Tips for Global Stock Plan Tax Withholding

When a company finds itself in trouble with regulators, it’s often due to a tax issue. Tax authorities around the globe can be aggressive in monitoring compliance, and the penalties for failures can be hefty financially—and sometimes criminally!

When equity plans are multinational, the factors to ensure proper tax withholding can multiply. This blog entry explains the most common approaches to managing global tax withholding of equity awards.

Determine the Best Withholding Methods

Figuring out what tax withholding method(s) may work best for your equity plan is not a one-size-fits-all approach. Here are the more common choices:

• Withhold from wages: The stock plan administration team reports equity transactions to local payroll teams, who then determine income and related tax withholding and deduct the taxes due from employees’ regular wages.
• Sell-to-cover: The employee sells enough shares to cover the tax withholding due on the award.
• Share withholding: Also referred to as net issuance or withhold-to-cover, in this approach, the company holds back shares from the equity award that have a value sufficient to cover the tax withholding due.
• Cash (remitted by employee): The stock plan administration team reports equity transactions to local payroll teams, who then determine income and related tax withholding and collect a cash payment from employees to cover the taxes due.

Several variables can influence the decision on which methods to use. Among them are the type of award, the company’s cash flow considerations, trading windows, and stock volatility. It may be appropriate to use different withholding methods for different types of equity vehicles. Withholding taxes from wages might make sense for ESPP purchases, while share withholding or sell-to-cover might be more feasible for RSUs.

Determine the Appropriate Withholding Rate

In the United States, equity compensation is treated as a supplemental payment and is eligible for withholding at a flat rate. Few other countries have a flat tax rate; instead, in most countries, taxes on equity awards should be withheld at the rate that applies to an employee’s regular wages.

In practice, however, determining this rate may be challenging. In countries with graduated or progressive tax rates, the tax rates that apply to individual employees may vary widely. In some cases, the income from equity transactions could move employees into a new tax bracket, causing their tax withholding rates to increase.

As noted by Caroline Durbin of Deloitte Tax in the NASPP Equity Expert podcast, “Tax Withholding Practices for Equity Awards,” one solution to this challenge is to withhold taxes at the top marginal rate in each country. This reduces the number of tax rates the stock plan administration team must keep track of to just one per country.

When this method is utilized, any excess withholding is generally refunded to employees through their local payroll, which effectively trues up the withholding to the individual rates applicable to each employee. This ensures compliance with local tax laws. Moreover, in many countries, employees do not file tax returns; refunding the excess withholding through payroll may be the only way to ensure employees don’t overpay the taxes due on their equity transactions.

One downside of withholding at the maximum tax rate is a scenario where the employee is due a significant refund due to over-withholding. In cases where shares were used to satisfy taxes (i.e., sell-to-cover or share withholding), applying the highest marginal tax rate to equity transactions means that employees receive fewer shares. It also increases the number of shares sold into the market when shares are sold to cover taxes and increases the company’s cash outflow for share withholding transactions.

Alternatives to Withholding at the Maximum Rate

Although collecting taxes based on a maximum rate ranks high on the easy-to-implement and manage spectrum, the potential impact on employees may be a reason to consider alternatives. Some other approaches to evaluate are:

Exact Rate: In this approach, taxes are withheld at the exact rate that applies to each individual employee, which is supplied by the local payroll. This can result in very accurate withholding and is especially viable when the parent entity receives automated payroll data feeds from their various localities (and when dealing with only a small number of countries). Without automation or if your participant population is spread out over many countries, this could be especially tricky to maintain.

Hybrid Approach: In this approach, the stock plan administration team, in coordination with local payroll teams, establishes a few rates (e.g., two per country) that span the minimum-maximum spectrum of liability for each jurisdiction. Taxes are withheld at the rate that most closely aligns with each employee’s anticipated income for the year.

This approach can result in more accurate withholding than the maximum rate approach, with fewer refunds, all while satisfying withholding requirements. It can be particularly helpful in countries where the maximum marginal income tax rate is exceptionally high and applies to a relatively small population of employees.

Learn More at Our Global Plan Design Bootcamp

Tax compliance should be a priority of focus for any company. Keeping on task with understanding requirements, potential pitfalls, and best practices can be overwhelming when multiple jurisdictions are involved. It’s a must for companies to allocate sufficient time and resources to plan, implement, and monitor their global tax compliance strategy—including learning about alternatives and deciding on the best course of action.

The Global Plan Design Bootcamp at this year’s NASPP Conference will unpack the legal hoops, tax puzzles, and cultural nuances you need to understand to design and operate a multinational equity program. You can add this program to your conference registration or register for it as a standalone program. Register today!