Multi-jurisdictional and Trailing Tax Liabilities: The Inevitable Challenge for Global Incentive Compensation Programs

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1 Multi-jurisdictional and Trailing Tax Liabilities: The Inevitable Challenge for Global Incentive Compensation Programs Michael Bussa, EY (US) Lisa Gavranich, EY (US) Angelo Petraglia, Citigroup (US)

2 Presenters Angelo Petraglia Citigroup Michael Bussa Ernst & Young LLP Lisa Gavranich Ernst & Young LLP

3 Agenda Citigroup global equity program overview Employees triggering multi-jurisdictional and trailing tax liabilities Collecting demographic data Determination of multi-jurisdictional and trailing tax liabilities Accruals budgeting for the tax impact of trailing liabilities and tax equalization expense Employee communications and mobility policy considerations Aligning key organizational stakeholders for a successful tax and payroll compliance process

4 Citigroup global equity program overview Operates global equity and/or deferred cash programs in over 90 countries Capital Accumulation Program (Deferred and Restricted Stock) Stock Option Program Over 75,000 participating employees CAP approximately 68,200 SOP approximately 7,750 Approximately 2,000 internationally mobile employees including 400 expatriate employees currently on international assignments Approximately 80% of expatriates participate in SOP or CAP

5 Types of employees triggering multijurisdictional trailing tax liabilities Globally mobile employees Expatriate assignees/long term assignees; Short term assignees; Permanent relocations; US Citizens or Green Card Holders working outside the US Domestically mobile employees State to state permanent moves Living and working in multiple states Traveling in multiple states Short term business travelers

6 Countries with increased focus on trailing tax liabilities United Kingdom France Switzerland Germany USA India China Taiwan Level of focus on trailing tax liabilities Brazil Malaysia Japan High Medium High Medium Lower

7 Types of employees triggering multi-jurisdictional trailing tax liabilities- domestically mobile employees Current landscape for US State audit activity for short term business travelers

8 Collecting demographic data Employee Survey Technology Share plan administrator Company Leverage technology to gather and store historical mobility data Participant survey to poll for all data or fill in missing information Refresh data on a periodic basis Implement process to track globally mobile employees on a go forward basis Mobility indicators in share plan administrator systems

9 Collecting demographic data (cont.) Employee Data Mobility Data Name Home country / regions Employee ID Host country or countries / regions Nationality US Green Card Holder Status Outstanding long term incentive grants Transfer dates Assignment type / tax equalization policy Certificate of coverage

10 Determination of multi-jurisdiction and trailing tax liabilities Where long term incentive awards are granted to mobile employees, a trailing tax liability may exist in the host assignment country or countries or multiple states The trailing tax liability may exist for the employee and for the employer Employee annual tax returns in home and host countries Real time employer payroll requirements in home and host countries The trailing liability payroll reporting and/or tax withholding obligation could depend on any the following: The employee s residency status or nationality in the relevant countries or states Country/state tax requirements for payroll reporting and tax withholding The long term incentive award vehicle Company s process for recharging the costs of the long term incentive awards

11 Determination of multi-jurisdiction and trailing tax liabilities- employer reporting and tax withholding Case study Employee granted 1,000 restricted stock units ( RSUs ) while in country A in July 2011 Employee transfers from country A to country B for work assignment on January 1, 2012 Employee repatriates to country A in July 2013 RSUs vest three years after date of grant in July 2014 when underlying stock price is $50 Transfer to Country B (January 2012) Grant of RSUs in Country A (January 2011) Repatriate to Country A (July 2013) Vest of RSUs (July 2014)

12 Determination of multi-jurisdiction and trailing tax liabilities- employer reporting and tax withholding (cont.) Possible scenarios Country A Country B Basis for tax conclusion Scenario 1 $50,000 $0 Taxed 100% in country of residence at vesting Scenario 2 $25,000 ($50,000 x 18/36 months) $25,000 ($50,000 x 18/36 months) Taxed on portion of RSUs attributable to employment services performed in each country Scenario 3 $50,000 $25,000 Taxed in country A based on tax residency at vesting and country B based on portion of RSUs attributable to employment services The above tax consequences could be further impacted by factors such as the company s cross-charge arrangement with respect to the RSUs, income tax treaties between country A and country B, and the employee s residency status.

13 Tax requirements challenges of payroll requirements related to trailing tax obligations Employees with trailing tax liabilities may no longer be on payroll Payroll may need to re-register employees Determining the amount of tax to process through payroll Rules vary by country, award type, assignment type, corporate recharge processes Real time payroll requirements Labor law considerations Country laws may limit payroll tax withholding for employees who have departed the country

14 Tax requirements payroll nuances and limitations Company operates multiple payrolls in multiple locations which do not communicate with each other Company has employees working in new locations where there are no established payroll systems or processes Company does not have an established process for information sharing between operational departments and payroll departments Company does not have the resources to manage an expanding payroll due to company expansion Company does not have the experience to manage rapid changes in compliance and reporting requirements Lack of centralized, consistent payroll process can hinder compliance, but also limitations in terms of technology and human capital can impact the ability to withhold and report equity income appropriately

15 Tax requirements individual income tax filings Employee obligations vary from country to country and are not always aligned with employer payroll tax withholding obligations Best practice is for company to offer tax assistance to employees to facilitate compliance with home and host country tax liabilities Analysis for mobile employees to determine if trailing tax liability exists related to long term incentive awards Company to determine employee authorization for tax preparation services due to the trailing tax obligation on the equity award income

16 Using accruals budgeting for the tax impact of trailing liabilities and tax equalization expense Leading companies have a process in place to plan for the potential tax cost impact of long term incentive awards for globally mobile employees for both: Tax Accruals Review outstanding long term incentive grants to prepare estimated tax accruals Projection of company stock price Assumptions re timing of exercise for stock options Prepare based on actual data or modeled based on standard assignee pattern Refresh analysis periodically; i.e., quarterly Assignment cost projections Cost projection to include outstanding long term incentive awards Consider future awards that may be granted while on assignment Analysis for hypothetical tax retention vs. tax cost Modeling for various assignment scenarios

17 Communication with employees Leading companies provide employee communications which set forth employee and employer tax requirements related to long term incentive compensation Communication should provide information to the employee regarding long term incentive award transactions and applicable tax implications, as well as information on tax equalization and the hypothetical withholding process High level vs. detailed communications Address cross border scenarios vs. in country nationals only Which party (employer or employee) bears double tax cost Communications should be reviewed annually, and as tax law changes occur throughout the year which impact the underlying tax rules in the relevant country

18 Mobility policy considerations Tax equalization/protection Limits on tax equalized/protected income for long term incentive awards Collection of estimated hypothetical tax on long term incentive awards Ongoing accruals for tax equalization expense Special considerations for post-assignment transactions (i.e., vesting/exercises) Authorization of tax preparation services post international assignment policy period due to trailing tax obligation Impact of corporate tax recharge process for long term incentive compensation expenses Permanent transfers present additional challenges

19 Aligning key organization stakeholders for a successful tax and payroll compliance process- global long term incentive plan steering committee Compensation Long term incentive plan administration Interface with share plan administrator Treasury/ Finance/ Accounting Tax Legal HR/Mobility Preparation of invoices Journal entries Cash settlements Reconciliations Policy and strategy of recharge program Monitoring changes in tax legislation/regulation/practice Tax audit support Revise award documentation/employee communications Prepare recharge agreements Assist with documentation execution process Employee communication in countries where recharge alters employee taxation Long term incentive plan design Assignment policy design Payroll HR/Mobility Compensation Global long term incentive plan steering committee Treasury/ Finance/ Accounting Tax Payroll Implementation of processes for payroll reporting and tax withholding, as required Legal

20 Questions Michael Bussa EY Lisa Gavranich EY Angelo Petraglia Citigroup