|
 Employee stock option plans have become a common component of remuneration packages in multinational enterprises. This publication presents and examines the many important tax issues that arise for beneficiaries and companies.
Focusing first on domestic tax issues, it considers what tax treatment would provide no tax-related incentives for a company to either increase or cut the use of stock options, and would be neutral regarding the choice of either granting stock options or paying ordinary salary. The approach is non-prescriptive and serves to provide a benchmark for policymakers. This is complemented by a survey of taxation of stock options in OECD countries in 2002 that calculates the effective rate of tax and compares it with tax on ordinary salary.
Cross-border taxation issues are then discussed. Issues such as the timing of the benefits from stock options, the distinction between employment income and capital gains and the identification of the services to which they relate are relevant to the application of tax treaties, which are based on the OECD Model Tax Convention, and the resulting changes to the Model's Commentary are fully explained.
Finally, the effects on transfer pricing are analysed in three circumstances: when an enterprise grants stock options to employees of a subsidiary in another country, when using transfer pricing methods that are affected by remuneration costs, and when employees benefiting from stock options are involved in activities that are the subject of a cost contribution arrangement.
This detailed study is essential reading for anyone seeking to understand the intricacies of taxation of stock options.
Download Free eBook: The Taxation of Employee Stock Options
PDF format, 1.6MB, 174Pages.
OECD Tax Policy Studies
The Taxation of Employee Stock Options
OECD. Published by : OECD Publishing
Table of Contents
Chapter 1. Tax Neutrality .......................................................................................................... 9
1. Introduction ..................................................................................................................... 10
2. The case of certainty with only corporate taxes ......................................................... 19
3. Introducing personal level taxation .............................................................................. 21
4. Introducing uncertainty ................................................................................................. 23
5. Introducing possible different productivity ................................................................. 26
6. Introducing employees’ risk aversion .......................................................................... 29
7. Summary .......................................................................................................................... 32
Notes .................................................................................................................................... 34
References ............................................................................................................................ 34
Annex 1.A1. The Algebra of Neutrality .............................................................................. 36
Chapter 2. Effective Tax Rates .................................................................................................. 39
1. Introduction ..................................................................................................................... 40
2. Qualitative description of the tax treatments ............................................................. 41
2.1. Concessionary schemes .......................................................................................... 42
2.2. Other incentive pay schemes ................................................................................. 44
2.3. Tax Treatment of Schemes ...................................................................................... 46
3. Tax wedges on stock options and incentive pay schemes: the calculation
methodology and results ............................................................................................... 55
3.1. The issue of disallowing labour costs .................................................................... 56
3.2. Introducing personal income tax and employee social security contributions 57
3.3. Introducing the time lag for stock options ........................................................... 57
3.4. The results of the calculations ............................................................................... 59
4. Comparison between stock options and ordinary salary .......................................... 59
5. Comparison between stock options and ordinary salary for higher levels
of income ......................................................................................................................... 60
Notes .................................................................................................................................... 82
Chapter 3. Cross-border Income Tax Issues ......................................................................... 83
1. Introduction ..................................................................................................................... 84
2. Background on ESOPs ..................................................................................................... 84
3. Issues related to the employee ...................................................................................... 86
3.1. Timing mismatch in taxing the employment benefit ......................................... 86
3.2. Distinguishing employment income from capital gains .................................... 89
3.3. Difficulty in determining to which services the option relates ......................... 92
3.4. Employment services that are provided in more than one State ...................... 95
3.5. Multiple residence taxation .................................................................................... 97
3.6. Compliance issues .................................................................................................... 100
3.7. Alienation of stock-options as a result of a merger or acquisition
and replacement of options ..................................................................................... 101
3.8. Valuation issues ........................................................................................................ 102
3.9. The granting of stock-options to members of a board of directors ................... 102
4. Issues related to the employer ...................................................................................... 103
4.1. Deductibility of the costs of ESOPs ........................................................................ 104
4.2. Remuneration “borne by” a permanent establishment ...................................... 104
Notes .................................................................................................................................... 105
Annex 3.A1. Graphical Illustration ..................................................................................... 106
Annex 3.A2. Changes to the OECD Model Tax Convention ............................................ 107
Chapter 4. Impact on Transfer Pricing ................................................................................... 115
1. Introduction – Scope of the study ................................................................................. 116
1.1. Introduction .............................................................................................................. 116
1.2. Scope of the study .................................................................................................... 117
2. Situation I: An enterprise grants stock options to employees of an associated
enterprise that is resident in another tax jurisdiction .............................................. 120
2.1. TOPCO Example: The “Non-Dilutive stock option plan” ..................................... 120
2.2. Variant to TOPCO example: Dilutive plans ........................................................... 146
2.3. Preliminary conclusion to Situation I .................................................................... 148
3. Situation II ........................................................................................................................ 150
3.1. The impact of stock options on controlled transactions
(other than transactions with respect to stock options)
in which the employees benefiting from stock options are involved ................ 151
3.2. The impact of stock options on comparability analysis when employee
remuneration of the tested party or the comparables is materially
impacted by stock options. determining a comparability adjustment ............. 155
3.3. Interaction between domestic rules and tax treaties ......................................... 160
3.4. Preliminary conclusion to Situation II ................................................................... 161
4. Situation III: The impact of stock options on Cost Contribution
Arrangements (CCAs) ..................................................................................................... 161
4.1. Example ..................................................................................................................... 162
4.2. Should stock options be included in the valuation of the contributions
of participants to a CCA? .......................................................................................... 162
4.3. Where stock options are included in the valuation of participants’
contributions to a CCA, what should the valuation principles be? ................... 165
4.4. Interaction between treaty rules and domestic rules ......................................... 169
4.5. Preliminary conclusion to Situation III ................................................................. 169
Notes .................................................................................................................................... 169
 |
eBook Categories 
Subscribe to the RSS feed.