going global: a practical survival guide for canadian ... · pdf fileguide for canadian...
TRANSCRIPT
Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.© 2015 Baker & McKenzie LLP
Going Global: A Practical Survival Guide for Canadian Multinational Employers
© 2015 Baker & McKenzie LLP
Introduction‒ Welcome remarks‒ Agenda The Current Landscape for Global Expansion Getting the Structure Right, Early Tax Opportunities and Pitfalls Realities of Global Employment Equity Compensation
© 2015 Baker & McKenzie LLP 4
The Current Landscape – A Strong Outlook for Worldwide M&A
Source: Thomson Reuters M&A Review, March 2015
© 2015 Baker & McKenzie LLP 5
The Current Landscape
72% 56%
Canada Global
expect to pursue acquisitions in the next 12 months
91% 47%expect to complete more deals than in the prior year
88% 77%
Canada Global
say their largest deal in the next 12 months will be $250m or less
91% 84%are focused on cross-border M&A in the next 12 months
© 2015 Baker & McKenzie LLP 6
The Current Landscape – Companies Look Beyond Borders for Growth‒ Domestic v. global growth rates
© 2015 Baker & McKenzie LLP 7
The Current Landscape
‒ National policies Global Markets Action Plan Trade agreements
‒ Challenges Growth outlook Financial market volatility Geopolitical tensions Greater political and regulatory scrutiny Expansion of sanctions regimes
© 2015 Baker & McKenzie LLP 9
Traditional Growth – Formation of Subsidiaries, Branches and Other Presences– Subsidiary – legal entity separate from parent company– Branch - extension of main company, fully operational– Representative / Liaison Office – limited to non-income
generating activities (e.g., “preparatory and auxiliary”)– Joint ventures
© 2015 Baker & McKenzie LLP 10
Drivers for Choice of Presence– Business considerations (e.g., legal restrictions on scope of activity)– Marketplace perception – Management structure – Ongoing cost of maintenance– Timing constraints – Employment / Immigration, Work Permits– Tax considerations (e.g., permanent establishment, utilization of
projected losses, access to Canada’s foreign affiliate system, transfer pricing)
© 2015 Baker & McKenzie LLP
Three Key Phases of Going International: Tax
1 2 3
Get the basics right
• Customs compliance
• Sales tax compliance
Get the Structure Right
• Minimize PE exposure for home country operating company
• Secondment, direct hire or hybrid arrangements for transferred employees
• Payroll compliance, localized equity incentive plans
• Canadian foreign affiliate and FAPI rules
• Structuring, supply chain planning, IP ownership planning
• Capitalization: debt and/or equity
Implement
• More sophisticated IP and supply chain planning
• Monitor group compliance and exposure
• Cash management and financing offshore operations
Sales to International Customers
Sales to International Customers
"Boots on the Ground” /Local Entity
"Boots on the Ground” /Local Entity
Established InternationalStructure
Established InternationalStructure
12
© 2015 Baker & McKenzie LLP 13
An Effective Tax Strategy Gauges and Mitigates Risks
EU tax climate and OECD BEPS project
Possible changes in tax law
Start up losses and path to profitability
Local presence but not too much local tax
Cash management and financing offshore operations
Tax planning vs. operational flexibility
© 2015 Baker & McKenzie LLP 14
Designing a Structure– Two fundamental elements guide much tax planning
Canadian taxation of foreign affiliates and foreign income Taxable income follows functions, assets & risks
– Transfer pricing Maximize value-creating activities in appropriate places International tug of war currently underway on relative contributions of
functions, assets & risks (and markets)
© 2015 Baker & McKenzie LLP 16
Key Employment Issues
‒ Hiring entity‒ Kind of hire‒ Onboarding questions‒ Form of offer‒ Key employment terms‒ Policies
© 2015 Baker & McKenzie LLP 17
Pick the Right Engaging Entity: Key Considerations – It’s All Interrelated!– Canadian tax consequences / local country tax consequences– Taxable presence or permanent establishment– Doing business requirements– Employment law requirements Mandatory benefits requirements Foreign exchange control Immigration
– Employee benefits entitlements– Local country pension issues– Eligibility for equity grants
© 2015 Baker & McKenzie LLP 18
Pick the Right Engaging Entity: What are the Options? – “Foreign” employers Canadian parent company or holding company
– Local employers Local subsidiary, branch or representative / liaison office
– Third party entity Partners, distributors, vendors Staffing agencies and PEOs
– Individual Independent contractors
Caution! Extra-territorial application of some Canadian laws CB3
© 2015 Baker & McKenzie LLP 19
Who is Being Hired / Engaged?– Director / manager v. non-manager – Employee v. independent contractor Ensure the nature of the relationship is properly classified, i.e.,
reality v. the “label” Continued / extensive use of independent contractors globally
raises misclassification risks worldwide– Employee through third party employer– Employee on expatriate assignment / secondment / TCN
© 2015 Baker & McKenzie LLP 20
Setting Up: Payroll, Benefits, CBAs– Local payroll and benefits provider?– Do application forms comply with local requirements?– Limits / requirements on pre-employment checks? – Do documents require translation?– National Collective Bargaining Agreements?– Additional government filing requirements?
Caution! Data privacy laws
© 2015 Baker & McKenzie LLP 21
Documenting the Hire: Employment Contract– Offer letter v. employment contract?
– Must be compliant with local laws
– Changes may require express consent or be unenforceable, avoid binding statements re: bonus/commission or benefits
– Cultural differences
© 2015 Baker & McKenzie LLP 22
Documenting the Hire: Employment Contract – Key Terms
– Identify the employer– Probationary periods– Duration of employment (definite v. indefinite)– Compensation / benefits– Hours / location– Vacation / holiday– Termination– Choice of law / forum– Arbitration
© 2015 Baker & McKenzie LLP 23
Documenting the Hire– PIIAs Included in employment contracts v. free-standing Intellectual property protection Confidentiality Non competition / solicitation Enforceability of restrictive covenants
‒ Key Policies Handbooks, work rules, internal regulations, etc. Codes of Conduct
‒ Global Compensation Programs Variable compensation / commission / bonus plans
© 2015 Baker & McKenzie LLP 24
Employee Policies
‒ Key approaches: Global Policy; Local Policy; or Hybrid Approaches
‒ Advantages and disadvantages ‒ Implementation requirements‒ Company culture and values
© 2015 Baker & McKenzie LLP 25
Plan Exit Strategy Going In– Plan for flexibility in hiring Consider types of hires depending on short / long term plans
– Plan for notice, severance and consultation obligations Statutory notice / severance can be “hidden” costs
– Trap for the unwary – nonsolicit / noncompetes Rapidly changing laws on enforceability (and costs) of
noncompetes– Be prepared for business change Understand compliance obligations from the outset
© 2015 Baker & McKenzie LLP 27
Equity Awards: Preliminary Considerations– Does equity compensation make sense outside of Canada?
Consider local practices and expectations
Consider communication challenges
Consider alternatives such as cash awards / deferred share units (DSUs)
– Review eligibility requirements (note if recipient is employee or contractor)
– Conduct compliance analysis before grant
Review regulatory requirements (e.g., securities or exchange control filings)
Review employer / employee tax obligations (e.g., tax withholding/reporting and social tax obligations)
© 2015 Baker & McKenzie LLP 28
Equity Awards: Types of AwardsType Canada USA Other Jurisdictions
Stock Option Preferable for tax reasons – 50% deduction
Need to be structured as an Incentive Stock Option for favorable tax treatment
Watch Belgium (potential tax at grant)Preferential tax plans in the UK and France, among others
RestrictedStock
Taxable at grant Generally taxable at vesting (in the absence of an election)
A number of jurisdictions tax at grant and others tax at vesting
Restricted Stock Units(and performanceunits)
Taxable at vesting, Generally taxable at vesting, but need to review deferred compensation rules (Code Section 409A)
Generally taxable at vestingPreferential tax plans in France, Israel among others
Stock Purchase Rights
Taxable at purchase Deferred taxation for qualified Code Section 423 plans
Generally taxable at purchase
© 2015 Baker & McKenzie LLP 29
Equity Awards: Design Considerations
– Separate plan for other jurisdictions or part of global omnibus plan?
Often use US subplan for tax-qualified awards
– Avoid Canada-centric award documents (e.g. reference to 50% deduction for tax purposes) Instead, prepare global or non-Canada versions of award
documents Possible to use one agreement and cover country-specific terms
in appendix
© 2015 Baker & McKenzie LLP 30
Equity Awards: Best Practices– Parent company (Issuer) should administer awards and minimize
involvement by local employing entity Ensures consistent approach in all countries Avoids possible plan compliance violations for issuer Decreases risk of vested rights / entitlement and other labor law
issues– Avoid mentioning awards in employment-related documents from
local employing entity– Use separate equity offer letter (side letter from issuer) to
communicate equity awards
© 2015 Baker & McKenzie LLP 31
Equity Awards: Securities Laws
– Impact of Canadian securities requirements on global awards
National Instrument 55-104 Insider Reporting Requirements and Exemptions requires certain insiders of reporting issuers to report their personal holdings on Sedi (System for Electronic Disclosure by Insiders)
• includes the CEO, CFO and CCO of a major subsidiary of the issuer
• also includes a person responsible for a principal business unit, division or function of the issuer
• catch-all for any other insider that has routine access to material or undisclosed information and exercises significant power or influence over the business, operations, capital or development of the issuer
© 2015 Baker & McKenzie LLP 32
Equity Awards: Securities Laws cont’d– Stock Exchange Requirements
If dual-listed in the U.S., SEC Form S-8 requirement applies to equity compensation plans that have U.S. participants
TSX / TSXV rules apply to security-based compensation arrangements if it involves the granting of listed securities or securities convertible into listed securities regardless of where the grantee(s) is resident
Evergreen plans are subject to maximum of 10% of the issued and outstanding shares of the issuer
Insider participation under all of the issuers security based compensation arrangements is limited to 10% of the issued and outstanding shares
© 2015 Baker & McKenzie LLP 33
Equity Awards: Securities Laws cont’d
‒ Both TSX and TSXV require shareholder approval for any equity compensation plans or amendments if listed shares will be issued
‒ ISS and Glass Lewis Canadian Proxy Voting Guidelines not necessarily the same as the U.S. version be careful when structuring plans and check both sets of
guidelines as they can differ on some points
© 2015 Baker & McKenzie LLP 34
Equity Awards: Securities Laws – Other Jurisdictions– Securities Laws – generally territorial, usually exemption
available (but understand thresholds and / or necessary disclosure) & typically applies at grant (but may be applicable at issuance) Key problem countries: Australia, Japan (options/ESPP), EU
(ESPP), Italy (financial intermediary), Malaysia, New Zealand, the Philippines, and Saudi Arabia
© 2015 Baker & McKenzie LLP 35
Equity Awards: Exchange Controls/Foreign Asset Reporting
– Exchange Controls – generally based on residency, may restrict funds or shares, usually an employee (not company) obligation & be careful about repatriation Key problem countries: Argentina, China, Ukraine, Vietnam;
also India and Russia (repatriation)– Foreign Asset Reporting – mature shares and even equity awards
may be reportable as “foreign assets.” Brokerage accounts used for plan administration may be reportable as “foreign accounts.” Use of trusts can also implicate local reporting requirements A few examples of countries with these requirements include:
Belgium, India, Spain, US (FATCA individual reporting)
© 2015 Baker & McKenzie LLP 36
Equity Awards: Tax & Social Tax Issues– Not all countries tax awards at the same time, in the same manner or
based on the same value – Key countries: Australia (options taxation at vesting in some cases),
Belgium (options can be taxed at grant ), Denmark, India (valuation), Malaysia, United States (deferred taxation of ISOs if holding periods satisfied)
– Both Income and Social Taxes (at high uncapped rates) typically apply Key countries: Sweden (31.42% uncapped), UK (13.8%
uncapped)– Know where your withholding and reporting obligations exist
Key countries: China, India, France, Germany, Malaysia, Taiwan, UK
‒ Consider application of deferred compensation rules such as Code Section 409A in the United States
© 2015 Baker & McKenzie LLP 37
Equity Awards – Tax & Social Tax Issues– Special annual reporting exists for equity that differs
from compensation Key countries: France, Japan, Switzerland, Taiwan, UK, US (for
certain plans) – Tax favored plans available to avoid or minimize
Social Taxes Key countries: France (New law in process), Israel, UK , US
– Beware of penalties and bad press related to tax on equity Key countries: France, Japan, Korea, Taiwan, UK
© 2015 Baker & McKenzie LLP 38
Equity Awards – Tax Issues– Although Canadian tax rules generally prohibit a corporate tax
deduction for equity compensation, this is not the case in a number of other countries
– However, a reimbursement of the equity compensation “costs” by the foreign subsidiary may be required in order for the foreign subsidiary to be eligible for a corporate tax deduction
– Also need to consider whether such reimbursement triggers other withholding requirements or social taxes which would not otherwise apply
© 2015 Baker & McKenzie LLP 39
Equity Awards: Best Practices
– Revisit tax / compliance issues on regular basis and adjust award practices accordingly
– Create tools to manage ongoing compliance (e.g., grant checklist, compliance chart, grant document chart)
– Take advantage of free information on global equity NASPP Global Portal Global Equity Organization (Toronto Chapter) B&M GES website – www.bakermckenzie.com/ges
© 2015 Baker & McKenzie LLP
Suite of Baker & McKenzie
Resources
Opportunities Across High-Growth Markets: Trends in Cross-Border M&A – with the Economist Intelligence Unit
Cross-Border Transactions Handbook
The Global Employer: Focus on Trade Unions and Work Councils
Pre-Transaction Restructuring Handbook
Post-Acquisition Integration Handbook
The Global Employer: Focus on Termination, Employment Discrimination and Workplace Harassment Laws