Tax News

Tracking Global Equity Through Automation

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How to manage global equity compensation is an increasingly complicated question. The answer? Automation.

The world is getting smaller, and while the emergence of a globally mobile workforce has allowed companies to maximize talent where it’s most needed, it has simultaneously generated a host of challenges when it comes to managing executive compensation. The taxation of equity awards is particularly complex, and can vary greatly depending on the type of award, the structure of the organization, the tax attributes of the recipient, and their location(s). This complexity is further exacerbated by new compliance and reporting requirements.

Companies are approaching these challenges in a variety of ways. Some are burying their heads in the sand and hoping that they won’t receive a violation notice. Others know they need to address these issues but aren’t sure how to get started. Even the most proactive businesses can fall into the trap of just repeating what’s been done in prior years instead of adjusting their processes to match the new regulations.

There’s a reason for this hesitation: Getting their procedures up-to-date and compliant isn’t easy. Businesses face steep costs in terms of both dollars and manpower. Many struggle to identify and dedicate the appropriate resources needed to develop and execute a comprehensive compliance plan—including maintaining the internal bench strength needed to gather and update information, acquiring the necessary tools to collect data, and operating payroll in every jurisdiction where employees are present. With new regulations released on a near-daily basis, centralizing and adjusting information in real-time is an uphill battle.

But it’s important to remember that while getting things done right the first time isn’t cheap, neither is going back to correct it later.  
 
Incorrectly reporting global equity typically leads to underreporting in some jurisdictions and overreporting in others, but these aren’t the only consequences. There can also be significant hard costs, including both penalties and interest payments, which, depending on the scale, could lead to a significant cash flow problem for the business.

Another, possibly more critical, consequence of incorrectly tracking global equity is damaging the employer-employee relationship. If businesses generate compliance issues related to equity awards, employees face problems with their personal income tax returns. With talent at a premium, companies should avoid generating significant problems for their workers and seek to minimize the risk as much as possible.

Companies would also be remiss to discount the potential reputational damage they might incur as well. For smaller businesses expanding into new markets, being reprimanded by a foreign tax authority may cast doubt on future growth potential. For larger companies, media and shareholder indignation can generate concerns that go beyond just the tax and accounting departments.

At the core of this problem, businesses are dealing with myriad compliance requirements and fragmented data, complicated by manual processes with a high potential for human error that can lead to disastrous consequences.
Enter automation.

Automated programs can assist companies in combating many of the challenges related to the taxation of global equity plans. Automated software can place all the equity compensation and payroll information from across a company into one place, rather than being spread across different offices and jurisdictions. By utilizing transaction data and cross-border travel information, automated tools can provide calculations of tax withholdings for an organization’s mobile employees in real-time using data from jurisdictions around the world. Doing so helps companies avoid costly fines, end-of-year scrambles, and time-consuming payroll report amendments and corrected W-2s. And, with global compliance requirements changing at a rapid pace, automating tax withholding enables taxation estimates to pivot and adjust on a dime to keep up with new regulations.

Some companies might think that they’re too small to own an automated solution, or that adopting one will be an expensive endeavor. However, a good program can be adjusted to the size of your company and scale with it. Over the long run, the cost of adopting an automated solution pales in comparison to the financial and intangible costs of noncompliance.

It’s important to note that while automation provides a potential solution to a critical challenge of managing global compensation, it’s still just one tool in the toolbox of compensation professionals and consultants. It’s critical to have experienced professionals designing competitive and cost-effective compensation plans customized to each company and individual employee. Software merely eliminates time spent on collecting, scrubbing, and aggregating data.

Companies can no longer afford to ignore compliance issues related to global equity compensation. With seasoned professionals equipped with automation, businesses can increase the efficiency of their processes, reduce costly errors, and maintain the focus on developing compensation plans that work for them and their employees, regardless of where they’re located.

Strategic Considerations Why Private Companies Should Adopt Public Company Controls

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Often viewed as a “public company problem,” private organizations may want to consider implementation of internal controls similar to Sarbanes-Oxley (SOX) Section 404 requirements. The inherent benefits of a strong control environment may be of significant value to a private company by providing: enhanced accountability throughout the organization, reduced risk of fraud, improved processes and financial reporting, and more effective inclusion of the Board of Directors.

Private organizations, while not always smaller, often have limited resources in specialty areas, including accounting for income tax. This resource constraint—the work being done outside the core accounting team—combined with the complexity of the issues, means private companies are ideal candidates for, and can achieve significant benefit from, internal controls enhancements. Thinking beyond the present, the following are five reasons private companies may want to adopt public-company-level controls:

  1. Future Initial Public Offering (IPO) – Walk before you run! If the company believes an IPO may be in its future, it’s better to “practice” before the company is required to be SOX compliant. A phased approach to implementation can drive important changes in company culture as it prepares to become a public organization. Recently published reports analyzing IPO activity reveal that material weaknesses reported by public companies were disproportionately attributable to recent IPO companies. Making a rapid change to SOX compliance can place a heavy burden on a newly public company.
  2. Private Equity (PE) Buyer – If the possibility of the company being sold to a PE buyer exists, enhanced financial reporting controls can provide the potential buyer with an added layer of security or comfort regarding the financial position of the company. Further, if the PE firm has an exit strategy that involves an IPO, the requirement for strong internal controls may be on the horizon.
  3. Rapid Growth – Private companies that are growing rapidly, either organically or through acquisition, are susceptible to errors and fraud. The sophistication of these organizations often outpaces the skills and capacity of their support functions, including accounting, finance, and tax. Standard processes with preventive and detective controls can mitigate the risk that comes with rapid growth.
  4. Assurance for Private Investors and Banks – Many users other than public shareholders may rely on financial information. The added security and accountability of having controls in place is a benefit to these users, as the enhanced credibility may impact the cost of borrowing for the organization.
  5. Peer-focused Industries – While not all industries are peer-focused, some place significant weight on the leading practices of their peers. Further, some industries require enhanced levels of security and control. For example, utility companies, industries with sensitive customer data (financial or medical), and tech companies that handle customer data often look to their peer group for leading practices, including their control environment. When the peer group is a mix of public and private companies, the private company can benefit from keeping pace with the leading practices of their public peers.

Private companies are not immune from the intense scrutiny of numerous stakeholders over accountability and risk. Companies with a clear understanding of the inherent risks that come from negligible accounting practices demonstrate their ability to think beyond the present, and to be better prepared for future growth or change in ownership

High-Income Individuals Income Tax Return Examinations To Begin July 15

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On May 29, 2020, the Treasury Inspector General for Tax Administration (TIGTA) issued an audit report titled “High-Income Nonfilers Owing Billions of Dollars Are Not Being Worked by the Internal Revenue Service”. The report focused on high-income nonfilers and the IRS’ nonfiler strategy.  For tax years 2014 through 2016, there were 879,415 high-income nonfilers with an estimated tax due of $45.7 billion. From this group, more than one-third of cases have not been selected by the IRS for an assessment.  The report indicated that the IRS has experienced decreased resources, which is likely a contributing factor in untouched cases. 

The TIGTA audit report issued seven recommendations that the IRS has agreed, partially agreed, or disagreed to:

  • Agreement:
    • Prioritize non-filers to ensure delinquency notices are issued to all high-income nonfilers.
    • Implement controls to ensure that high-income nonfilers are not shelved.
  • Partial Agreement
    • Reallocate resources to ensure that most, if not all, high-income nonfilers are subject to enforcement action.
    • Analyze the population of high-income nonfilers for tax years 2014-2016 and issue notices.
    • Reconsider working multiple tax year cases for all high-income nonfilers.
    • Implement controls that will assist to identify and prioritize high-income nonfilers who are repeat offenders.
  • Disagreement
    • Designate a senior management official with appropriate resources and specific non-filer duties to address nonfiling, including high-income taxpayers and repeat nonfilers.

In response to the TIGTA report, a spokesperson for the IRS announced that their Global High Wealth Industry Group (a specialized group within the Large Business and International Division) will initiate several hundred return examinations of high-income individuals, starting between July 15 and September 30 of 2020. The Global High Wealth group analyzes the whole financial picture of high-income individuals. The examination process includes not only the taxpayer’s individual return but also any related pass-through entities with a heightened focus on partnerships. When examining the pass-through returns, there will be an emphasis on ensuring the taxpayer is in compliance with the new tax laws of the 2017 tax reform legislation known as the Tax Cuts and Jobs Act. Additionally, there will be a renewed focus on the examinations of private foundations.