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Dear Client,
Tapestry Alert: Global Update
February
2016
Dear Client,
In the
Tapestry Global Update webinar on 20 January, we gave an overview of
tax and regulatory changes over the last few months of 2015 and the
start of 2016. In this newsletter we will look at some of the
topics covered in the webinar in more detail. If you missed the
webinar and would like to listen to the discussion, please contact Gabby who will send you a link.
The topics
covered in this newsletter are:
Global
Updates:
Tapestry Team
News:
If you would like more detail on any
of the topics discussed in this newsletter, please let us know.
Global tax
changes in 2016
For many
countries, revised tax rates start on New Year’s Day. Often the
rates are only announced in the last days of December and in some
cases the final figures are not available until well into
January. Our international advisors provide us with new rates
to update our database as quickly as they become available. In this
update we take a brief look at some of the changes:
- Austria – individual
tax rates increase for earnings over EUR1 million - individual income tax rates will generally
be reduced for all individuals on incomes less than EUR 90,000
per year. The income tax rates for individuals earning more than
EUR1 million per annum will be increased from 50% to 55%. This
tax rate increase is planned to apply from 2016 to 2020.
- Belgium – under the
2016 ‘tax shift’ - employer social security contributions have
been reduced from the previous rate of 33% to 25%. The personal
income tax rates have been restructured to benefit low and
medium wages with a new top tax rate of 55% introduced for
income over EUR1 million. Belgium has also introduced a
capital gains tax of 33% for listed shares held for less than 6
months. Gains on shares acquired by employees in the context of
an employee incentive scheme, which may have been subject to
income tax, are excluded from the new capital gains tax.
- Brazil - capital
gains rates increase for 2016 – from 1 January 2016, progressive rates
apply to capital gains with a top rate of 30% on gains over
BRL20,000,000.
- Canada – Federal
income tax rate increased and limit on stock option deduction – the maximum federal tax rate has increased
from 29% to 33%. The government has also proposed an amendment
to the 50% stock option exclusion (which allows an employee to
claim a 50% deduction (25% in Quebec) of the taxable benefit on
the exercise of a stock option in certain circumstances). The
details of this amendment, which are expected to apply to upper
incomes, have not yet been released.
- Finland -
increases in effective income tax rate and in capital
gains tax rate –
under the 2016 budget the maximum income tax rate of
31.35%(municipal and other taxes increase the maximum rates to
54.25%), now applies to income from EUR72,300 (previously the
top rate applied to income from EUR90,000). Capital gains tax
also increased from 33% to 34%.
- Latvia – introduces
solidarity tax
- from 1 January 2016, income over EUR48,600 is subject to a
solidarity tax which is set at the current social security
rates. The personal income tax rate was expected to reduce from
23% to 22% in 2016 but has remained at the 2015 rate.
Australia -
Changes to filing of the Employee Share Scheme (ESS) annual report
For tax years
beginning from 1 July 2015, the Australian Tax Office (ATO) will no
longer accept ESS annual reports in paper based format or using the
ATO’s spreadsheet for bulk reporting (other than for amendments to
earlier filings and reports).
As part of the ATO’s modernisation of the tax reporting system
generally, all further ESS report filing must be through the online
ESS webpage portal (for employers reporting 20 or fewer individuals)
or by using of the ATO’s official software (the new version is number
2.0.0) for online filing.
In addition to the new filing system, employers will be required to
provide additional information, in particular in relation to mobile
employees. Employers may also be required to provide a more
detailed ESS statement to employees although the revised format of
the ESS statement has not yet been released.
Tapestry
comment:
As we have
already seen in the UK and Ireland, tax authorities are increasingly
moving to online filing. Although this may streamline processes
for employers once the system has been tested, there will invariably
be teething problems and we recommend taking early steps to ensure
that the relevant in-house team (or external advisors) are aware of
the new rules and that the information which is required
can easily be accessed and processed in the new format.
Denmark and
Sweden - restrictive covenants
Denmark
recently passed a new act which regulates the use of restrictive
covenants (non-compete and non-solicitation clauses) in employment
contracts. The new rules apply to agreements entered into from
1 January 2016.
What are
restrictive covenants?
Restrictive covenants in employment contracts may be in the form of a
‘non-compete’ clause which aims to prohibit an employee from
competing against his or her employer, for example by moving to a
competitor, or a ‘non-solicitation’ clause which seeks to
prevent the employee from entering into a business relationship with
former clients or work colleagues. A non-solicitation clause
could also be agreed between employers who agree not to poach each
other’s employees.
Key features
of the new Danish rules
Denmark already had in place rules regulating restrictive covenants
but the new act has made several important changes.
Non-solicitation of employee clauses are no longer permitted,
although existing clauses can be enforced until January 2021.
The following points apply to non-compete and non-solicitation
clauses.
- The previous rules
only covered managerial staff, the new rules apply equally to
all employees.
- Only employees in
positions of particular trust can be subject to a non-compete
clause.
- The clause can only
be invoked if the employee has worked for the employer for at
least six months (the previous period was three months).
- The term of the
clause is limited to 12 months from the end of employment (six
months where there is a combined non-compete and
non-solicitation clause).
- The employee must be
compensated during the term of the restrictive covenant, the
amount depends on the term and nature of the clause but can be
up to 60% of the employee’s salary.
- A non-solicitation of
customers clause is limited to customers with whom the employee
had direct contact during the previous 12 months.
Danish law also provides that a
non-compete clause is not enforceable where the employment has been
terminated by the employer without good reason or where the employee
has resigned because of the behaviour of the employer (i.e.
constructive dismissal).
Sweden’s rules on non-compete clauses are governed by the Contracts
Act which states that non-compete commitments which are found to be
too extensive, may be deemed unreasonable and unenforceable. A new
collective bargaining agreement regarding non-compete clauses in
employment agreements was entered into in July 2015, the agreement
includes provisions on reasonableness, duration, scope and
compensation. The new agreement applies to employment contracts
entered into on or after 1 December 2015.
Tapestry
Comment:
Whilst
employers are keen to minimise the number of country specific
amendments to their plan documents, as the Danish and Swedish
examples demonstrate, in the context of a global incentive plan,
there are likely to be jurisdictions were certain aspects of a plan
might not be enforceable or might not work as the employer
expected. There might also be a cost to enforcement: under the
Danish rules, the employee is entitled to compensation if a
restrictive covenant provision is enforced. We often work with
our network of international counsel to perform global due diligence
exercises on specific provisions in incentive plans, in particular
where a new clause is to be included in an existing plan
structure. We would be very happy to discuss any aspect of your
plan documents with you to consider whether such a review would be
helpful.
France –
Introduction of PAYE income tax and electronic filing of tax returns
Currently
France does not have a tax withholding system for employment income.
Income tax is assessed on the basis of individual tax returns and
paid by employees directly on an annual basis. In the 2015 budget,
the French government announced that a withholding tax system (PAYE
or pay-as-you-earn) will come into effect on 1 January 2018. Details
of the new system have not yet been released, in particular how
income for the 2017 year will be taxed and guidance is expected to be
announced during 2017. It seems likely that the PAYE tax will
be implemented gradually and that the tax will be collected and
processed by employers through payroll, as is currently the case with
social security contributions.
Individuals will still be required to file annual tax returns.
However, France is to bring in a system of compulsory electronic
filing of the annual tax return and the payment of income tax. The
system will be phased in over a four-year period with different
income bands being included each year so that by 2019 the electronic
filing and payment obligation will apply to all taxpayers.
Tapestry
Comment:
The
introduction of a PAYE system will bring France into line with most
other developed countries. The actual process has yet to be finally
finalized but employers should investigate how the new system could
be integrated into their existing payroll system.
Japan – Data
protection
Amendments
to the Act of the Protection of Personal Information (the Act) were
passed by the Japanese parliament in September 2015. The
amendments are due to come into force by September 2017.
Although there is a long lead in time, and further details are
expected to be released, companies doing business in Japan should
start now to ensure that their data privacy policies and personal
data procedures will comply with the Act.
What data is
affected by the new rules? The definition of
“personal information” is extended to include biometric data and
identifying numbers (such as passport and membership numbers).
Sensitive information (which includes race, medical history and
criminal history) is subject to stricter controls and cannot be
collected without the subject’s prior consent. It is also subject to
more severe restrictions on disclosure to third parties. However,
anonomyised information (where identifying features have been
removed) can generally be transferred without permission.
Who controls
the application of the new rules? The government is
due to establish a Personal Information Protection Committee (the
Committee) in early 2016. The Committee will have the authority to
investigate data collection and protection practices, including
on-site inspections.
What are the
reporting obligations? Disclosure of personal data to
third parties, or changes to the proposed use of personal data, will
require a report to the Committee. The report will become
public information and is likely to be made available via the
Internet. The provider and recipient of the data must keep records of
the transfer.
What about
exporting data outside Japan? A data controller
may not transfer personal data to a separate legal entity outside
Japan (including a group company), without first obtaining the data
subject's consent or complying with the pre-amendment Act. In
addition, either the foreign jurisdiction or the recipient entity
must have a data protection regime that meets the standards approved
by the Committee. The Act will also apply to businesses outside of
Japan that collect personal data in the course of supplying goods and
services to Japan.
What are the
consequences of non-compliance? The theft or
transfer of a personal information database for improper gain will
constitute a crime. Penalties may be imposed on companies and
current and former employees. The maximum penalty is one year in
prison or a fine of JPY500,000.
What
companies are covered by the Act? The exemption
for companies who handled personal information for under 5,000
individuals is removed. The Act will now cover all companies that
deal with personal data.
Tapestry
Comment:
The Japanese
amendment reflects a global trend towards stronger data protection
laws and enforcement. We recommend that companies check that
their data protection policies and practices comply on a country by
country basis rather than relying on a ‘one size fits all’ global
policy.
New Zealand
– Revenue alert on employee share purchase agreements
In November,
the New Zealand Inland Revenue issued a Revenue Alert (RA 15/01)
which addresses concerns over the taxation of some structures in
employee share purchase plans. The Revenue noted that some of
the plans that it has reviewed ‘could be seen as altering the tax treatment
Parliament intended’ and that in certain cases the structuring of the
plans could amount to tax avoidance.
An Alert is a notice on an issue which is of concern to the Revenue
and is not binding but it does provide guidance on areas of focus for
the Revenue.
How are
share plans taxed: tax is payable on the difference
between the amount an employee pays to purchase the shares and the
market value of the shares on acquisition. Currently employees are
responsible for paying the tax on any share benefit in their tax
return (although this is under review – see our August newsletter on
proposals to reform the procedure for the payment of tax on share
plan income).
What is the Revenue’s concern? the Alert focuses on employee
share plans which contain arrangements which appear to transfer
ownership of the shares in such a way as to reduce the participant’s
tax obligation. Two examples are given:
- On purchase, the
shares are held by a trust and the employee can subsequently
reject the shares: in the first example, an employee purchases
shares at market value which are then held on trust for three
years. The purchase of the shares is funded by way of a limited
recourse loan from the employer. The employee does not
receive any voting, dividend, or similar rights from the shares
while they are held on trust. After the three year period
expires, the shares vest and the loan must be repaid. However,
at this time the employee may choose to reject the vesting of
the shares. If the shares are rejected then the loan will be
satisfied by the transfer of the beneficial ownership in the
shares from the trust back to the employer.
- Where the shares are
reclassified after purchase: in the second example, shares are
issued as one class which has a lower value than ordinary shares
and are subsequently reclassified. The employee is able to
purchase Class B shares in the company at market value. The
shares vest immediately. However, because the Class B
shares do not contain any dividend or voting rights (the only
right the Class B shares have is to reclassify to ordinary
shares at a future point), their market value is substantially
lower than the market value of ordinary shares. After a
specified period of time, the class B shares held by the
employee are reclassified by the company into ordinary shares.
In both examples, the Revenue
found that the effect is artificially to reduce the value of the
shares on purchase and to remove the tax liability on any subsequent
increase in the value of the shares. The Revenue considers that these
arrangements are designed primarily to avoid tax.
What is the
Revenue going to do? The Revenue has indicated that
arrangements which it considers amount to tax avoidance arrangements
will be subject to investigation and the amount of tax paid by
employees subject to reassessment. Before launching an official
investigation, the Revenue will initially approach employers who have
implemented employee share schemes for more details about the schemes
and, if there are concerns, potentially request details of employees
(and former employees) who have participated.
Tapestry
Comment:
Some local
advisors have cautiously welcomed the Alert as it clarifies what
seemed to be the practice of the tax authorities. However, the
examples given in the Alert are felt only to illustrate extreme
situations and there is little guidance on how this will affect plans
which contain only some of the features objected to by the Revenue or
where the structure has sound commercial reasons. A review of
the tax rules relating to share plans is expected to be announced in
2016 which should provide more certainty for employers and employees.
Sweden –
Taxation of share plans
The Swedish
Administrative Court of Appeal has recently ruled on two issues
affecting the taxation of share plans for mobile employees.
Timing of
foreign tax credits
The court held that a foreign tax credit on share-based incentive
income may be granted only for the income year in which the income is
subject to tax in Sweden. The court held that any foreign tax credits
claimed must be applied for in the same income tax year that the
double-taxed income is subject to tax and that any reassessment of a
tax return in Sweden must be filed within six years (under Swedish
law, the statute of limitations for reassessing a tax return is six
years from the end of the relevant accounting year). In this case,
the income was taxed in Sweden in the year of vesting and taxed again
in Finland at the time the option was exercised, more than six years
later. The court held that tax credit had to be applied for in
the year the tax was paid in Sweden and, as that was more than six
years before the double taxation arose, the Swedish tax payment could
not be reassessed.
Tapestry
Comment:
As this case
demonstrates, the treatment of tax credits, in particular timing
issues, is complex. Employers may consider how they can assist
mobile employees in navigating their way through the application of
international tax law. The incentivising benefits of share
plans can be lost through the unfortunate intervention of the tax
man.
Changes to
the taxation of share awards and stock options for EU citizens
In a
separate case, the Court held that the Swedish system of taxation of
share plans, in relation to share income earned by an employee who
was an EU-citizen and who was working outside Sweden for part or all
of the time that the income was earned, breaches the EU’s principles
on freedom of movement.
Under Swedish tax law, share awards and stock options are taxable in
full if the employee is resident in Sweden at the point of vesting
for share awards and exercise for stock options, even if the income
was partly or fully earned while the individual was non-resident in
Sweden. As discussed above, in the event of double-taxation, the
employee is able to claim a foreign tax credit.
In its ruling, the court held that Sweden has the right to tax the full
benefit under Swedish law. However, it found that the rule,
applied in these circumstances, had the effect of discriminating.
Tapestry
Comment:
The ruling is
a clarification but opens up the possibility for employees to apply
for a reassessment of earlier tax returns (within the six year
deadline). The ruling only addressed the position of EU
citizens and does not cover non-EU employees (although the income
does not have to have been earned in an EU member state).
Employers should check that their payroll is able to take this into
account so that tax and social security withholding in respect of
share benefits for employees who are EU citizens can be apportioned
according to the number of days spent in Sweden during the period
from grant to vest/exercise.
Thailand –
no reporting for options exercised on a cashless basis
In general,
the Thai Securities and Exchange Commission (SEC) requires foreign
issuing companies to make filings throughout the term of the
plan. Under a change announced in 2015, there is no longer a
requirement to report share options where the options are
automatically exercised on a cashless basis, and the shares are
immediately sold, so that the employee never receives the shares but
is only entitled to the cash balance.
Tapestry
Comment:
This is a
welcome development which reduces the ongoing reporting obligation on
companies. While the filings are not complicated or expensive they
need to comply with prescribed documents and time-frames, depending
on the plan features, so generally require the input of local
counsel.
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