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Tapestry
Newsletter: Global Update - January 2018
January 2018
Dear Client
In this Tapestry global update we
will cover:
Brazil -
eSocial on-line tax reporting system
Brazil has
recently introduced the eSocial on-line system for reporting
information about employees, tax and social security. The
introduction of eSocial has been delayed several times but, under
the latest timetable, companies with revenues over BRL78 million
(currently USD24,398,400) in 2016 were required to start the
process of complying with the new reporting regime on 8 January
2018. eSocial requires substantial input from employers
(there are 45 different forms with 2,736 fields for data entry) and
the introduction is being phased in over the next 12 months.
For companies required to commence reporting on 8 January,
the current timetable is:
Tapestry
Comment
Companies
which operate incentive plans in Brazil will want to check that
payments under the plan are not affected by the new reporting
system. For example, concerns have been raised about the timing and
manner in which payments to former employees under incentive plans
will be reported. It is currently unclear how eSocial would
deal with this type of payment. This, and similar issues, are likely
to be addressed over the next 12 months as companies start to use
eSocial and glitches in the system are identified and (hopefully)
resolved. We will be following progress with our local
counsel and are happy to raise any concerns that you may have.
France - clawback
for the financial services sector proposed
As part of
President Macron’s planned reform of the French labour code, on 23
November 2017 the French National Assembly adopted an amendment
which will require companies in the financial services sector (i.e.
credit institutions, asset management companies and investment
companies) to include contractual clawback provisions under which
companies can require the repayment of bonuses paid to identified
staff in cases of reprehensible risk taking behaviour.
This amendment has not yet been adopted by the French legislator
but that may happen during the current year.
Tapestry
comment
The
proposal marks a major change for French labour law and follows a
similar development in Germany which introduced rules on clawback
in bankers’ employment contracts last year. Enforcing
clawback has always been incompatible with the French labour code
and currently it is not possible to enforce a clawback provision
against an employee in France. This change, if it becomes law, will
be a dramatic step. We will keep you updated on developments.
New
Zealand - Update on proposed tax changes for share plans
In a newsletter in June last year (here) we outlined plans by the New
Zealand government to change the taxation of conditional and
‘option-like’ share plans. The new rules were part of an
omnibus piece of tax legislation - the Taxation (Annual Rates for
2017-18, Employment and Investment Income, and Remedial Matters)
Bill (the ‘Bill’). The Bill lapsed at the time of the NZ general
election in September but was reinstated in November and is
currently back in committee stage.
Tapestry
comment
Nothing new
to report here but we just wanted to let you know that the Bill is
still alive and may yet become law this year. We will include
an update in a future newsletter.
Poland -
extension of tax advantage for share plans to include non-EU
companies
What has
happened?
The Polish Personal Income Tax Act (the PIT) has been amended to
extend existing favourable tax treatment of share-based employee
compensation to include incentive plans for employees in Poland
where the parent company is based in a country with which Poland
has a double-tax treaty.
What is
the favourable tax treatment?
Under the rules, employees are able to defer the payment of tax on
equity incentive income from receipt of the income (typically at
exercise or vest) until the sale of the shares. This means
that the income will be taxed at the capital gains tax flat rate of
19% rather than at progressive income tax rates between 18% and
32%. Prior to the change in the rules, this treatment was only
available to employee share plans offered by companies based in the
EU/EEA.
Are there
any other requirements?
The only other requirement under the PIT is that the grant of the
awards must have been approved by a resolution of the shareholders
of the parent company.
How does
this affect employer withholding?
As a general rule, there is no employer withholding or social
security on equity incentive benefits paid to Polish participants,
unless there has been a recharge or the local employer is actively
involved in operating the plan. If an employer currently withholds
tax and pays social security on payments made under an incentive
plan, the withholding and social security should no longer be
required if the tax deferral applies.
How do I
know if our plan qualifies?
Companies are advised to check if it applies to share plans offered
to their employees. In some cases companies are advised to seek a
tax ruling to ensure that the plan comes within the deferral rules.
This is particularly important before making any changes to
existing withholding and social security arrangements.
What is
the timing?
The new rules came into force at the start of 2018 and apply to
income received from 1 January 2018.
Tapestry
Comment
This is good
news for employers offering share plans to employees in
Poland. The favourable tax regime is straight forward and
offers tax advantages to employees at little cost to
employers. As noted above, companies with existing incentive
plans operating in Poland should seek advice to ensure that the
regime applies to their plan. Employers will also need to
advise participants of the change in tax treatment and subsequent
reporting of the share benefit. If you would like any further
information or advice on how to ensure that your plan qualifies,
please let us know.
USA - Tax
update: the Tax Cuts and Jobs Act
In
newsletters at the end of 2017 (here and here) we looked at proposals in the US
tax bill which affected employee share plans and executive
compensation. The Tax Cuts and Jobs Act (the ‘Tax Act’) was signed
into law at the end of 2017 and in this newsletter we briefly
discuss the impact of some of the tax changes.
Section
409A - not repealed
The major concern for employee tax planning under the first draft
of the tax bill was the proposed repeal of section 409A. This
section of the tax code allows US taxpayers to defer the payment of
tax on cash and shares until the point when actually received. The
repeal provision was dropped from subsequent drafts of the bill and
was not included in the Tax Act.
Tapestry
Comment
This was a
very welcome reversal. The prospect of the repeal of section
409A sent a chill wind through the share plan world with the fear
that it would result in the demise of stock options for US
employees.
Section
162(m) - performance based compensation exemption removed
The changes to section 162(m), outlined in our previous newsletter,
were included in the Tax Act so that:
- 'qualified-performance based' compensation
is now included in the USD1 million cap on deductions for
executive compensation in section 162(m);
- the definition of ‘covered employees’ under
section 162(m) has been extended to include the chief
financial officer. In addition, any person who becomes a
covered employee for any taxable year beginning after 31
December 2016 continues to be a covered employee in subsequent
years, so severance pay will be subject to the cap;
- a covered employer includes foreign
corporations whose stock is traded by American Depository
receipts (ADRs).
Transition
period
The Tax Act includes a transition period which allows a company to
deduct compensation paid under a written binding contract in effect
on 2 November 2017, if the terms of the contract are not modified
in any material way after that date.
Tapestry
Comment
The removal
of the performance based compensation exclusion was not a surprise
as there was broad political support for this change. As many
US companies refer to the section 162(m) performance compensation
rules in their incentive plan documents, companies with executive
share plans in the US should check that the removal of the
exemption does not affect the administration of the plan. We also
note that there is an expectation that the list of covered
employees will continue to expand and companies might want to take
this into consideration for future planning.
Reduction
in top rate of personal tax
The top rate of income tax for individuals has reduced from 39.6%
(on income over USD235,350 for a single tax payer) to 37% (on
income over USD500,000 for a single taxpayer).
Changes to individual rates means that employers must adjust their
tax withholding procedures. Employers that make supplemental wage
payments (which includes equity awards) to employees over USD1
million in a calendar year, must withhold on the amount over USD1
million (or on the full amount of the payment if applicable) at the
highest marginal tax rate (down from 39.6% to 37%). For
supplemental payments below USD1 million, the withholding rate has
reduced from 25% to 22%. The IRS has issued new withholding tables (Notice 1036) which employers should comply
with as soon as possible but by no later than 15 February
2018.
Tapestry
Comment
As you will
be aware, the Tax Act introduced sweeping tax rate changes for
individuals and companies. Please let us know if you would
like more information on the new tax rates. The reduction in the
top rate of tax will apply from 2018 to 2025 and is then due to
revert back to 39.6%.
Section
83(i) - tax deferral on private company shares
A new section 83(i) allows ‘qualified employees’ of a privately
held company to elect to defer tax for up to five years on illiquid
shares issued to them on the exercise of non-qualified options or
the settlement of restricted stock units (RSUs). There are
numerous qualifying conditions, including:
- ‘qualified employees’ excludes the CEO, the
CFO and related persons, the four highest compensated officers
(current or at any point during the previous 10 calendar
years) or a shareholder holding 1% or more of the company;
- the options/RSUs must relate to shares in a
private company. The deferral will not apply if the
employee can receive cash, including by transferring the
shares back to the employer;
- at least 80% of all full-time US employees
must be granted awards on the same terms under the incentive
plan. The employees do not all have to receive the same
number of shares but they must all receive more than a minimal
number;
- the employee must make a tax deferral
election within 30 days after the first time the employee's
right to the shares is substantially vested or is
transferable, whichever occurs earlier;
- if an election is made, the shares will be
included in taxable income on the earlier of the fifth
anniversary after the first date the employee’s right to the
stock becomes substantially vested or an early termination
event;
- early termination events include the shares
becoming transferable or publicly traded, the employee ceasing
to be a qualified employee or if the employee revokes the
deferral election;
- the taxable amount is the valuation at the
time of vesting or exercise;
- there is no deferral for FICA or Medicare;
- the employer would be required to report
any section 83(i) deferral and to advise employees of their
right to make a deferral.
Timing
Section 83(i) applies to options exercised and RSUs settled after
31 December 2017 and would cover outstanding awards, subject to
meeting all of the conditions.
Tapestry
Comment
At Tapestry
we are always pleased to see tax advantages being offered to a
broader category of employees. However, the section 83(i)
deferral has received mixed reviews, with some commentators
considering it overly complicated for too little benefit. The
requirement that at least 80% of employees must receive grants may
require employers to restructure their incentive compensation
procedures. There is also a risk that an employee could end up with
worthless shares and a high tax bill if the value of the share
drops between vesting/exercise and the end of the deferral
period. However, for employees in growing companies which
include a broad-based incentive plan in their compensation package,
the employee may well benefit from the ability to defer the payment
of tax for 5 years and for the taxable amount to be based on the
share price at the date of vest/exercise 5 years earlier.
If you would like to keep track of the legal and tax requirements
around the world, our OnTap database covers over 100 countries and
is kept up-to-date with all the latest legal and tax requirements
to operate your incentive plans. We would be delighted to
provide a demo and a free Trial.
Bob, Sharon
& Jordan
 
Bob Grayson
Sharon Thwaites
Jordan Levy
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