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Global Reward Services Quarterly NewsletterJune 2019
KPMG LLP’s (KPMG) Global Reward Services Quarterly Newsletter brings you compensation and rewards developments, along with KPMG observations from around the world.
In this issue
Featured articlePeer group development: Multiple markets for multiple purposes
Americas— Canada: Budget 2019—Proposed changes to
employee stock option regime
— Costa Rica: Tax reform impacting income tax rates
— USA: Interim guidance on taxing “excess” executive compensation of exempt organizations
— USA: In Case You Missed It: Other provisions of the TCJA
Asia-Pacific— Australia: Noncompliant payments for work and
services no longer deductible
— China: Tax treatment of non-PRC-domiciled individuals under the new individual income tax regime
— Israel: Income tax update regarding performance-based options
Europe— Belgium: Salary tax and social security
withholding obligations for equity-based incentives
— France: Withholding tax on wages, new rules effective January 1, 2019
Peer group development: Multiple markets for multiple purposesBenchmarking a company against organizational peers is a common exercise utilized by virtually all corporations—public and private. This is particularly true of compensation strategy and design. The use of benchmarking in the compensation field often serves as a foundation for establishing policies, programs, salary levels, and various incentives. Compensation is critical to most businesses in recruiting, rewarding, and retaining talent. In the balance are the objectives of the company as well as individuals. Most companies find particular comfort by identifying common practices among peer companies. Read more>
Canada: Budget 2019—Proposed changes to employee stock option regimeMarch 19 On March 19, the Finance Minister presented the 2019 Budget, which includes a proposal to introduce an annual cap of CA$200,000 on employee stock option grants that may be eligible for the stock option deduction. Currently, there is no such cap on the number of shares that can qualify and the regime provides significant tax savings
Americas
Featured article
1Global Reward Services Quarterly Update
© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. NDPPS 876193
for employees in Canada. The cap would be calculated by reference to the fair market value of the underlying shares at the date of grant. This is a significant change to the current stock option plan deduction rules.
In parallel, the proposal also provides that a corporate tax deduction (with respect to the portion of income corresponding to the options not eligible for the preferential personal tax treatment) would be allowed for the company. A corporate tax deduction is not currently available for stock settled awards in Canada. The proposals do not address whether the corporate tax deduction would extend to other award types such as Restricted Stock Units, etc.
Note that this would apply to employees of “large, long-established, mature” companies. The proposal will not impact the amount eligible for the stock option deduction for “start-ups” and “rapidly growing” Canadian businesses. Note that these proposals are expected to come into force on a prospective basis (not retrospectively) once additional details are released later this summer.
USA: Interim guidance on taxing “excess” executive compensation of exempt organizationsJanuary 16Tax Reform created a new excise tax on certain employee compensation and severance payments paid by tax-exempt organizations. Imposition of the new tax as practical endeavor has been challenging for these organizations, but uncertainty has been eased by recent guidance that addresses many key outstanding questions and concerns. Read more>
USA: In Case You Missed It: Other provisions of the TCJA April 1Taxpayers should be aware of important—but sometimes overshadowed—domestic provisions changed by tax reform. Although by no means exhaustive, this article provides a snapshot discussion of some key changes in the areas of tax accounting and compensation. Read more>
KPMG observations: For now, companies should assess whether it is appropriate to make option grants to Canadian employees before the proposals are introduced, to avail the unlimited stock option deduction since these proposals could significantly increase costs for companies with employees in Canada. In addition, applicable tax withholding rates would need to be updated for future option exercises to reflect the limited preferential treatment going forward.
KPMG observations: Companies operating cash bonus plans or cash settled equity awards in Costa Rica will need to revisit income tax withholding rates with their Stock Plan Administrator for transactions after July 1, 2019. Employers may also wish to communicate the tax reform measures to employees who may have an increased tax burden and lower net income, resulting in potential cash flow issues.
Costa Rica: Tax reform impacting income tax ratesDecember 4thOn December 4, 2018, Costa Rica enacted the Law on the Strengthening of Public Finances bill, which was approved by Congress on December 3, 2018. This new law provides for a comprehensive reform of the Costa Rican tax system.
Among the new tax law measures are changes to the income tax regime:
— Two additional salary tax brackets of 20 percent (applies to CRC 2,103,000 up to CRC 4,205,000 (USD 7,128) and 25 percent (on the excess of CRC 4,205,000) have been introduced.
— In addition, income tax withholding rates on cash compensation will increase from 15 percent to 25 percent for the payment of professional services. This includes cash settled equity awards.
— However the tax withholding rate for ‘salary-in-kind’ payments which includes equity awards, will not change and will continue to be subject to a 15 percent tax withholding rate. The higher tax withholding rates only apply to cash compensation.
2Global Reward Services Quarterly Update
© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. NDPPS 876193
Asia-Pacific
China: Tax treatment of non-PRC-domiciled individuals under the new individual income tax regimeMay 7China has recently undergone a reform on its individual income tax (IIT) law. In the March 2019 release of Announcement 35, certain tax positions have been amended for non-PRC-domiciled individuals, given Guoshuihan [2000] Circular 190 (Circular 190) was rescinded.
Australia: Noncompliant payments for work and services no longer deductibleMarch 4Effective July 1, companies will no longer be able to obtain deductions for what is determined to be “noncompliant” payments. Generally, under the Australian Pay-As-You-Go (PAYG) withholding tax system, businesses must report, remit, and withhold tax from certain payments for work and services. These businesses would then accordingly be entitled to an income tax deduction in relation to such payments. Examples of these kinds of payments include payments (1) for salary, wages, commissions, and bonuses; (2) pursuant to a labor hire arrangement; and (3) for contractors of services where the contractor has not provided their ABN. Noncompliant payments would not qualify for this deduction.
A noncompliant payment is any payment made by an Australian employer where it has not withheld or reported the PAYG tax to the Australian Tax Office (ATO). However, this measure does not apply in relation to an amount required to be withheld from a payment or to an amount required to be paid to the Commissioner of Taxation in the following scenarios: (1) the amount to be withheld is zero; (2) the employer, making a payment to an employee, genuinely believes they are a contractor; or (3) before the Commissioner commences an audit or other compliance activity, the company voluntarily tells the Commissioner of Taxation that they have failed to withhold an amount.
Multinational companies will be only be able to claim corporate income tax deductions for payments that are made to workers where they are compliant with the new PAYG withholding and reporting obligations for that payment. To maintain compliance, the company can either (1) use a shadow payroll so that the correct withholdings are applied for their employees or (2) submit a PAYG withholding variation to the ATO in order to reduce the withholding to zero and (3) pay taxes due by an employee’s income tax return submission.
KPMG observations: Employers operating in Australia would need to review their tax withholding procedures accordingly, if they are intending to seek corporate tax deductions for such payments. For foreign payroll employees working in Australia, please contact your KPMG representative to discuss our Shadow Payroll Assist technology that provides full automation of PAYG compliance, and other Australian employment tax and reporting obligations.
3Global Reward Services Quarterly Update
© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. NDPPS 876193
Israel: Income tax update regarding performance-based options December 5On December 5, 2018, an Income Tax Circular (the Circular) was published by the Israeli Tax Authority regarding the conditions under which Section 102 of the Income Tax Ordinance (New Version), 1961 (the Ordinance) will apply to equity-based remuneration (options, shares, and participation units) where the vesting of which is contingent on performance.
The Circular provides, among other things, that where vesting conditions are subject to fulfillment of targets, such conditions must be fixed, measurable, and predefined commencing from the grant date of the rights, and they must be without abstract or general reference that leaves open future discretion with respect to determination of the vesting conditions. The Circular also provides that an equity-based remuneration plan that is contingent on an “exit” or public issuance is not within the scope of Section 102 of the Ordinance.
In cases where the targets determined by the issuing company are abstract and/or general, the grant date will be viewed (for purposes of examination of the two-year restriction period in the hands of a trustee and quantification of the ordinary income component, as applicable) as the date on which the condition is fulfilled. In other words, when the performance condition is satisfied, the two-year restriction period will begin.
Regarding grants that are contingent on an “exit” or public issuance, in order to comply with the provisions of Section 102 of the Ordinance, the company is required to change the conditions of the grant.
It is clarified that the Circular also applies to existing plans and, accordingly, it permits submission of a notification to the Israeli Tax Authority within 180 days of the publication date of the Circular (on the form attached as an appendix to the Circular), of adoption of a tax arrangement for a new grant in order to conform such plans to the Circular’s provisions. That is, the plans will be deemed to have been issued on the submission date of the notification regarding the provisions of Section 102 of the Ordinance.
KPMG observations: In light of the publication of the Circular, a review of all existing remuneration plans (options, restricted shares, etc.) is recommended to confirm if they comply with the conditions of the Circular. Note that there are a number of additional provisions and qualifications that KPMG in Israel can assist with, as you review your existing plans and determine next steps.
Circular 190 provided for tax-exempt treatment on certain trailing equity-based compensation derived by non-PRC-domiciled individuals after they permanently departed the PRC. Specifically, the type of equity-based compensation that is eligible for the tax-exempt treatment should meet the following criteria:
— The equity-based compensation accrues to a period or periods of time during which the non-PRC-domiciled individual rendered services in the PRC
— The compensation is derived after the individual has permanently departed the PRC
— The cost of the compensation is not borne by any entity or permanent establishment in the PRC. Where the criteria above was met, employees were able to exempt trailing equity compensation from income. This is no longer the case.
KPMG observations: Companies should be aware that the release of Announcement 35, which is effective retroactively from January 1, 2019, removes the tax-exempt treatment that was provided under Circular 190. This means that effective January 1, 2019, non-PRC-domiciled individuals will be taxable on all of their PRC sourced equity-based compensation, irrespective of when the income is derived.
Furthermore, under the new PRC IIT regime, companies may still face challenges with applying the new income sourcing rule on long-term incentive awards where an individual taxpayer’s PRC tax residency status in the year of assessment differs from his/her residency status during the corresponding performance period.
While we await further guidance from the tax authorities, please contact your KPMG representative to review the implications of the PRC IIT reform on your company’s long-term incentive plan in order to take appropriate actions to ensure that you stay compliant.
4Global Reward Services Quarterly Update
© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. NDPPS 876193
Europe
Belgium: Salary tax and social security withholding obligations for equity-based incentivesJanuary 28The Belgian government enacted new legislation to introduce an income tax reporting and withholding obligation for Belgian employers on all equity-based incentives. The rules are effective for equity income realized on or after March 1, 2019 and provide a transition period for equity income realized between January 1, 2019 and February 28, 2019. For equity income realized during the transition period, it must be reported on the employees’ salary statement and should be electronically filed with the Belgian authorities by March 1, 2020.
In addition, the social security authorities have widened their definition of income subject to social security contributions. Based on this new definition, all equity-based compensation that relates to an employment exercised in Belgium is subject to social security contributions regardless of whether or not the cost is borne by the Belgian employer. It remains to be seen if the courts agree with this position.
KPMG observations: Companies must incorporate income tax withholding and reporting mechanisms for equity income regardless of whether the Belgian entity is involved in plan administration or there is a recharge of costs to the Belgian entity. The new legislation does not make this differentiation and tax withholding is now mandatory. In addition, employers should review their position with respect to social security contributions.
5Global Reward Services Quarterly Update
© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. NDPPS 876193
France: Withholding tax on wages, new rules effective January 1, 2019January 1The French government introduced a new pay as you earn (PAYE) tax system that introduces monthly income tax withholding for employees on wages and pensions. This new obligation applies to income earned in the 2019 tax year and will also be applicable to non-French qualified long-term incentive plans. It is a significant change from the prior position where employees paid income tax on wages via self-assessment tax returns.
Note that given this is the first year of the PAYE system, French employees will still need to satisfy their 2018 tax liabilities in 2019. However, to avoid paying twice in 2019 (i.e., payment of income tax due on 2018 income, plus withholding tax on 2019 income), employees will be entitled to a tax credit to cancel out the 2018 French income tax due on nonexceptional income.
KPMG observations: Companies will need to apply the individual withholding rates provided by the French tax administration on compensation income including equity income, or if none are provided default rates. This may lead to cash flow issues. Changes to the rates used in each individual case must be requested by the employee, not the employer. KPMG in France can assist with determining the best approach.
About Global Reward ServicesKPMG’s Global Reward Services (GRS) professionals can help your organization meet the challenges associated with global employee reward program design, implementation, administration, tax effectiveness, and compliance. Whether managing costs, improving performance, evaluating global aspects, or attracting and retaining talent, KPMG’s experienced team can help your company throughout the lifecycle of your total rewards program.
For more information about how KPMG can help, please visit our GRS web page, or click here to download our brochure.
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© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. NDPPS 876193
7Global Reward Services Quarterly Update
© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. NDPPS 876193
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Contact us
Michael A. BussaPartner, National & Global Reward Services LeadT: 212-954-1811 E: [email protected]
Jill M. HemphillPartner, New York/Metro LeadT: 212-954-1942 E: [email protected]
Kathy LoPrincipal, San Francisco LeadT: 415-963-8988 E: [email protected]
Parmjit SandhuPrincipal T: 212-954-4063 E: [email protected]
Terrance RichardsonPrincipal,West Region LeadT: 214-840-2532 E: [email protected]
Leann BalbonaManaging DirectorT: 212-872-3671 E: [email protected]
David CrossManaging DirectorT: 617-988-1460 E: [email protected]
Andrew GewirtzManaging DirectorT: 973-912-6246 E: [email protected]
Jennifer LinkManaging DirectorT: 212-909-5381 E: [email protected]
Dinesh SinniahManaging DirectorT: 312-665-3603 E: [email protected]
Mark SpittellManaging DirectorT: 214-840-4394 E: [email protected]
To learn more about GRS services, contact your local KPMG adviser or any of the professionals listed below.
Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.
The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. NDPPS 876193
