The Data You Need for Mobility Compliance

I had to do it. I jumped on the ChatGPT bandwagon and asked it how to tax an employee who moved from Germany to the United States with stock options granted in Germany and exercised in the United States The response was surprisingly comprehensive and well-written but largely inaccurate. It was also so wordy that sharing the full response here would take up most of my word allowance for the Blog, so I will not repeat it in full here.  

The response included most of the considerations that would be required in this situation, including the German taxation (inaccurately) and the US federal taxation (almost accurately) of stock options. The ChatGPT response asked the reader to also consider state tax, social tax, and the double tax treaty, but did not analyze the implications of these. Furthermore, the response did not include any reference to the social security agreement between Germany and the United States, which could impact the participant’s liability to social taxes.

In all fairness, I had not told it whether the stock options were non-transferable; the response took a tax position for the German taxation of transferable stock options that is a gray area. The dubious German conclusion presumably impacted the US federal tax conclusion, which was full taxation; in actuality, US federal tax withholding could be reduced for the German tax withholding at exercise.

The most striking thing, albeit perhaps obvious, is that ChatGPT did not ask any questions to clarify or refine the data, such as whether the stock options are transferable or which US state the employee had moved to. The information required for the correct taxation of mobile employees varies by country and the type of award and can be very lengthy.

Information Required for Mobility Compliance

Exhibit 14 of the Global Equity Plans GPS includes a comprehensive list of the information required, and it is too long to publish here. While the entire list can be overwhelming, not all the information is necessary for every situation. At a minimum, the following information is required:

• Jurisdictions involved, including countries, states, provinces etc. if applicable. Provide live-in and work-in locations, if different.
• Whether the employee is a transfer, expatriate, remote worker, or business traveler. Also, whether the participant is an employee, an independent contractor, or third-party employer (such as a Professional Employer Organization, PEO or Employer of Record, EOR).
• If relevant for the countries involved, details of the stock awards including whether the awards qualify for special tax treatment in a country, whether the company recharges, etc.
• If a calculation of the income allocations is required, relevant dates such as date of grant, vest, exercise, and, of course, the mobility dates.

A qualified advisor should be able to ascertain if more information is needed as well as analyze the applicability and implications of the double tax treaty and social security agreement.

Getting Dates & Locations Right

Mobility data is often the most difficult part of any mobility compliance project. At the start of most projects, it can be more difficult to get clean data on a timely basis than to do the tax analysis. The process for data gathering improves over time as processes develop and stakeholder awareness increases.

One frequent point of contention is the actual dates of move. It is not uncommon to have the HRIS system, payroll system, and the employee provide three different move dates, as usually these three stakeholders have different milestones. HRIS may use the date a visa came through or the employment contract became effective; payroll might use the first day of the payroll period; the employee may have traveled early to the new location to house hunt, or stayed longer at the legacy location, for children to finish the school year or to close a house sale. For tax purposes, most jurisdictions consider the date the employee arrives in the location with the intention of staying as the start of a residency. Procedurally, it is important to find the data source that best reflects this and apply it consistently.

Another data aspect that has been problematic since the pandemic is the designation of work location. In most jurisdictions, but not all, taxable income is determined by where the employee is physically working. Work location has become harder to identify since the increase of remote work. Some companies assign remote employees, who are known to be working in a different state or country, with a work location that reflects a prior office (presumably because their costs are allocated to that office), this practice can often lead to incorrect taxes being applied. It is important to capture the correct location where services are being performed to apply the correct tax withholding rules.

Don't Replace Your Tax Advisor

It seems that ChatGPT is not quite ready to work through the data analysis yet. In fact, the ChatGPT response ended with a disclaimer that tax laws are complex and advised the reader to consult an international tax specialist, so I have not been replaced by AI, yet.