Download Taxation of Employee Stock Options

Taxation of Employee Stock Options
September 4, 2014
Presented by Gouri Puri
Amarchand & Mangaldas & Suresh A. Shroff & Co.
Privileged & Confidential
Contents
▪
Introduction to Employee Sock Option Plans (“ESOPs”)
▪
Overview of Indian legal and regulatory framework
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Tax treatment of ESOPs
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Key tax issues
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Key takeaways
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Introduction to ESOPs Equity based incentive
plans
Employee stock option
plan ✓
Restricted stock units/
restricted stock
Employee share
purchase scheme
Stock appreciation
rights
Phantom
Stock
ESOP is a right given to employees to purchase shares of a company at a future date at a
pre-determined price
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Introduction to ESOPs
▪
(Contd.)
Key Features of an ESOP
-
ESOP is a right and not an obligation to purchase shares
-
Right to purchase shares at a future date
-
The price of shares is fixed today irrespective of change in market price – in the money
and out of the money options
-
Option upon exercise converts into equity shares
-
ESOP contemplates a four stage process:
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Overview of legal and regulatory framework ▪
▪
Indian ESOPs
-
SEBI (Employment stock Option Scheme & Employee Stock Purchase Scheme)
Guidelines, 1999
-
Companies Act, 2013
-
Exchange control regulations
-
Income-tax Act, 1961 (“IT Act”)
Cross border ESOPs
-
Exchange control regulations
-
IT Act
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Tax Treatment of ESOPs Obligation to deduct tax at source on perquisite income under section 192 of
Income Tax Act
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Key tax issues ▪
Cross border income tax issues
-
Timing mismatch in taxing the employment benefit
-
Distinguishing employment income from capital gains
-
Difficulty in determining to which services the option relates
-
Employment services provided in more than one country
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Compliance Issues
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ACIT v. Robert Arthur Keltz, ITA No. 3452/Del/201
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Proportionate taxes attributable to services rendered in India
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Place of rendition of service between grant - vesting – exercise
▪
Lack of clarity on tax treatment on cancellation/ replacement of options
-
Capital gains v. employment income - differentiation in source rules, tax rates and withholding tax
liability
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Sumit Bhattacharya v. ACIT – “fruits of employment” theory
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Key tax issues ▪ Obligation to deduct TDS
-
In case of ESOPs granted to Indian employees under global ESOP plan, whether obligation to deduct tax
is on actual payer (foreign affiliate or parent issuing shares) or employer (Indian Company)
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Section 204 of the IT Act – person responsible for making payment is employer for salary income
-
In case of ESOPs issued under the ESOP trust mechanism, is there an obligation to deduct tax – Wipro
ruling
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Key tax issues
▪
(Contd.)
Deductibitly as business expenditure
-
Accounting treatment and SEBI guidelines permits amortization
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Tax deductibility to be determined Section 37 of the IT Act
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Divide in judicial opinion
•
Allowed: SSI Ltd v. DCIT, Accenture India Pvt. Ltd. v. ACIT, Biocon v. DCIT
•
Disallowed: Ranbaxy Laboratories Ltd. V. DIT
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Whether discount is allowable tax expense?
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When can such discount be claimed as an expense and how much?
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Is any subsequent adjustment needed to discount amount claimed as an expense?
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Cash payout by Indian company to foreign parent/ affiliate of discount amount incurred by
foreign parent/ affiliate – whether deductible by Indian company?
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No cash payout by Indian company to foreign parent/ affiliate of discount amount incurred by
foreign parent/ affiliate – whether deductible by Indian company?
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Key tax issues
▪
▪
▪
(Contd.)
-
Indian company issues shares to employees of foreign subsidiary at discount – whether
deductible by Indian company? Transfer pricing implications, if any?
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Deductibility as business expenditure when shares transferred to ESOP trust?
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Deductibility in cases of restricted stock and shares issued under employee share purchase plan?
Taxation of ESOP trusts
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Shares received by ESOP trusts below book value – section 56(2)(viia) of IT Act?
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Taxation under sub-clause (iv) of proviso to section 164 of IT Act
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Taxation of dividends, interest and capital gains
Taxation of restricted stock and restricted stock units
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Indian law treats allotment of shares as taxable event
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Infosys ruling and WIPRO ruling
Deduction of tax at source under cashless exercise of options
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Deduction from regular salary
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Retention of shares for payment of taxes
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Key takeaways
▪
Tax policy on tax consequences of ESOP for all stakeholders should be clear and certain to
incentivize equity based compensation plans
▪
Clarity in law needed on tax issues arising from cross border ESOPs
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Market practice for employers for deducting tax on salary is to take a conservative stance –
full disclosure to employees on tax issues
▪
Clarity in law needed on deductibility of discount on shares issued pursuant to ESOPs
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Clarity in law needed on taxation of ESOP trusts and related issues
▪
Clarity in law needed on taxation of other equity based incentive plans – restricted stock units
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Thank You
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