Global Tax and Regulatory Update: March 2015

In this month’s update: Important reminders regarding Hong Kong, Japan, Ireland, Israel, New Zealand, Spain, The Philippines and Vietnam.
This regular feature is prepared by Solium GSP, Solium’s  tax and regulatory consulting service.

Regulatory updates

nz  New Zealand

Changes to the online Disclose registration

A new online Financial Markets Conduct register called “Disclose” has been recently introduced in New Zealand. Although the Disclose register enables companies to manage information about their registered offers and plans online, companies were concerned about the impact of this new requirement on their employee share plans implementation, given the Disclose registration could lead to further filings and complex compliance obligations.

However, a recent approach to the Financial Markets Authority (FMA) has confirmed that overseas issuers relying on the new employee share schemes exclusion under the Financial Markets Conduct Act 2013 are not required to register with Disclose. This is good news for companies running global share plans in New Zealand. Many thanks to Minter Ellison Rudd Watts for approaching the FMA for this opinion and sharing it with Solium GSP.

 

Please note that issuers who have previously offered securities in New Zealand in reliance on the Securities Act (Overseas Employee Share Purchase Schemes) Exemption Notice 2002, and who continue to do so, are not required to register with Disclose but such issuers should continue to lodge their documents with the Companies Office, in compliance with that exemption notice.

Tax updates

hk  Hong Kong

Meeting between IRD and Certified Public Accountants yields discussion on equity tax

Equity tax issues were discussed at the 2014 annual meeting between the Hong Kong Inland Revenue Department (IRD) and the Hong Kong Institute of Certified Public Accountants in February 2015. Although the minutes are not law, they are a good reference of the IRD’s position on several matters.  Below is a summary of a few pertinent highlights but companies with interests in Hong Kong are advised to take the IRD’s views into account. Download the minutes on the HKICPA’s website.

The following are some pertinent highlights:

Deemed vesting of equity awards upon departure from Hong Kong

Employees who are permanently departing from Hong Kong may elect for a notional exercise of any stock options granted to them before the date of departure and can apply for a reassessment in the event that the gain at exercise is less than the amount assessed at the time of the notional exercise.

The minutes confirm that no reassessment will be possible in respect of a deemed vesting of share awards upon a taxpayer’s departure.

Taxation of share awards

Generally speaking, restricted share awards are taxed at “vesting“ which, under Hong Kong tax law, is defined as entitlement of ownership free of any conditions. Therefore, the timing of the taxation is dependent on the terms of the award. The minutes clarify that generally tax is due at grant (rather than at vesting) where:

  • the employee has all the rights of a normal shareholder at the date of grant (i.e., registered as a shareholder, voting rights and right to receive dividends) and there is no forfeiture risk (even if there is a requirement to sell back the shares to the company at the prevailing fair market value, upon termination of employment); or
  • the employee has acquired full economic benefits and ownership of the shares at the time of grant and the only forfeiture risk is remote.

Companies can apply to the IRD for ruling if they are not sure of the tax point.

Deductibility under a recharge

The IRD view is that recharge payments that are substantially above the market price of the shares may not be within a reasonable range from a deductibility standpoint. Even though the amount may have been due to normal changes in the share price, the IRD may reject deduction claims where the recharge is excessively over a reasonable price for acquiring shares from an open market.

Note: If an overseas company with a Hong Kong branch incurs costs in acquiring its own shares from the market as treasury stock to fulfill the share option/award obligations in respect of its employees, the Hong Kong branch would be allowed a deduction on the expenses incurred. However, this does not apply to a Hong Kong incorporated company.

The shares bought back will be treated as canceled and any subsequent issue of shares to the employees is a new issue of shares.

ph  The Philippines

Tax treatment of equity awards

A new circular clarifying the taxation of stock option plans has recently been issued by the Philippines Bureau of Internal Revenue. Even though the provisions in the circular apply only to stock options (and other equity plans) granted by unlisted Philippine companies, our local lawyers have confirmed that it would be considered good practice for foreign companies with Philippine subsidiaries or affiliates to follow the circular guidelines.

The circular clarifies the following points:

Grant of stock options

Where a stock option has been granted to an employee due to an employment relationship and no payment was received from the employee for the grant of the option, a deduction is unlikely to be available on the grant of the option.

Exercise of stock options

The circular clarifies that stock options exercised by rank-and-file employees (non-managerial or non-supervisory employees) are considered additional compensation subject to income tax. If the award costs are recharged to the local entity, and an expense is recorded in the local entity’s accounts or a cash payment is made via the Philippine payroll, then the local entity must withhold tax from the employees.

If stock options are exercised by employees who hold managerial or supervisory positions, the taxable amount will still be the difference between the “book value” and “fair market value,” whichever is higher. However, the taxable gain will be treated differently depending on whether there is a recharge or not.

  • If there is a recharge to the local entity, the local employer will have to pay fringe benefit tax at rates of up to 32% of the grossed-up taxable amount of the awards.
  • If there is no recharge then no fringe benefit tax is due even from managerial or supervisory employees. Instead, the taxable amount is subject to income tax and is paid by the employees through their annual income tax returns.

Recommended action

As mentioned, the provisions in the circular relating apply only to stock options granted by Philippine companies. However, for companies with Philippine subsidiaries or affiliates, it would be considered good practice for their Philippine entities to follow the circular. Therefore, it is recommended that companies with subsidiaries or affiliates in the Philippines review how they calculate the taxable amount of awards in light of the circular, and ensure they are applying the correct tax treatment. They should consider the employees’ positions and whether or not there is a recharge.

This article has been kindly shared by our collaborating law firm in the Philippines, Quasha Ancheta Pena & Nolasco, who will be able to assist if you have any questions.

 

Upcoming deadlines

jp  Japan

 

 Foreign asset reporting– by March 15

 Individuals who are permanent residents for tax purposes in Japan (whether they are tax payers or not) are required to file a report when the total value of their foreign assets exceeds JPY 50 million (approximately USD 500,000) as at December 31 of any year. This includes foreign nationals who are currently resident in and/or have had a domicile in Japan for more than 5 years in the preceding 10 years, or those who are currently tax residents. Foreign assets include any assets held by a Japanese resident located outside Japan that have an economic value, even if they have been awarded or acquired outside of Japan. This includes vested but unexercised options. Unvested awards do not need to be included in the report.This filing should be effected using a specific form which differs from the income tax return and is required, even if no individual income tax return is made. The due date is March 15 (or the next business day) for assets held at December 31 of the previous year.

Equity reporting – by March 31

Japanese companies that are majority owned by non-Japanese companies and Japanese branch offices of non-Japanese companies must file an annual report by 31 March to the tax authorities, using Form 9(3), if their employees have cash or equity awards that have been granted or have vested in the previous tax year.

ie(1)  Ireland

Equity reporting – by March 31

Companies (including non-resident parent companies) and Irish branches have to report to the Irish Revenue on Form RSS1 (filed electronically) any unapproved options and other rights to acquire shares that were granted, assigned, released and/or exercised by employees and/or directors during the relevant year.

Companies (including non-resident parent companies) and Irish branches operating the following approved share schemes have to report to the Irish Revenue on an annual basis on approved forms:

  • Save as you earn – Form SRO1
  • Approved profit sharing scheme – Form ESS1
  • Employee share ownership trust – Form ESOT1

NOTE: Under an approved employee share ownership trust, the trustee has the reporting obligation. The due date for filing is March 31 following the end of the tax year. Failure to file a return may result in the withdrawal of Revenue approval for the scheme. The forms are available on the Irish Revenue website.

il  Israel

Equity reporting – by March 31

For stock option, RSU, and ESPP grants under trustee and non-trustee plans in Israel, reports must be made annually to the Israeli tax authorities. The local affiliate or trustee must file Form 156 with the Israeli tax authorities by March 31 of the following year detailing the grant activity and the status of any outstanding grants during the prior calendar year.

Please note that while the Israeli tax authorities have indefinitely extended the deadline for these submissions (until an electronic submission system is operable), some companies and trustees choose to make these reports in hard copy until the electronic system is operable.

es  Spain

Foreign asset reporting – by March 31

Tax residents in Spain with assets outside of Spain worth more than EUR 50,000 have to declare them on Form 720 to the Spanish Tax Office by March 31. If a declaration has already been made in the previous year, then a new declaration only has to be submitted if the assets have increased by EUR 20,000 or more.

vn  Vietnam

Equity reporting for approved plans – by March 31

Where any plans have been approved by the State Bank of Vietnam, the company will need to report any awards that were granted or have vested as well as any options that were exercised in the previous calendar year by March 31.

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