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Recent legislative updates


Country summaries
For a more comprehensive discussion, please
see Country Discussions starting on page 3.
China
New circular on certain outbound remittances
Under current Tax Clearance Certificate (TCC)
requirements, foreign companies wishing to
settle a recharge of equity plan costs to their
Chinese affiliate have to go through
cumbersome procedures, including tedious
documentation requirements before funds can
be remitted from China to settle the recharge
of costs.

In an effort to simplify the TCC requirements,
a new circular was jointly issued by State
Administration of Taxation (SAT) and the
State Administration of Foreign Exchange
(SAFE) which sets out the guidelines for a new
tax registration system for certain outbound
remittances (e.g., service trade payments,
dividends, interest, royalties, salaries, capital
gains).

While this new record-filing system does not
mean that the tax authorities are taking a more
relaxed view towards administration for
outward remittances, it does mean that their
focus will shift from pre-remittance approvals
to daily tax administration and post-
remittance examinations.





Global equity compensation newsletter / Issue 11 / November 2013
Country summaries p1/ Country discussions p3

This month's issue addresses recent tax and legal changes in various jurisdictions, such as:
China New circular on certain outbound remittances
France New employer-paid tax on employee compensation in excess of 1 million Euros
Hong Kong Clarification on the allocation of equity income for subsequently localized
expatriates
India Reduction of the Liberalized Remittance Scheme threshold and ruling on the corporate
tax deductibility of ESOPs
Mexico Increase in income tax rates pursuant to Mexicos 2014 Tax Reform
United Kingdom HMRC guidance regarding the classification of stock options as legal options
United States California reduces Section 409A penalty
United States PwCs 2013 W-2 Handbook released



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France
New employer-paid tax on employee compensation in excess of 1 million Euros
On September 25, 2013, the French government presented the draft Finance Bill for
2014 which included the creation of a special tax due by employers on individual
gross remuneration in excess of 1 million Euros to their corporate officers and
employees. This special tax will be in the form of a 50% tax due on remuneration
accrued or granted in 2013 and 2014 by any company, group, or individual doing
business in France, in excess of 1 million Euros.
Please refer to our PwC France Alert for more information. This alert can be found by
accessing this link and scrolling down to the English translation. The information
presented above will not be discussed below under Country Discussions.
Hong Kong
Clarification on the allocation of equity income for subsequently localized
expatriates
At the 2013 annual meeting between the Hong Kong Inland Revenue Department
(IRD) and the Hong Kong Institute of Certified Public Accountants (HKICPA), the
IRD expressed its views on a number of salary tax issues that may be of interest to
taxpayers. Some of the issues discussed were solely related to the interpretation and
application of the domestic law of Hong Kong while others involved application of the
Hong Kong treaties.
One of the issues discussed was share awards for expatriates who are subsequently
localized. In the past, there were uncertainties as to the correct salaries tax treatment
and employers reporting requirement of share award benefits received by expatriate
employees who were initially seconded to work in Hong Kong and later localized (i.e.,
switched from non-Hong Kong employment to Hong Kong employment during their
secondment).
Please refer to this PwC Hong Kong News Flash for more information. The
information presented above will not be discussed below under Country Discussions.
India
Reduction of the Liberalized Remittance Scheme threshold and ruling on the
corporate tax deductibility of ESOPs
In accordance with A.P. (DIR Series) Circular No. 23 dated August 14, 2013, the
Reserve Bank of India (RBI) has reduced the monetary limit of remittance under the
Liberalized Remittance Scheme (LRS) from USD 200,000 per financial year to
USD 75,000 per financial year. As a result, Indian resident individuals are now
permitted to freely remit only up to USD 75,000 per financial year for remittances
outside of India under the LRS.
In addition, recent court decisions have provided important guidance on the
deductibility of stock option expenses recharged by foreign parent companies to their
Indian affiliates. Given there has previously been some uncertainty with respect to the
corporate tax deductibility of employee stock option plans (ESOPs) in India, these
recent decisions have provided additional guidance on the corporate tax deductibility
requirements for foreign parent companies recharging their equity plan costs to
India.
Mexico
Increase in income tax rates pursuant to Mexicos 2014 Tax Reform
Recent tax reforms have resulted in changes which will impact employees
participating in equity compensation plans in Mexico. Effective January 1, 2014, the
top marginal income tax rate will increase to 35% (previously 30%) on annual income
in excess of approximately USD 250,000. Notably, dividends received from foreign
corporations will be subject to a 10% tax payable by shareholders upon filing a
monthly tax return. This 10% tax will be in addition to the income tax payable at the


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employee's marginal rate of tax on dividend income reported in the annual income
tax return (a foreign tax credit will be available for any foreign taxes paid). As such,
beginning in 2014, employees in the top bracket should expect to pay higher taxes on
equity income including an additional element of compliance for dividend income.
The information presented above will not be discussed below under Country
Discussions.
United Kingdom
HMRC guidance regarding the classification of stock options as legal options
HM Revenue & Customs (HMRC) has amended their published guidance relating to
stock options which they classify as "legal options. This update will be particularly
relevant to non-UK resident employees who are granted stock options outside the UK.
This is because a legal option which is granted to a non-UK resident employee and
which is not related to the prospect of taking up UK employment or duties performed
in the UK will be outside the scope of UK tax.
The amended guidance emphasizes that not all "securities options" - namely rights to
acquire securities, will be considered legal options. The updated guidance
underlines the importance of analyzing what rights employees obtain at what time
under the particular stock plan.
United States
California reduces Section 409A penalty
With the signing of the California Assembly Bill 1173 on October 4, 2013, the
additional California state tax penalty for non-compliance under section 409A of the
Internal Revenue Code has been reduced from 20% to 5% for taxable years beginning
January 1, 2013. Prior to the adoption of this amendment, deferred compensation
arrangements that were not in compliance with Section 409A regulations were
subject to an additional California state tax of 20% plus interest penalties.
While Assembly Bill 1173 has reduced the state tax portion of the penalty to 5%, the
federal tax remains at 20%, resulting in a new combined federal and state tax rate of
25%. This reduced rate will be applicable retroactively to January 1, 2013. The
information presented above will not be discussed below under Country Discussions.
Country discussions
China
New circular on certain outbound remittances
Under the current Tax Clearance Certificate (TCC) requirements, foreign companies
wishing to settle a recharge of equity plan costs to their Chinese affiliate have to go
through complex procedures with tedious documentation requirements in order to
obtain a TCC. In practice, these approvals are not obtained with ease before funds can
be remitted from China to settle the recharge of costs. In an effort to simplify the TCC
requirements, a new circular (Notice 40) was jointly issued by the State
Administration of Taxation (SAT) and the State Administration of Foreign Exchange
(SAFE). The Notice sets out guidelines of a new tax registration system for certain
outbound remittances (e.g., service trade payments, dividends, interest, royalties,
salaries, capital gains).
Under Notice 40, local entities wishing to settle a recharge of costs will have to file the
necessary documentation with the in-charge local tax bureau in order to remit
payments which exceed USD 50,000 or the equivalent. Starting September 2013,
Notice 40 removed the requirement for the local Chinese entities to obtain a TCC
from the tax authorities and will allow remittances to be processed as soon as the
necessary documentation has been filed with the local in-charge tax bureau. As a
result, it is anticipated that the processing of outward remittances will occur more
quickly than the current TCC mechanism allows.



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While this new record-filing system does not mean that the tax authorities are taking
a more relaxed view towards the tax administration of outward remittances, their
focus will shift from pre-remittance approvals to a more closely monitored daily tax
administration process which will include post-remittance tax audits. With the
removal of the TCC requirements from the Chinese tax authorities, it is important for
foreign companies to make a correct assessment on their China tax liabilities at the
time of remittance to avoid potential surcharges or penalties during the tax bureaus
post-remittance examination. Please refer to this PwC China News Flash for more
information.
India
Reduction of the Liberalized Remittance Scheme threshold
The Reserve Bank of India (RBI) in accordance with A.P. (DIR Series) Circular No. 23
dated August 14, 2013, has reduced the monetary limit of remittance under the
Liberalized Remittance Scheme (LRS) from USD 200,000 per financial year to
USD 75,000 per financial year.
In accordance with the LRS, Indian resident individuals are permitted to freely remit
up to USD 75,000 per financial year (April March for any permissible current or
capital account transactions (or a combination of both). This limit applies to Indian
resident individuals transferring funds from India.
Under the scheme, resident individuals can acquire and hold shares or debt
instruments or any other assets outside of India, without prior approval of the RBI.
However, the LRS cannot be used for acquisition of immovable property, directly or
indirectly outside India. Individuals can also open, maintain and hold foreign
currency accounts with banks outside of India, without prior approval of the RBI, for
carrying out transactions connected with or arising from remittances permitted under
the scheme.
Therefore, employees participating in employee share plans will not be subject to any
foreign exchange controls and will be free to acquire and hold shares outside of India
without prior approval from the RBI where the total remittal amount is less than or
equal to the USD 75,000 LRS threshold. This is provided that resident individuals are
either employees or directors of an Indian office or branch of a foreign company
having a foreign holding of not less than 51%.
A separate exemption which applies to the purchase of shares by employees
participating in an employee share plan is available where the following conditions
are met:
1. The shares under the Plan are offered by the issuing company globally on
uniform basis; and
2. The employer (i.e., the Indian company) submits an annual return in the
prescribed format to the RBI through an Authorized Dealer Bank giving
details of the remittances/beneficiaries, etc. No specific timelines have been
provided for filing the annual return; however, the annual return should state
the status for the year ended on March 31st.
A person resident in India is permitted to sell the shares acquired (i.e., as a result of
exercising options) without obtaining approval from the RBI, provided that the
proceeds of the sale are repatriated to India (e.g., to the employees' Indian bank
account) within the prescribed time (i.e., 90 days from the date of sale shares).
Ruling on the corporate tax deductibility of ESOPs
In the past, there has been some uncertainty with respect to the corporate tax
deductibility of employee stock option plans (ESOPs) in India. Recent decisions such
as that in the case of Biocon Limited (July 2013) have provided important guidance
on the deductibility of stock option expenses recharged by foreign parent companies
to their Indian affiliates. In the case of Biocon Limited, the court put to rest the
controversy surrounding the allowability of a deduction and also provided clarity and
useful reference on the timing and amount of deduction that can be claimed in the
Indian affiliates books. The court held that a corporate tax deduction is available for


5 PwC


the discount associated with a stock option on the basis it is considered a revenue
expense and held that the stock option discount was in the nature of an employee cost
and deductible at the time of vesting of the stock option.
It also held that the stock option discount is not in the nature of a contingent liability
(as there is a risk the options may not vest or be exercised) and that the discount
claimed as a deduction during vesting period should be adjusted in relation to any
unvested or unexercised options. The employer is also required to make an
adjustment based on the stock price upon exercise, resulting in an additional
deduction or write off for the employer at the time of exercise. As the Biocon Limited
case was specific to an Indian company, foreign companies will still need to recharge
to their Indian affiliate in order to secure a deduction. The deduction will be available
at the time of the taxable event (e.g., exercise for Stock Options or vesting for RSUs).
It is recommended that a recharge agreement is in place for the Indian affiliate to
secure a deduction.
The above mentioned judgement in the case of Biocon Limited has been relied upon
in the case of Novo Nordisk (Bangalore Tribunal) in October 2013. The court in Novo
Nordisk reconfirmed the position of deductibility of the stock option expenses
recharged by the parent company to its Indian subsidiary in respect of shares allotted
to the employees of the Indian Company under the stock option plan of the parent
company. These recent decisions provide additional certainty on the corporate tax
deductibility requirements to foreign parent companies recharging their equity plan
costs to India.
United Kingdom
HMRC guidance regarding the classification of stock options as legal options
The HMRC has amended its published guidance relating to stock options which are
classified as "legal options." By "legal options," HMRC refer to rights to acquire stock
which are a contractual legal entitlement given by the employer to the employee for
"consideration" or under deed under English law. The classification of "legal option"
relates to a 1961 House of Lords case called Abbott v. Philbin in which the option was
determined to be capable of being turned into money at the date of grant; therefore,
the taxable employment income arose at grant. There are now statutory overrides to
this case by virtue of which stock options are generally taxed in the UK when the
underlying stock is acquired.
However, the "legal option" definition remains important for grants of stock options
to non-UK residents. This is because a legal option which is granted to a non-UK
resident and which is not related to the prospect of taking up UK employment or
duties performed in the UK will be outside the scope of UK tax; as the right is deemed
related to non-UK employment at grant.
In updated guidance, the HMRC emphasizes that they do not accept that all rights to
acquire securities will be legal options and outside the scope of UK tax for non-UK
residents at grant.
The updated guidance underlines the importance of analyzing what rights employees
obtain at what time under the particular stock plan. For grants to non-residents, this
will be particularly important if a position is taken that the award is not taxable in the
UK relying on HMRC guidance relating to "legal options."






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United States
PwCs 2013 W-2 Handbook

The W-2 Handbook is a comprehensive guide to U.S. payroll withholding and
reporting.

In recent years the IRS has increased the number (and scope) of employment tax
audits, and as such, compliance with W-2 wage withholding and reporting
requirements is now more critical than ever. The IRS has begun intensive
employment tax audits on employers; additional agents have been trained and are
focusing on fringe benefits, executive compensation, employee expense
reimbursement plans and worker classification. The W-2 Handbook is a detailed
resource guide which addresses these issues as well as other common types of
employee compensation and W-2 reporting requirements.

This years edition provides specific information on more than fifty types of
compensation and fringe benefits. The Handbook includes information on recent
developments of interest to payroll and tax professionals, including the following:

The impact of health care reform legislation on payroll taxes and employer
reporting requirements;
The impact of the recent U.S. Supreme Court decision regarding the Defense of
Marriage Act (DOMA) on payroll taxes and employer reporting requirements;
Employer reporting requirements with respect to nonqualified deferred
compensation plans under IRC section 409A;
Reporting requirements with respect to certain equity-based compensation plans;
and
Current developments in fringe benefit taxation.

If you are interested in ordering a Handbook, please contact your client service
representative.























2013 PricewaterhouseCoopers LLP. All rights reserved. In this document,PwC refers to PricewaterhouseCoopers (a
Delaware limited liability partnership), which is a member firm of PricewaterhouseCoopers International Limited, each
member firm of which is a separate legal entity.

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This content is for general information purposes only, and should not be used as a substitute for consultation with
professional advisors.


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