global withholding on restricted stock and restricted stock units - ohio naspp chapter meeting -...

Global Withholding on Restricted Stock and Restricted Stock Units

NASPP Ohio Chapter MeetingFebruary 6, 2007

Geoff Hammel, PricewaterhouseCoopers

Global Withholding on RS and RSU

Agenda

• What is required?

- US accounting rules

- Global tax considerations

• Potential solutions and practical considerations


What is Required?

• Because there is no cash readily

available upon vesting or delivery,

most companies prefer to withhold

shares on restricted stock (RS) and

restricted stock units (RSU) to satisfy

their payroll withholding

requirements


What is Required?

• Accounting guidance

- In order to avoid variable accounting, FIN 44 provided that when a

company withholds in shares, it may not withhold more than the

“minimum statutory withholding”

• Minimum statutory withholding includes federal, state and payroll

taxes

- FAS 123R follows the same rule as FIN 44

• No longer a concept of “variable” accounting, however, liability

accounting would result under FAS 123R

- Industry advocates requested that FASB allow “hypo” tax for expatriates

to be withheld in shares – FASB declined


What is Required?

• In the US, relying on the supplemental federal

withholding rates will satisfy the accounting

requirements

- Be cautious of state withholding

requirements

- Some states have supplemental rates

• Very few countries outside of the US have

supplemental or flat withholding rates that

apply to equity compensation

- Most US companies will have withholding

requirements in 1/3 to ½ of the countries in

which they make grants


What is Required?

• In the US, employers have two choices:

- Withhold based on an employee’s Form W-4

- Withhold based on the supplemental withholding rates (25% / 35%)

• Using the supplemental rates has been interpreted to satisfy the “minimum

statutory withholding”

• FICA / Medicare withholding is also required

• States can be challenging

- Some have supplemental rates

- If not supplemental rates, then treat like the foreign countries


What is Required?

• Most other countries require companies to withhold at individual rates

depending on:

- The employee’s marginal tax bracket

- Various deductions / exemptions / martial status, etc.

- Social tax wage caps often applied on a monthly basis

• This means that withholding rates vary by individual and may vary during

the course of the year

• This poses a challenges in determining “minimum statutory withholding”


What is Required?

• There are differing views in the marketplace:

- Is the supplemental rate always okay?

- What if an employee can influence the withholding rate?

• Filing status

• Number of exemptions


Vendor Considerations

• Possible Tax Payment Elections

- Participant pays cash

- Company withholds shares

- Participant sells enough shares to the open market to cover the tax obligation

• System Functionality

- How might system functionality limit/broaden your alternatives?

• Use of default election

• Support of open market transactions

• Reporting Limitations?

- Ensure all “necessary” information is available to plan sponsors and transfer agents


Potential Solutions

• Withhold in cash

- From regular paycheck

- Collect a check from the employee

• “Automatic” sale with withholding from sales proceeds

• Pre-code individual tax rates

• Two-step share withholding

Before implementing any of these solutions, we recommend that you

discuss the process with your independent auditor


Potential Vendor Solutions

• To avoid the accounting concerns, use two tax rates

- The first tax rate would be used for non share withholding taxation. The

second rate would be used for share withholding taxation

• Provide the client the ability to limit the tax payment methods based on

participant locations


Withhold in Cash

Pros Cons

Avoid the accounting issue entirely Collecting checks is nearly impossible

with a large population

Employee has all shares available to

hold or sell

Next paycheck may not be sufficient

to cover withholding

Could cause impermissible loans

and/or interest charges

May cause timing problems with local

deposit requirements

Some countries restrict amount of

withholding from paychecks


Automatic Sale With Withholding From Sale Proceeds

Pros Cons

Should avoid the accounting issue, but

title to shares must transfer to

employee

May not be available for currently

outstanding awards, or may require

agreement by the employee

Settles the employee out of the

transaction quickly

May result in the sale of more shares

than are required to meet the

withholding obligation

Relatively low time commitment to

establish and maintain

Some legal counsel have said “no”

May require changes to plan

document and/or grant agreements

Requires an authorization to trade


Pre-Code Actual Individual Tax Rates

Pros Cons

May work well for executive only plans Requires substantial real-time

maintenance of individual rates

Settles the employee out of the

transaction quickly

Requires close coordination with local

payroll

Consistent with the general approach

many companies are currently using

Inherent risk of error

May not be feasible for broad-based

population

Relatively labor-intensive


Two-Step Share Withholding

Pros Cons

With proper administration, we expect

that it will satisfy the accounting

requirements, however, different Firms

may have different views

Requires timely and accurate

coordination with foreign payrolls at the

time of the taxable event

Relatively little up-front development /

maintenance required

Likely to cause a delay in the

employee’s access to a portion of their

shares

Requires additional coordination

between company, the transfer agent,

the plan administrator and the broker

Will cause the administrator and payroll

to make two tax journal entries per

vesting event


How Do You Decide?

• What does your plan document permit or require?

• Is your population executive or broad-based?

• What is the size of your population?

• What is HQ’s relationship with foreign payrolls?

• What will your independent auditor accept?

• How often are your vesting events (accelerations)?

• Would you consider different approaches in different countries?


Other Considerations

• 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?

- Amounts can be significant

• Generally shares withheld to satisfy taxes will come back into the share pool

• When you withhold in shares, the employee cannot elect a higher

withholding amount

• Rounding Issues:

- Get it in writing from your auditors whether you round down or up


Other Considerations

• Create or participate on a task force

- HR, Legal, Accounting, Payroll, Treasury, Tax

- Domestic and regions

• Understand the plan(s)

• Be aware of both domestic and international issues

• Develop phases

- Prioritize critical vs. important

- Design vs. implementation vs. routine

• Determine roles and responsibilities

Questions

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