile employees:  Payroll compliance  Income allocation  Tax Treaties  Corporate Tax Deductions  Corporate Governance  Data Tracking

7. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. The Issues  Each tax jurisdiction can impose its own set of income, payroll, social security and other taxes  Limited statutory and administrative guidance in some countries  Some governments impose severe exchange control restrictions  Ownership of foreign currency prohibited  Ownership of foreign stock prohibited  Some governments may require central bank approval

8. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Taxation  How and when does taxation apply?  Grant  Vest  Exercise  Sale  Each jurisdiction may want to tax the employee on the income  The employee may have to pay tax in more than one country  Employee may even be subject to tax in a jurisdiction where he/she no longer works

9. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. US Taxation  US citizen  Taxed on worldwide income regardless of where he/she is working  Will pay US tax on 100% of the income related to equity compensation even if he/she is working in another country  US tax resident (not US citizen)  May hold equity compensation that has not been taxed in the US  When taxable event occurs, will pay US tax on the portion of the income earned in the US

10. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Avoiding Double Taxation  Local law may tax all income from the equity compensation or only a percentage  You may pay double tax since each jurisdiction has a right to tax the income  Look for tax credits  If taxed at 100% in the jurisdiction, a tax credit may be available.  Tax credits provide an “offset” for the income by reducing actual tax by tax paid in another tax jurisdiction

11. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Employer Reporting and Withholding  US Tax Rules  Employer required to withhold taxes and remit them to the IRS  Gain should be reported on the employee’s W-2  US Sourced (granted in the US)  Income is taxed in the US, regardless of employee location  Same withholding and reporting requirements apply  OECD (Organisation for Economic Co-Operation and Development)  Recommends that countries source stock option income based on workdays in that location for the period from grant to vest  Portion of gain calculated as a simple pro-rata based on days worked in each location between date of grant and vest

12. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Employer Reporting and Withholding  Employers may be required to report and withhold in multiple jurisdictions  Penalties for non-compliance  Administrative complexities  Companies may need to withhold on a different amount than the employee’s actual tax liability  Companies may manage the international complexity by withholding at a flat rate  Any excess withholding can returned to employee via local payroll  FAS123(R) contains provisions that complicates this for withholding outside the U.S.

13. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Employer Reporting and Withholding  Paragraph 35 of FAS 123(R) states that if the number of shares withheld exceed the number of shares needed to meet the minimum statutory withholding rate, the entire award shall be classified as a liability  Auditors would assert that this triggers liability accounting for the plan  The rule impacts awards settled into shares, including:  Restricted Stock  RSUs  Stock Settled Stock Appreciation Rights  Stock Options are often excluded

14. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Employer Reporting and Withholding  US Federal income tax withholding at the taxpayer’s top marginal rate or at the employee’s marginal tax rate will exceed the “minimum statutory withholding rate” under FAS 123(R)  US Federal supplemental withholding rate of 25% (35% for supplemental wages over $1 million)  State Withholding – What is the state minimum statutory withholding rate?  State supplemental withholding rate?  Where state has no supplemental withholding rate – employee’s marginal rate?  How do we determine what the “minimum statutory withholding rate” outside the US?  Very few countries outside the US have supplemental or flat withholding rates Auditor sign off should be obtained to confirm that withholding methodology does not created adverse accounting implications.

15. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Employer Reporting and Withholding  RSUs – vesting and releases are scheduled events  Withholding and reporting can be determined prior to vest and/or release  Stock options – calculations done at time of exercise  T+3, may require planning  Analysis should be done to determine “minimum statutory withholding rates”  Taxable income and withholding may need to be apportioned  Locations and dates (effective dates) can be used to calculate a blended withholding rate of tax to apply to the income

16. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Example  How long did an optionee live in each location over the life of the option?  Summarizes the percentage of time spent in a particular location for vesting periods

17. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Example  How long did an optionee live each location over the life of the exercised shares?  Summarizes the number of days an optionee spent in a given location when exercising option shares -- appears as a percentage of time spent in each location for each of the vesting periods.

18. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Example  An employee is granted 3,000 Restricted Stock Units (RSUs) August 31, 2004  At grant the employee is living and working in the Netherlands.  RSUs will vest 1/3 on each anniversary of the grant date with the final vesting August 31, 2007  Employees moves to the US on March 1, 2005  Employee returns to the Netherlands on July 1, 2007  FMV of shares as follows on August 31, 2006 is $20 Global tax implications and reporting/withholding responsibilities.  1,000 shares at $20 per share = $20,000 plus $200 accrued dividends and interest = $20,200 taxable income  Grant to vest – 8/31/04 to 8/31/06  Netherlands 6 months (9/04 through 2/05), US 18 months (3/05 through 8/06)  25% of the income is reportable and taxable in the Netherlands  75% of the income is reportable and taxable in the U.S. Blended tax rate for plan administrator to use for withholding purposes.

19. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Example  The vesting value of the shares will be unknown until the vesting date.  We cannot calculate how much income to report in each country in advance of this date.  However, we can calculate a blended withholding rate of tax to apply to the income on the vesting date.  Netherlands  $20,200 X 6/24 = $5,050 @ 52% = $2,626 OR  $20,200 @ 13% = 2,626  13% = 52% * 25%  United States  $20,200 X 18/24 = $15,150 @ 28% = $4,242 (Federal and State) OR  $20,200 @ 21% = 4,242  21% = 28% * 75%

20. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Tracking and Compliance  Allocating income between tax jurisdictions  Sourcing  Location at grant  Location during vesting  Location between grant and exercise  Tracking employees during the lifetime of the grant  Address changes  Maintain records / database  Exchange information with HR  Keep equity compensation records current with HR

21. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Preparation  Global Long Term Incentive Plan(s)  Is it valued by employees?  Are you competitive in the employment market?  Review the design of your plan on a country-by-country basis  Review and assess the awards and structure by looking at other global companies  Strategies for stock options  Reduce number of stock options granted  Reduce participation  Introduce equity vehicles not typically used  Offset stock options with non-equity compensation  Increase use of performance shares  Strategies for restricted stock  Less shares granted, less cost incurred  Less likely to be taxable on a consistent basis than other forms of equity

22. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Are you at risk?  Incorrect reporting and withholding can expose employee and/or employer to penalties  Risks of non-compliance  Multiple penalties and interest  Negative publicity  Loss of government contracts  Reduced employee confidence  Increased chance of local tax authorities carrying out an investigation  Potential criminal liabilities  Exposure to civil penalties, i.e. jail time More recently, mobile employees are being targeted by tax authorities for compliance.

23. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Are you at risk?  Is someone tracking your mobile employees?  Are the employees being tracked with your stock plan information?  Are you complying with T+3 settlement ?  Who withholds taxes?  Where are the taxes remitted?  How do you handle terminated employees?

24. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Practical Guidelines  Employee involvement  Pro-active orientation process  Data collection and tracking  Tax planning and cost savings opportunities  Help ensure compliance  Raise issues to management  Involve all relevant functions (HR, Tax, Payroll, Treasury)  Balance practicality with risk management  Communicate frequently – inform employee of potential liabilities  Create policies and enforce them – be consistent

25. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Practical Guidelines  Identify impacted individuals  Design an effective and efficient withholding/reporting process  Review details of the relevant share plans and consider the geographies and demographics that apply  Understand local tax and social security implications and the impact of tax treaties, rulings and approvals  Specific legislation  Recharge  Large employee population  Identify accounting and reporting implications  Understand the policies and costs associated with international assignees  Achieve compliance consistency across different countries  Communicate actions to the employees and business units  Monitor, review progress and continuously improve quality

26. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. International Financial Reporting Standard  International Financial Reporting Standard 2 ( IFRS 2)  Applies to companies operating under IAS (International Accounting Standards)  An alternative to GAAP and provides for consistent financial accounting across borders  Similar to FAS 123(R)  Disclosure & Recognition  Fair Value  Valuation Methodologies  Effective for annual periods beginning on or after January 1, 2005  Must be adopted by a country to apply to that jurisdiction

27. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. International Financial Reporting Requirements  IFRS 2  Uses same valuation techniques as under FAS 123(R)  Black-scholes  Binomial model  REQUIRES FIN 28 attribution (multiple approach)  Companies have to report:  Under US GAPP for consolidated financial statements  Under IFRS 2 where required locally

28. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. Questions?

29. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. References and Resources  Selected International Tax & Legal Consequences, Baker & McKenzie, Global Equity Services, March 2008  Cross-border Income Tax Issues Arising from Employee Stock Option Plans, Organisation for Economic Co-Operation and Development, June 16, 2004  An Overview of Global Employee Stock Plan Concepts, Understanding the basic concepts when offering a plan to participants outside the United States, Jon F. Doyle, DLA Piper US LLP; Carine M. Schneider, Global Shares; Craig P. Tanner, DLA Piper US, LLP (Certified Equity Professional International Article, 2008)  NASPP: www.naspp.comwww.naspp.com

30. © 2009 E*TRADE FINANCIAL Corp. All rights reserved. This presentation contains confidential information and may not be disclosed without E*TRADE FINANCIAL Corporation’s written permission. 30