California Payroll Conference

1. California Payroll Conference September 11 and 12, 2014 Global Equity Crystal Gronau & Marlene Zobayan Rutlen Associates LLC

2. Disclaimer This presentation contains general information only and the respective speakers and their represented firm are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and firm shall not be responsible for any loss sustained by any person who relies on this presentation.

3. Objectives • To understand the payroll challenges faced by companies operating global stock plans • Parent company • Foreign affiliate • To appreciate the typical non-payroll compliance requirements • To understand U.S. payroll challenges for U.S. expatriate and inpatriate employees

4. What Are Typical Challenges? • Central administration of stock plans by parent company • Only domestic payroll feeds • Compliance requirements (for payroll employer): • Tax withholding & reporting • Employer social taxes • Legal requirements • Corporate tax deductions • Locally qualifying plans • Mobile employees • Time zone, currency and language issues • Staying up to date

5. What Is Global Equity? • Stock options • Non-qualifying • Qualifying • Restricted stock awards • Restricted stock units • Performance shares • Employee stock purchase plans • Stock bonuses

6. U.S. Taxation of Equity • At grant • 83(b) elections • At vest • Restricted stock awards • At release • Restricted stock units • At exercise • Non-qualifying stock options • At sale • Incentive stock options • Employee stock purchase plans

7. Non-U.S. Taxation of Equity • At grant • Most countries for restricted stock awards • Some countries tax stock options • At vest • Most countries for restricted stock units • Some countries tax stock options • At exercise • Most countries tax stock options • At purchase • Most countries for employee stock purchase plans • At sale • Brazil, Israel, most locally qualifying plans

8. How to Withhold Tax When Employer is Not the Issuing Company • Potential Solutions • Deduct tax through salary • Ask employee for check • Withholding from shares • Withholding from sale proceeds • Proceeds to subsidiary • May require different processes for different plans or sets of employees

9. Withholding From Salary Parent Co. or Broker Informs company of exercise Proceeds or Shares Employer Employee Withholding from next paycheck Remits taxes • Advantages: • Employee receives proceeds quickly • Correct withholding is applied • Disadvantages: • No withholding mechanism for terminated employees • Salary may not be sufficient to cover liability • Local employer needs to act quickly

10. Employee Cuts Check Parent Co. or Broker Informs company of exercise Proceeds or Shares Employer Employee Employee cuts check Remits taxes • Advantages: • Employee receives proceeds quickly • Disadvantages: • No withholding mechanism for terminated employees • Additional administration for local employer

11. Withholding From Shares Parent Co. or Broker Informs company of exercise Proceeds or Shares less withholding Actual rate Actual withholding Employee Employer • Advantages: • Ensures withholding for terminated employees • Correct withholding is applied • Disadvantages: • Employee may have to wait some time for proceeds • Withholding has to be at minimum statutory rate to avoid US accounting issues • Administratively burdensome Remits taxes

12. Proceeds less flat percentage Flat withholding percentage Employer Employee Reconcile withholding Remits taxes Flat Rate Withholding From Sale Proceeds Parent Co. or Broker • Advantages: • Employee receives proceeds quickly • Ensures some withholding for terminated employees • Disadvantages: • Withholding process done twice • Broker withholding may be too much or too little (employee expectation management)

13. Actual Rate Withholding From Sale Proceeds Parent Co. or Broker Informs company of exercise Proceeds less withholding Actual rate Actual withholding Employer Employee Remits taxes • Advantages: • Ensures withholding for terminated employees • Correct withholding is applied • Disadvantages: • Employee may have to wait some time for proceeds • Administratively burdensome

14. All proceeds Proceeds less withholding Employer Employee Remits taxes Withholding – Proceeds to Subsidiary Parent Co. or Broker • Advantages: • Ensures withholding for terminated employees • Correct withholding is applied • Disadvantages: • Employee may have to wait some time for proceeds • Need to be careful of US GAAP

15. Payroll Reporting Requirements • Timing of reporting • Grant • Vest • Exercise • Sale • Annual • How will local tax/payroll department get access to data? • Beware of Data Privacy issues

16. Other Global Equity Compliance Requirements • Legal Requirements • Local securities filing • Contract law • Data privacy • Foreign exchange

17. Time Zone, Currency & Language • Difficulties in communication due to • Time zone • Language • Who is going to answer employee questions? • Currency issues • Are there cash disbursement restrictions? • How will funds be disbursed to employees? • Local currency: check/wire • Through payroll • Cost to employee • What exchange rate should be used?

18. International Assignees • Tax equalization process requires special treatment • Expatriate pays tax only to same extent they would have paid in the their home country • Hypo-tax • Company pays host country and home country actual taxes • Tax impact of exercising stock options varies widely due to location at: • Grant, vest, exercise and sale

19. Sourcing Principles • The general rule is that income is sourced where it is earned or over the “earnings period” • Each taxing jurisdiction may have a different view of the earnings period • U.S. • Generally where “earned” • Equity usually deemed to be earned from grant to vest • Maybe overridden by treaty • State sourcing may vary from Federal • E.g., Ohio stock options

20. SourcingFor Equity Compensation

21. US Sourcing Rules • Since January 1, 2006 Federal sourcing is based on US workdays from grant to vest • Some treaties state otherwise: • US : Canada • US: Japan • US: UK • Specific grants may require different sourcing • E.g., an award granted for a project undertaken in a particular location

22. US Sourcing Rules • US resident • Tax entire award • Allocate award between US and foreign source • Foreign earned income exclusion and FTCs can be taken against foreign source income • US non-resident • Tax US sourced portion only

23. Inpatriate • What countries require reporting • Is the inpatriate tax equalized • What social tax scheme is the employee covered by – home or host • Do you withhold taxes at the minimum statutory tax rates or sell to cover anticipated actual tax liabilities

24. Expatriate • What countries require reporting • Is the inpatriate tax equalized • What social tax scheme is the employee covered by – home or host • Do you withhold taxes at the minimum statutory tax rates or sell to cover anticipated actual tax liabilities

25. Double Tax Treaties • Each double tax treaty is different • U.S has double tax treaties with almost 70 countries • BUT generally an individual is tax exempt if : • The employee is present in the host country for 183 days or less, • In the taxable year concerned or rolling 12 month period • Referred to as 183 day rule • The employee compensation is paid by or on behalf of an employer which is not a resident of the host country, and • The compensation is not borne by a Permanent Establishment (PE) or fixed base which the employer has in the host country • Economic employer

26. Totalization Agreements • Similar to double tax treaties but focus is social security • U.S. has totalization agreements with 24 countries • Generally, individual can be covered in “Home Country‘” for up to 5 years • May mean that income tax and social tax are sourced differently for the same income

27. Example • Peter, an employee of ACME Inc. in the U.S. is assigned to work in Germany for 3 years starting July 1, 2013. ACME obtain a Certificate of Coverage to retain Peter in the U.S. social security system during the course of his assignment. In March 2014, Peter receives a bonus of $10,000 related to his performance during 2013. What taxes have to be paid? • U.S. income tax on $10,000 x 50%* • U.S. social tax on $10,000 x 100% • German income tax on $10,000 x 50% • Does the payer matter? • * Assuming a US citizen and the company takes a position that U.S. withholding is not required on foreign sourced income as the individual is subject to foreign withholding

28. Staying Up To Date • Withholding rates change annually • Constant international law changes • Withholding requirements • Reporting requirements • Legal requirements • Consultant update newsletters

29. Any Questions? Crystal Gronau Rutlen Associates LLC cgronau@rutlen.com 650-279-5879 Marlene Zobayan Rutlen Associates LLC mzobayan@rutlen.com 650-868-9282

30. Thank you for your attention