FANews
FANews
RELATED CATEGORIES
Category Compliance - Regulatory
SUB CATEGORIES Acts (FAIS / Pension etc) |  Association for Savings & Investment SA (ASISA) |  Association of Black Securities and Investment Professionals (ABSIP) |  Banking Ombudsman |  BEE (Black Empowerment) |  Competion Commission |  Corporate Governance |  FAIS Ombudsman |  FICA |  Financial Sector Conduct Authority (FSCA) (was FSB) |  General |  Insurance Ombudsman |  Life Ombudsman |  LOA - Life Officers' Association |  NCA - National Credit Act |  PFA - Pension Fund Adjudicator |  SAIA - South African Insurance Association |  SARS - South African Revenue Services |  Short Term Ombudsman |  The Institute of Retirement Funds (IRF)  |  The National Financial Ombud Scheme (NFO) | 

Executive Share Options Schemes face tax compliance risks due to an increasingly mobile workforce

08 October 2007 PricewaterhouseCoopers

Equity compensation for company directors and senior management now takes centre stage in both financial reporting and corporate governance. Previously tucked away as footnote disclosures in the annual report, equity compensation now has to deal with increasing demands with regard to tax and risk management, accounting, legal regulations, corporate governance, human resources and benchmarking. And as the corporate workforce becomes increasingly globally mobile, these challenges become even more complex.
 
Claire Bladen, a senior manager at PricewaterhouseCoopers (PwC), says it is imperative that companies pro-actively manage the risks associated with equity compensation. "Non-compliance with the tax and regulatory burdens in a country can expose the company to reputational risks, PAYE audits, additional tax liabilities that attract punitive penalties and interest, and even criminal charges."
 
Bladen emphasises that it is vital for an international company to conduct regular compliance reviews of its equity compensation plans in each country where equity plans are offered to employees in that country. "Many of the participants in these types of plans work in several countries during the award cycle and the tax authorities in most countries now expect organisations to collect and track accurate data for each of these individuals over the award cycle.." 
 
There are potentially expensive exposures associated with the tax risks of equity compensation and these need to be identified and managed. For example, the payroll departments need to ensure that the correct taxes are withheld and paid over timeously to authorities, and they must therefore be appropriately staffed.. There needs to be data sharing between HR, accounting and tax departments to ensure the system functions optimally. Sometimes the payroll department is not even aware that such equity plans even exist.
 
The 2006 PwC Global Equity Incentives Survey reviewed the practices of 151 companies headquartered in 16 countries with operations in over 36 countries worldwide. The survey results showed that nearly 25% of companies had not conducted internal compliance reviews in countries affected by such compensation plans or did not even know if such reviews were being done. About a third of companies conduct these reviews annually but nearly a quarter did not know what their frequency policy was with regard to such audits.
 
Companies are now being audited more frequently by the tax authorities in regard to their equity plans with activity being highest in the UK, followed by the US and Netherlands, and the costs of non-compliance with regulatory burdens can be high. "South Korea has announced its intention to audit equity plans of all companies operating there. Japanese tax authorities are closely investigating the appropriate classifications of these plans and the SEC in the US is targeting the backdating of options". Businesses operating in Africa do not escape from the responsibilities of equity compensation tax management as most countries on the continent impose withholding taxes on equity compensation (despite the lack of legislation in this area) and require such plans to be extensively disclosed." 
 
Bladen says that companies with global operations need to keep up to date with the tax regulations in each jurisdiction and must know how to calculate withholding taxes on options exercised or shares vesting. "Specifically designed software should be able to do this. For example, the PwC shareTax tool which has been developed in the UK is an online tool which is available 24/7 and which allows a multinational to calculate tax liabilities relating to share incentive compensation plans currently in 16 countries and caters to an individual who has worked in three separate jurisdictions in the award cycle. Whatever mechanism the company chooses to calculate these withholding taxes should also easily interface with other information management systems."
Quick Polls

QUESTION

Early 2025 asset manager outlook statements point to opportunities in emerging markets and the US dollar. How do you approach these factors in client portfolios?

ANSWER

Diversify across emerging and developed markets
Focus on long-term opportunities in China and India
Maintain a cautious stance around US-dollar investments
Prioritise local markets for safer EM growth
View the Results
fanews magazine
FAnews November 2024 Get the latest issue of FAnews

This month's headlines

Understanding treaty reinsurance – and the factors that influence it
Insurance brokers: the PI scapegoat
Medical Schemes' average increases for 2025
AI is revolutionising insurance claims processing and fraud detection
Crypto arbitrage: exploring the opportunities and risks
Subscribe now

Products & Services

Useful Links

Important Links

Jobs

View Current job listings