Alert
Alert
03.22.12
When a multinational company implements product deployment, research, sales expansion and manufacturing on an international basis, it may want a unified approach to compensation incentives covering both U.S. and other foreign executives. This means a U.S. citizen or resident who works outside the U.S. and is in an incentive program designed by a non-U.S. employer can face surprising, often serious tax problems. A non-U.S. citizen who is assigned to the U.S. but stays in their home country incentive plan may also have U.S. tax problems. And now, new issues are arising from the U.S. Foreign Account Tax Compliance Act.
Background on U.S. Tax Laws and Non-U.S. Tax Incentive Plans
Unlike most other countries’ tax laws, the Internal Revenue Code (“IRC”) takes a very aggressive approach to U.S. tax laws by extending their reach to the worldwide income of U.S. citizens and residents (resident either by physical presence in the U.S. or though immigration status – e.g., holding a “green card”), without regard to source or residence. The U.S. thus applies its domestic tax laws to other countries’ compensation structures. What this means is that a U.S. citizen or resident who works outside the U.S. and winds up in an incentive program designed by a non-U.S. employer can face surprising, and often serious, tax problems. Correspondingly, a non-U.S. citizen who is assigned to the U.S. and who stays in the home country incentive plan may have significant U.S. tax problems.
If the incentive program is “unfunded,” most of the issues around individual taxation have been handled by the IRS in the regulations under IRC section 409A. What this means is that certain deferred compensation programs, executive pensions, and deferred stock unit plans and stock option plans have special rules for non-U.S. plans and the U.S. taxpayers who find themselves covered by these plans. This is not to say that multinational companies can ignore the 409A rules, but there may be additional time to correct these problems, or to comply with special rules for employees who are subject to U.S. tax 409A rules for the first time.
When it comes to plans that are considered “funded,” the general rules of IRC section 409A do not apply, and the individual taxpayers, their employers, and in some cases the financial institutions holding the funds or equity have significant problems. For example, a U.S. taxpayer who has an interest in a non-U.S. trust that holds employer stock or other financial assets may face taxation in advance of actual distribution of the assets. The employee may also be facing a non-tax Treasury filing under the Report on Foreign Bank and Financial Accounts (FBAR) requirements. This report has been required for some time, but the U.S. Treasury has indicated there will be increased enforcement of this filing. There have been particular issues with FBAR reports required for foreign accounts over which a U.S. taxpayer has signature authority. These filings can also sweep in some forms of incentive and deferred compensation plans. Reporting for most U.S. taxpayers with only signatory authority was delayed to June 30, 2012, and then again to June 30, 2013.
Download: FATCA Creates New Issues for Cross-Border Stock and Other Incentive Compensation Plans