1. Crystal Gronau & Marlene Zobayan Rutlen Associates LLC October 9, 2015, Session 5

2. This presentation contains general information only and the respective speakers and their represented firm are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and firm shall not be responsible for any loss sustained by any person who relies on this presentation. 2

3.  To understand the payroll challenges faced by companies operating global stock plans ◦ Parent company ◦ Foreign affiliate  To appreciate the typical non-payroll compliance requirements  To understand U.S. payroll challenges for U.S. expatriate and inpatriate employees with equity compensation 3

4.  Central administration of stock plans by parent company  Only domestic payroll feeds  Compliance requirements (for payroll employer): ◦ Tax withholding & reporting ◦ Employer social taxes ◦ Legal requirements  Corporate tax deductions  Locally qualifying plans  Mobile employees  Time zone, currency and language issues  Staying up to date 4

5. 5  Stock options ◦ Non-qualifying ◦ Qualifying  Restricted stock awards  Restricted stock units  Performance shares  Employee stock purchase plans  Stock bonuses

6. 6  At grant ◦ 83(b) elections  At vest ◦ Restricted stock awards  At release ◦ Restricted stock units  At exercise ◦ Non-qualifying stock options  At sale ◦ Incentive stock options ◦ Employee stock purchase plans

7.  At grant ◦ Most countries for restricted stock awards ◦ Some countries tax stock options  At vest ◦ Most countries for restricted stock units ◦ Some countries tax stock options  At exercise ◦ Most countries tax stock options  At purchase ◦ Most countries for employee stock purchase plans  At sale ◦ Brazil, Israel, most locally qualifying plans 7

8.  Potential Solutions ◦ Deduct tax through salary ◦ Ask employee for check ◦ Withholding from shares ◦ Withholding from sale proceeds ◦ Proceeds to subsidiary  May require different processes for different plans or sets of employees 8

9. Advantages: Employee receives proceeds quickly Correct withholding is applied Employee can retain all the shares Disadvantages: No withholding mechanism for terminated employees Salary may not be sufficient to cover liability Local employer needs to act quickly 9 Proceeds or Shares Informs company of exercise Withholding from next paycheck Remits taxes

10. 10 Proceeds or Shares Informs company of exercise Remits taxes Employee cuts check Advantages: Employee can retain all the shares Disadvantages: No withholding mechanism for terminated employees (unless required as a condition of exercise/release) Employer acts as collection agency Foreign exchange/ wire issues

11. 11 Proceeds or Shares less withholding Informs company of exercise Remits taxes Actual rate Actual withholding Advantages: Ensures withholding for terminated employees Correct withholding is applied Disadvantages: Early planning is a must! Withholding has to be at minimum statutory rate to avoid U.S. accounting issues Administratively burdensome Company has to find the cash to remit to tax authorities

12. 12 Proceeds less flat percentage Flat withholding percentage Reconcile withholding Remits taxes Advantages: Employee receives proceeds quickly Ensures some withholding for terminated employees Disadvantages: Withholding process done twice As usually at flat rate, initial taxes withheld may be too much or too little (employee expectation management)

13. 13 All proceeds Proceeds less withholding Remits taxes Advantages: Ensures withholding for terminated employees Correct withholding is applied Administratively simple Disadvantages: As payrolls are usually monthly outside U.S., employee may have to wait some time for proceeds Need to be careful of US GAAP Employee has no ability to retain shares/tax disadvantageous

14.  Timing of reporting ◦ Grant ◦ Vest ◦ Exercise ◦ Sale ◦ Annual  How will local tax/payroll department get access to data? ◦ Beware of Data Privacy issues 14

15.  Legal Requirements ◦ Local securities filing ◦ Contract law ◦ Data privacy  Foreign exchange 15

16.  Difficulties in communication due to ◦ Time zone ◦ Language ◦ Who is going to answer employee questions?  Currency issues ◦ Are there cash disbursement restrictions? ◦ How will funds be disbursed to employees?  Local currency: check/wire  Through payroll  Cost to employee ◦ What exchange rate should be used? 16

17.  Assignees – including expatriates, inpatriates, third-party nationals ◦ Long or short term  Permanent transfers  Business travelers – including commuters  Telecommuters Can be domestic or international Individuals can have more than one type of mobility

18.  The general rule is that income is sourced where it is earned or over the “earnings period”  Each taxing jurisdiction may have a different view of the earnings period  U.S. ◦ Generally where “earned” ◦ Equity usually deemed to be earned from grant to vest  Maybe overridden by treaty ◦ State sourcing may vary from Federal  E.g., Ohio stock options 18

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20.  Since January 1, 2006 Federal sourcing is based on US workdays from grant to vest  Some treaties state otherwise: ◦ US: Canada ◦ US: Japan ◦ US: UK  Specific grants may require different sourcing ◦ E.g., an award granted for a project undertaken in a particular location

21.  US resident ◦ Tax entire award ◦ Allocate award between US and foreign source ◦ Foreign earned income exclusion and FTCs can be taken against foreign source income  US non-resident ◦ Tax US sourced portion only

22.  Tax equalization process requires special treatment ◦ Expatriate pays tax only to same extent they would have paid in the their home country  Hypo-tax ◦ Company pays host country and home country actual taxes  Tax impact of exercising stock options varies widely due to location at: ◦ Grant, vest, exercise and sale 22 International Assignees

23. 23  What countries require reporting  Is the inpatriate tax equalized ◦ Hypo tax compared to actual tax deposits  What social tax scheme is the employee covered by – home or host  Do you withhold taxes at the minimum statutory tax rates or sell to cover anticipated actual tax liabilities

24. 24  What countries require reporting  Is the expatriate tax equalized ◦ Hypo tax compared to actual tax deposits  What social tax scheme is the employee covered by – home or host  Do you withhold taxes at the minimum statutory tax rates or sell to cover anticipated actual tax liabilities

25.  Each double tax treaty is different  U.S has double tax treaties with almost 70 countries  BUT generally an individual is tax exempt if : ◦ The employee is present in the host country for 183 days or less,  In the taxable year concerned or rolling 12 month period  Referred to as 183 day rule ◦ The employee compensation is paid by or on behalf of an employer which is not a resident of the host country, and ◦ The compensation is not borne by a Permanent Establishment (PE) or fixed base which the employer has in the host country ◦ Economic employer 25

26.  Similar to double tax treaties but focus is social security  U.S. has totalization agreements with 25 countries  Generally, individual can be covered in “Home Country‘” for up to 5 years  May mean that income tax and social tax are sourced differently for the same income 26

27.  Peter, an employee of ACME Inc. in the U.S. is assigned to work in Germany for 3 years starting July 1, 2014. ACME obtain a Certificate of Coverage to retain Peter in the U.S. social security system during the course of his assignment. In March 2015, Peter receives a bonus of $10,000 related to his performance during 2014. What taxes have to be paid?  U.S. income tax on $10,000 x 50%*  U.S. social tax on $10,000 x 100%  German income tax on $10,000 x 50%  Does the payer matter?  * Assuming a US citizen and the company takes a position that U.S. withholding is not required on foreign sourced income as the individual is subject to foreign withholding 27

28.  Shadow payroll for international assignees ◦ Exchange rates ◦ Actual or hypo tax  For short term mobile employees from non treaty countries – How do you withhold on and report earnings? ◦ Form W-7 – Individual Taxpayer Identification Number  Timing and processing issues

29.  Tracking and allocating multistate domestic workdays – includes sales team ◦ Permanent transfers ◦ Business travelers

30.  Taxes withheld on equity transactions have the same withholding deposit rules as a regular payroll  Tax withholding in excess of $100,000 ◦ Must be deposited the next business day

31.  Withholding rates change annually  Constant international law changes ◦ Withholding requirements ◦ Reporting requirements ◦ Legal requirements  Consultant update newsletters 31

32. Crystal Gronau Rutlen Associates LLC cgronau@rutlen.com 650-279-5879 32 Marlene Zobayan Rutlen Associates LLC mzobayan@rutlen.com 650-868-9282