July 2023
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 third quarterly Worldwide Wrap-Up of 2023, 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 26 July webinar.
India - tax on outward remittances (TCS)
In our recent alert (here) we discussed the proposed extension of a tax which is withheld on outward remittances under the Liberalised Remittance Scheme (LRS). ‘Tax collected at source’ (TCS) now applies to transfers of funds under an employee share plan, as such transfers come under the LRS under the revised 2022 foreign exchange rules. Currently, the TCS is set at 5% and is only withheld on remittances over INR700,000. Changes to the TCS were due to take effect on 1 July, increasing the tax rate to 20% and abolishing the INR700,000 threshold. Fortunately, however, a last-minute reprieve was issued on 28 June (see here). Now, the TCS rate increase will only apply from 1 October and the threshold will continue to apply, meaning TCS will only be withheld if an individual makes outward remittances under the LRS over INR700,000 in any financial year.
Tapestry comment
The last-minute revision to the 2023 Indian Budget announcement was very welcome indeed! We are aware that industry groups in India are lobbying the Indian government to request that remittances under employee share plans are excluded from TCS. For the time being, however, the delay gives companies extra time to consider with their local payroll teams and authorised dealer bank, how plan operation will be affected if the full 20% TCS becomes relevant for participants from 1 October.
Indonesia - new securities rules for employee share plans
Indonesia’s Financial Services Authority (the OJK) has implemented new rules requiring non-Indonesian listed companies to formally obtain approval before offering securities for consideration under an employee share plan to Indonesian resident employees and directors. This process replaces the previous informal 'No-Action Letter'. Under the new rules, where a non-Indonesian listed company offers securities for consideration under an employee share plan, and the plan qualifies as a public offer in Indonesia (if the thresholds for exemption cannot be met), the company must now apply to the OJK to obtain a ‘Stipulation Letter’ exempting the plan from the public offer registration requirements. For more detail on the Stipulation Letter application process, see here.
Tapestry comment
Historically, many companies offering awards for consideration in Indonesia have been comfortable that they did not need to apply for a No-Action Letter, on the basis that the law was unclear and market practice indicated that the risk of the OJK enforcing any kind of penalty was low. The new rules formally requiring a Stipulation Letter have made the OJK’s expectations much clearer regarding the process for offering an employee share plan in Indonesia, which seems to have limited the ability of companies to take a commercial view for the same reasoning. Affected companies should now re-evaluate their position and the relative risk in light of this update, especially if they previously had obtained a No-Action Letter.
Republic of Korea - clarification on trading employee shares
South Korea’s Financial Supervisory Service (FSS) has recently clarified the procedure to be followed by Korean residents when trading shares of a foreign parent company acquired under an employee share plan (see here). Under existing foreign exchange rules, Korean residents may only trade foreign listed securities through a ‘Korean securities company’, however there was no guidance on whether this rule applied to the sale of shares acquired under an employee share plan. Therefore, Korean participants in a global share plan did not necessarily use a local broker or securities company to conduct the sale of shares under the plan. The recent announcement by the FSS confirms that the rules do apply to shares acquired under an employee share plan of a foreign listed company when the shares are sold by a Korean resident. We will discuss the developing practical effects of this during the webinar.
Tapestry comment
Although this is not new law, the abrupt change in the guidance has raised a number of practical issues for companies, employees and administrators. Although the compliance risk falls on the individual employee, companies will want to ensure the correct structure is facilitated for their participants and we are working with local counsel and our clients to navigate the full impact of the obligation and to how to communicate this to employees.
USA - timeline for clawback compliance extended to 1 December 2023
Shortly after our last World Wide Wrap-up in April, we sent out an alert (here) raising the possibility of an accelerated deadline for US listed companies to comply with the new SEC clawback reforms. It was anticipated that the date for companies to have a compliant clawback policy in place would be 8 August 2023 (rather than the long stop date of 27 January 2024 set out in the SEC rules), but the position remained unclear. In another last-minute reprieve (see here), the deadline was thankfully extended. The NYSE and Nasdaq filed amended proposed listing standards which were accepted by the SEC. The key change is that the effective date is now 2 October 2023, pushing the date for company compliance to 1 December 2023 (being 60 days after the effective date).
Tapestry comment
The extension of the effective date was great news and provided much needed clarity on company compliance timings. There was a real concern that companies would struggle to put in place compliant policies by 8 August, so more time is helpful. However, the clock is still ticking, so we suggest companies act now (if they haven’t already) to be ready well ahead of the 1 December deadline.
EU/US - data privacy framework adopted
Following a year of ‘will-they-won’t-they’ news reporting, the European Commission finally granted an equivalency decision to the US on 11 July, approving the latest EU/US cross-border data transfer arrangement: the Data Privacy Framework. It has been a long time coming, with the first announcement published in March last year and acceptance by the US in October 2022. The equivalency decision means the EC has accepted that the Framework creates an adequate level of protection (i.e. comparable to that provided under EU law) for cross-border transfers of personal data. This will allow personal data to be transferred from the EU to companies based in the US, which have signed up to the Framework, without having to put in place additional data privacy safeguards.
Tapestry comment
The Framework replaces the Privacy Shield (quashed by the EU Court of Justice in 2020) which, in turn, replaced Safe Harbour (quashed in 2015), and commentators are already questioning whether the Framework is sufficiently different from its predecessors to avoid the same fate. The collapse of the previous data protection arrangements between the EU and the US caused disruption to the thousands of organisations who had to fall back on alternative transfer tools or to keep employees’ personal data in the EU. This is not always a workable option given the global nature of share plans and the internationalisation of share plan administration. For the time being, companies transferring personal data from the EU to the US will be glad to be able to rely on a relatively simple and legal basis.
Global tax rates
We will look at some recent tax updates, in particular those countries with a tax year commencing in July. Our international advisors provide us with new rates to update OnTap as quickly as they become available. Recent announced changes include:
- Australia - employer social security rate increased to 11%.
- Egypt - in-year tax change increased maximum tax rate to 27.5% from 1 July.
- Mauritius - maximum tax rate increased to 20%. Solidarity tax abolished.
- Nepal - maximum tax rate increased to 39%.
Tapestry comment
Although tax changes usually happen according to a set timetable (usually at the start of the relevant tax year), the in-year tax increase in Egypt is a salutary reminder that changes can actually happen at any time. We will look at the above changes, plus several more, in detail during the webinar.
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!
Sally, Sonia, Olivia
