8 January 2021
Happy New Year and we hope that you had a relaxing break over the Holidays.
Staying ahead of the curve on regulatory and tax compliance is a never-ending task for companies.
To help you keep on top of recent developments, here is our first quarterly Worldwide Wrap-Up of 2021, with some of the most recent changes that should be on your radar. We have summarised these topics briefly in this alert, however they will be covered in more detail along with other recent developments on our 13 January webinar.
Brexit – data protection
The UK-EU Trade and Co-operation Agreement (TCA), signed on Christmas Eve, included some good news on the transfer of data from the EU to the UK. The TCA includes a 4 month (extendable to 6 month) transition period for data protection rules. During this period the UK will not be treated as a third country under GDPR. This means that data flows to the UK that are in compliance with GDPR can continue unchanged as long as the UK makes no major changes to its data processing laws. The new transition period allows further time for the EU Commission to adopt an adequacy decision, confirming that the UK’s data protection rules will be treated with equivalent status to the GDPR.
Although this update is not incentive plan specific, there are data compliance implications when operating global plans. This arrangement increases the likelihood that the UK will receive an adequacy decision or, at the very least, it gives companies operating in the UK additional breathing space to put in place or update systems (including documentation and privacy notices), to reflect the UK’s status as a third country for GDPR in the event that an adequacy decision is not adopted.
Canada – cap on tax deduction
We reported in our recent alert (here), that the Canadian government is moving ahead with plans to impose an annual cap on the value of employee stock options that can qualify for preferential tax treatment. Currently, employees receiving stock options can benefit from a 50% deduction on the income tax payable. Under the proposed new rules, under certain circumstances, only options up to CAD200,000 in each year will be eligible for the tax deduction. If approved, the changes will apply to options granted from 1 July 2021.
This proposal has been under discussion for some time, and it seems increasingly likely that it will finally come into force this year. Companies offering share options to employees in Canada will need to keep an eye on how this develops, and may consider how to take advantage of the extension of the start date (now 1 July 2021) to review existing plans and maybe bring forward grants, or even put in place a new plan to ensure that employees can benefit from the current rules.
Gig economy workers
Several recent reports have looked at whether workers in the global gig economy are treated as employees or as self-employed contractors. In recent cases in Australia and Italy, workers have claimed more extensive rights (e.g. minimum wages and sick pay). In California, voters passed Proposition 22 which will exempt app-based transport and delivery companies from the obligation to provide employee benefits to workers by classifying drivers as independent contractors.
The growth in the gig economy, with increasing numbers of people working as self-employed or contract workers, has created a model where flexibility for some is seen as insecurity and loss of benefits for others. The classification of workers is important from an incentive plans perspective, as non-employees are generally excluded from the benefits of such plans. Incentive plans will usually be limited to employees, and both tax and regulatory rules which provide tax breaks or securities exemptions for employee share plans may not extend to non-employees, including contractors. Keep these global classifications under review if your workforce falls into this category.
Global tax rates
For many countries, revised tax rates start on New Year’s Day. Often the rates are only announced in the last days of December, and in some cases the final figures are not available until well into January, sometimes later. Our international advisors provide us with new rates to update OnTap as quickly as they become available. Current changes include:
Argentina – “millionaire’s tax” charge for individuals with worldwide assets over approx. USD2.5 million.
Austria – Basic rates reduced to 20% but reduction in top rate postponed.
Croatia – Personal tax rates reduced for both income and capital.
Kenya – Top 30% rate reinstated.
Malaysia – Social security (EPF contribution) for employees is reduced from 11% to 9%.
Netherlands – Basic rates income tax reduced but tax on capital increased.
Poland – Plan to abolish cap on social security contributions postponed.
The above list is not exhaustive and we will discuss the detail of these changes in our 13 January webinar. Many countries have made adjustments to tax bands and to social security caps. If you need specific advice for any jurisdiction, please let us know.
Latvia – changes to taxation of employee share plans
Rules introduced in 2013 allowed the deferral of tax on employee share income to the sale of the shares. Under the 2013 rules, the shares were subject to a 3 year holding period during which the participants had to remain in the employment of the issuer or its subsidiary. From 12 January 2021, the holding period will be reduced to 12 months and participants will be able to benefit from the tax treatment even if their employment is terminated in certain circumstances.
This is a significant change to the tax treatment of employee share plans. The reduction in the holding period from 36 to 12 months allows greater flexibility in the operation of share plans. For employees, the ability to continue to benefit from the plan, even if they chose to switch jobs, underlines the value of share plan participation.
UK – off-payroll working in the private sector
The UK was due to extend off-payroll working rules to include the private sector from April 2020. Due to the impact of the Covid pandemic, this was postponed until April this year. Since 2017, public sector employers have been responsible for determining whether a worker should be deemed to be an employee, and operating payroll and accounting for income tax and NICs for such workers where the off-payroll working rules apply. In the private sector this burden still falls on an intermediary, which is usually a worker’s limited company. The extension of these off-payroll working rules to the private sector will mean that medium and large company end-user clients in the private sector are also caught by the rules. An attempt to postpone the extension of the rules for an additional two years was rejected in July and it seems likely that the new rules will apply from 6 April 2021.
This is an important topic that all employers should be mindful of. The majority of companies will need to be aware of their responsibility to determine the employment status of a worker for tax purposes and how to actually do this. Companies should ensure that tax teams still have this on their radar and take the appropriate measures to prepare for these changes by ensuring workers are informed about off-payroll working determinations and establishing a process for dealing with any worker disputes. Where the contract or work practices change in any way, it is important for companies to review the IR35 rules to check whether they should apply.
USA – $1 million penalty for FBAR non-reporting
As covered in our December alert (here), a former CEO of a US pharmaceutical company was slapped with a USD1 million penalty for failing to report a foreign bank account under the US Bank Secrecy Act. Under the reporting requirements, individuals must report certain foreign financial accounts by filing a Report of Foreign Bank and Financial Accounts (better known as FBAR) by 15 April each year. The penalty for non-compliance is a fine equivalent to 50% of the amount not reported.
This case serves as a reminder for companies and individuals to stay on top of their foreign asset reporting obligations, which may arise as a result of operating international incentive plans. Although particularly strict in the US, similar obligations can arise in other jurisdictions and when operating incentive plans globally, so it is important to be aware of any reporting obligations for local employing entities and participants, which maybe unfamiliar to them.
USA – New York modernises Blue Sky filing for Reg D Offerings
New York has recently modernised the blue sky (state) filing requirements for securities sold or offered in New York using the exemptions available under Regulation D of the Securities Act. The new amendments update the notice filing process for issuers conducting private placements, notably by eliminating the need to file a Form 99 annually, and instead requiring issuers to electronically file a notice through the NASSA Electronic Filing Depository (EFD).
This is good news – the Form 99 filing was cumbersome and the new filing will streamline the compliance process. For companies relying on Reg D that have made annual filings in New York, please let us know if you would like more information on this change. Thank you to our US counsel, Harter Secrest & Emery LLP, for drawing this update to our attention.
USA – Reminder for Annual ISO and ESPP Reporting
The annual deadlines are fast approaching for delivering participant information statements (to current and former employees), and filing IRS information returns to report exercises of incentive stock options (ISOs) and transfers of certain shares of stock obtained by participants under employee stock purchase plans (ESPPs). Compliance with the participant information statement requirement is made by providing certain forms to relevant participants by 1 February 2021. The same forms are also used for IRS information returns, which must be filed with the IRS by 1 March 2021 (for paper filings) or 31 March 2021 (for electronic filings).
Tax reporting is an essential part of compliance and the US is a very high risk and, for most of our clients, important jurisdiction. Please let us know if we can help you with these filings.
if you have any questions, or would like to discuss any element of legal and tax compliance for your global incentive plans, do get in touch – we would be delighted to help!
Sarah Bruce, Lorna Parkin and Sonia Taylor