Global equity compensation Recent legislative updates

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1 Global equity compensation Recent legislative updates Country Summaries March 2012 Edition (for a more comprehensive discussion, please see the "Country Discussions" section below) Australia Recent ruling allows for deferral of taxes due upon termination The Australian Taxation Office recently released Class Ruling 2012/12 in relation to a particular company's long-term incentive plan. Under the ruling, an employee who retained equity awards considered to be "indeterminate rights" at the time of termination was allowed to defer the payment of taxes due until the time the amounts underlying the award became determinable. While the ruling is specific to the company's plan, the favorable outcome may have broader implications for good leavers in similar situations. PwC Global Equity Compensation 1

2 China Tightening of foreign exchange control on overseas equity incentive plans The State Administration of Foreign Exchange (SAFE) in China has recently taken further steps to tighten registration requirements for Chinese employees participating in their employer's overseas equity incentive plans. A new internal guideline issued in February 2012 (Circular 7) expands the coverage of the SAFE registration requirements to virtually all types of equity awards. Circular 7 also expands coverage to certain plan participants in China that were not previously covered under the old guidelines. These guidelines will apply to newly registered plans and to plans previously registered under Circular 78. The new guidelines are effective as of February20, Ireland Changes to Finance Bill impacting equity awards and internationally mobile employees The Irish Finance Bill published on February 8, 2012 introduced a number of employment focused initiatives. Such initiatives included a range of administrative measures in relation to equity awards including a new 'sell to cover' facility for employers in instances where the tax withholding requirements cannot be met through deductions from cash based earnings. Furthermore, several tax relief measures were provided for inbound/outbound assignees in order to make it more attractive for individuals to consider employment opportunities in Ireland. United States Foreign asset reporting: Release of new guidance and final form The Internal Revenue Service (IRS) recently released temporary and proposed regulations implementing Code 6038D which requires reporting of a specified foreign financial asset (SFFA). If reporting is required, the taxpayer must disclose its SFFA holdings on Form 8938 (Statement of Specified Foreign Financial Assets), with their U.S. federal income tax return. The reporting requirement is effective for tax years beginning after March 18, 2010 and thus in practice, individuals should report for 2011 calendar tax years if they meet certain requirements and their interests in SFFAs exceed certain thresholds. PwC Global Equity Compensation 2

3 Extended Social Security Tax Cut On February 17, 2012, Congress passed the Tax Relief Act of 2012 extending the 2011 decrease in the employee social security tax rate from 6.2% to 4.2% through the end of PwC Global Equity Compensation 3

4 Country Discussions Australia Recent ruling allows for deferral of taxes due upon termination Recently, the Australian Taxation Office released Class Ruling (CR) 2012/12 on a particular company's long-term incentive plan. The Ruling provides a favorable outcome for good leavers who retain equity awards, which are considered to be indeterminate rights upon cessation of employment. An indeterminate right arises in circumstances where it cannot be determined, at grant, whether or not the employee will receive shares or cash upon settlement or whether the number of shares to be settled may be determined. In CR 2012/12, an indeterminate right arose because the award could be settled in either shares or cash at the discretion of the employer. The ruling provides that employees may effectively defer the payment of income tax due upon cessation of employment until it can be determined that their awards will be settled in shares or the number of shares which the employee is entitled to is known. This will alleviate the adverse cash flow implications as the taxing point will not arise until the employee is able to obtain the underlying shares following vesting of his/her awards. While the ruling is specific to the company's plan, the favorable outcome may have broader implications for good leavers in similar situations. China Tightening of foreign exchange control on overseas equity incentive plans Back in 2007, the SAFE issued an internal guideline Hui Zong Fa [2007] No.78 (Circular 78) which provides detailed procedural requirements for Chinese employees to participate in their employers overseas equity incentive plans. Since then, there have been an increasing number of multi-national companies complying with the foreign exchange registration requirements as stipulated in Circular 78 (commonly known as the SAFE registration ) for their overseas equity incentive plans in order to facilitate the inbound and/or outbound fund flows properly for their Chinese participants. PwC Global Equity Compensation 4

5 Four years down the road, the SAFE has recently taken further steps to tighten the registration requirements by issuing a new internal guideline (Circular 7) in February Most Types of Equity Awards Now Covered The previous Circular 78 only covered Employee Share Purchase Plans (ESPPs) and stock option plans. The new guidelines now cover virtually all types of equity plans including Share Appreciation Rights (SARs), Restricted/Performance Share Units (RSUs/PSUs), Restricted/Performance Share awards and cash-settled phantom share awards. Companies can no longer bypass the SAFE registration requirements by offering cash-settled equity awards to Chinese participants. However, SAFE Shanghai has interpreted Circular 7 to only apply to such awards where the cash payment is made by transferring the cash from foreign country to its Chinese participants in China. If the cash-settled award will be paid out through the local China payroll in local currency directly to the participant and the relevant cost will be borne by the local entity, such award is not subject to SAFE registration requirements. Other provinces may take a different approach to this issue; and therefore it is recommended to secure specific advice on the treatment of cash-settled plans. All Local Individuals Now Covered The previous Circular only applied to Chinese nationals participating in the company's overseas equity plan. The new guidelines now covers Chinese nationals (including residents of Hong Kong, Macau and Taiwan), and foreigners. Furthermore, the registration requirements will apply not only to employees but also individual contractors and directors of the Chinese entities participating in the plans. Note that the new guidelines does not provide further clarification as to whether foreigners is only meant to cover locally hired employees or also include employees of the overseas entity on international assignment to China. However, SAFE Shanghai has confirmed that it is not mandatory for local entities to include their foreign employees in the SAFE registration and local entities could exclude them based on their decision or needs. SAFE Shanghai has also confirmed that international assignees are not covered by SAFE registration according to Circular 7. Again, as noted above, other provinces may take a different approach to this issue; and therefore it is recommended to secure specific advice on the treatment of non PRC nationals. PwC Global Equity Compensation 5

6 Additional Plan Administration Required Circular 7 now requires the local agent to facilitate revised SAFE registration within 3 months after major changes are made to the original equity plan. Furthermore, the local agent is required to apply for cessation of the SAFE registration within 20 days after the plans are terminated. The local agent is also required to file quarterly foreign exchange transaction status reports within 3 days after each quarter end. It is believed the new requirements under Circular 7 apply not only to newly registered plans going forward but will also apply to plans previously registered under Circular 78. Thus, it is highly recommended that companies review their current SAFE registration status to ensure all types of equity awards are properly registered under the new guidelines. Finally, despite the new guidelines being issued in the form of an internal circular which has not been released to the public, it is PwC-China's understanding that these guidelines will be effective as of February 20, Please see the attached China Global Watch for more information regarding the new SAFE guidelines. Ireland Changes to Finance Bill impacting equity awards and internationally mobile employees The Irish Finance Bill published on February 8, 2012 introduced a number of employment focus initiatives, which included a range of administration measures in relation to equity awards and several tax relief measures for inbound/outbound assignees in Ireland. Equity Award Initiatives A number of administrative changes have been announced involving share schemes including: It will now be possible to sell equity award shares to meet tax withholding obligations where the employee's other income is insufficient to meet the tax or USC charges arising on share awards; PwC Global Equity Compensation 6

7 Relief from USC will apply to Revenue Approved Profit Sharing Schemes shares, which are sold prior to the normal 3 year holding period where USC has been paid on appropriation; and A USC exemption for shares held in Revenue Approved Employee Share Ownership Trust prior to January 1, Mobile employee initiatives A cornerstone of the new government incentives towards employment creation is an enhanced Special Assignee Relief Programme (SARP). This essentially removes many of the previous restrictions and is likely to be warmly welcomed, particularly by multi-nationals considering further investment in Ireland. The positive aspects under SARP for inbound assignees include: Irish domiciled individuals can now for qualify for the relief; Qualifying individuals may be working on Irish employment contracts as opposed to just overseas contracts; The applicable relief may be claimed up front via a payroll deduction, rather than after the end of the tax year; The relief will apply to individuals asked by existing employers to come to Ireland from January, 1, 2012 onwards; and A qualifying individual will be entitled to a tax deduction of 30% of employment income liable to Irish tax in excess of EUR 75,000. A new tax relief will also apply to outbound employees working in certain countries. This should encourage Irish based employers to continue efforts in maximizing business opportunities in those countries. The relief will be calculated on the ratio of qualifying days spent in these countries to total days in the tax year. This ratio will be applied to income earned from the employment in a tax year, including share based benefits but excluding termination payouts, company cars and preferential loans. Please see the attached Ireland Global Watch for more detailed information regarding the impact of the Irish Finance Bill on internationally mobile employees and other areas of impact. PwC Global Equity Compensation 7

8 United States Foreign asset reporting: Release of new guidance and final form On December 14, 2011, the IRS released temporary and proposed regulations implementing Code 6038D which requires reporting of a specified foreign financial asset (SFFA). It is effective for tax years beginning after March 18, 2010 and thus in practice, individuals should report for 2011 calendar tax years if they meet certain requirements and their interests in SFFAs exceed certain thresholds. If reporting is required, the taxpayer must disclose its SFFA holdings on Form 8938 (Statement of Specified Foreign Financial Assets), with their US federal income tax return. SFFA's include foreign bank accounts, investment securities, trusts and rights in foreign entities that are not held through a US financial institution. These assets must be reported regardless of whether the assets generated income during the year. Thus, specific individuals may be required to include equity compensation held in a company headquartered outside the US on their Form 8938 filing. Generally, US individuals (US citizens and residents) need not report foreign assets if the total value the US individual holds is less than $50,000 at year-end and less than $75,000 at all times during the year ($100,000 at year-end or $150,000 during the year for married individuals filing joint returns.) This new reporting requirement reflects a significant focus on identifying individuals who have assets and income offshore and ensuring compliance with US tax laws. While Form 8938 does not itself result in increased US federal taxes, the information to be reported may be complex and the IRS may impose substantial penalties for failure to complete a true and accurate form. The requirement to file Form 8938 is in addition to any requirement to disclose certain foreign financial assets to the US Department of Treasury on the Report of Foreign Bank and Financial Accounts, Form TD F (FBAR). Thus, there may be some duplication of effort involved if the individual is required to file both the FBAR and the Form Various interested parties, including PwC, have made recommendations to the IRS to create exceptions and ease the compliance burden on both the taxpayer and the IRS. While there have been some modification to the reporting regime, many of the concerns raised have not been resolved. Upcoming hearings on the proposed regulations should provide an additional opportunity for taxpayers and practitioners to further emphasize the challenges associated with these potentially onerous filing requirements. PwC Global Equity Compensation 8

9 Please see the attached US FACTA Reporting Global Watch for more detailed information regarding the reporting requirements under the new regulations. Extended Social Security Tax Cut Congress recently passed the Middle Class Tax Relief and Job Creation Act of 2012 (Tax relief Act) which extends the reduction of the employee social security rate paid in the United States from 6.2% to 4.2%. This reduction was set to expire on December 31, 2011, was temporarily extended through the end of February 2012, but will now remain at 4.2% through the end of PwC Global Equity Compensation 9

10 Contact information For more information about any of these developments, please feel free to contact any of our team members listed below. Philadelphia, PA Bill Dunn (Partner) AmyLynn Flood (Partner) Kerri McKenna Michael Shapson Stamford, CT Heather Royce Los Angeles, CA Aldona Gorman New York, NY Parmjit Sandhu Ari Solomon Chicago, IL Andrew Katsoudas Anne Roest San Jose, CA / San Francisco, CA Julie Rumberger Karolyn Sadowski* *currently seconded to Zurich, Switzerland This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. SOLICITATION 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers LLP, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. PwC Global Equity Compensation 10

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