Andrew Gewirtz, Tax Managing Director, KPMGChristopher Jereb, Global Head HR CoE, Avaloq

Michael Sterchi, Partner, KPMGGreg Win, Finance Director, The Trade Desk

Let’s Talk: Truth in Negotiations with the Regulators

KPMG Notice

The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

These materials are copyrighted to the company of the presenter presenting them.

Agenda1. General rules and obligations2. Non compliance in withholding3. Non compliance in reporting4. Consequences for employees5. Employer and employee consequences in example

countries like the UK and US6. Case studies and experiences7. Wrap up and questions (at the end 15 Min)

General rules and obligationsGeneral rules for Equity based Compensation (EbC):

• EbC is considered taxable employment income in almost all countries

• EbC is subject to social security in most countries

• A lot of countries require withholding of taxes and social security

• In a lot of countries employer and employee have reporting obligations for EbC

Non compliance and under-withholdingGeneral issues and consequences for non compliance and under withholding:• Employer is non compliant in reporting• Employer fail withholding• Employee has not declared EbC in the tax return• Employee has not paid sufficient income tax,

wealth tax, social security or any other statutory deductions (where applicable)

Penalties and interest charges

Non compliance in withholding• Most European countries require withholding for tax and social security• Employer is at risk and finally reliable • Employer may relay on the employee if still employed• Penalties often based on non withheld tax amount• Late interest charges in addition to penalties

Non compliance in reporting• A number of Asian and Latin American countries do not have withholding and therefore most only reporting• Employer have to provide mandatory reporting forms to employees in certain countries• Non filing triggers penalties in most countries (standardised amounts)• Negative impact on employee based on missing forms

Consequences for employee• Employee are nevertheless responsible for accurate and complete declaration in tax return• Employee may be subject to further penalties and late interest charges• Employee might hold employer liable (not obvious incomplete form)

Country specific consequencesEmployer: Tax withholding (PAYE):• Electronic filing Penalties for late filings• Share plan filing Penalties for late filings up to 5,000 £• In case of an audit and recover of under-withholding: penalty of up to 30% of non

withheld taxes and interest charges in addition• Imprisonment in case of tax evasion or tax fraud• In case of an audit look back between 3 to 6 yearsEmployee tax return filing:• Penalties for late and incomplete filing of tax return• Penalties and late payment interest in case of underreporting.Self Disclosure procedure:• No or low penalties • HMRC generally ask question and request prove of proper process for the future

U.S. Wage Reporting and Tax Withholding……and related exposure for failure to comply

Federal Income Tax Reporting & WithholdingApplicable Internal Revenue Code (IRC) sections ( indicates where our experience shows to be the highest level of non-compliance)• IRC §61 – Compensation/wages paid to employees is included in

income unless excluded • IRC §3401 – For reporting purposes, wages means all

remuneration for services as an employee (including equity compensation) unless an exemption applieso Amounts paid to a U.S. citizen or resident employed by a foreign entity

are wages for U.S. withholding and reporting purposes –whether or not wage reporting/withholding is required depends on employer and employee facts and circumstances

Federal Income Tax Reporting & WithholdingApplicable Internal Revenue Code sections• IRC §3121 – must withhold FICA/Medicare taxes on FICA wages

o Definition of wages for FICA may be different than for income tax• IRC §3402 – All employers paying wages must deduct and withhold

federal income tax unless exclusion applieso Subject to employee’s payroll documentation

• IRC §6041 – must report wages paid to the IRS and to the employee on Form W-2o Forms 940, 941, 944 – annual and quarterly reporting to IRS of

compensation paid and tax withholding

Withholding Timing and Method • Regular wages

o Payroll withholding deposited within 2-5 days (for most employers) o Follows Form W-4, whatever the W-4 says goes

• Supplemental wages (bonuses, equity compensation)o Mandatory 39.6% flat rate for an employee with ytd supplemental wage >$1 milliono Optional 25% for all other supplemental wages when available, otherwise must use

aggregate method Flat 25% rate used in many situations where employee does not satisfy

conditions for its use

• Next Day deposit ruleo Deposit required on next business day for employment tax collected >$100k

in payroll period• State withholding rules vary by state• State employment tax deposit timing follows federal schedule

Employer Penalties & Interest ExposureA myriad IRC sections cover penalty and interest provisions for failures to comply with report/withhold requirements• Failure to provide Form W-2

o $50/$100/$260 per form depending on how much beyond the due date Form W-2 is issued, max penalty up to $3.2 mil unless intentional disregard

• 100% liability for income and FICA taxes (§3403 and §3102)o Relief from obligation to pay tax available with signed Form 4669 from employee,

P&I still imposed

• Failure to file employment tax returns Form 940, 941,944 – 4.5%/5% per month, max 22.5%/25%, subject to reasonable cause relief

• Failure to pay tax – 0.5% per month (1% after IRS issues notice), max 25%, subject to reasonable cause relief

Employer Penalties & Interest Exposure continued

• Failure to make timely depositso The penalty rate is determined by the number of days the deposit is

overdue, varies from 2% to 15%, subject to reasonable cause relief

• Accuracy related penalties - 20% of the failure, subject to reasonable cause reliefo Negligence or disregard of rules and regulationso Substantial understatement of income tax

• Failure to withhold and pay over - §3403 provides the IRS can collect employee’s federal income tax withholding from the employer

Employee Penalties & Interest Exposure• Where the employer fails to properly report, withhold and remit taxes the

employee has risk exposure for penalty and interest assessment by the IRSo Employee cannot hold the employer liable for failure to report/withhold tax

• Failure to file - 5% per month, max 25% unless failure due to fraud then penalty increased to 10% per month

• Failure to pay tax - 0.5% per month, max 25% unless taxpayer shows reasonable cause

• Underpayment of estimated tax - interest paid to IRS at short-term rate plus 3%

• Accuracy related penalties - 20% of the failure, subject to reasonable cause reliefo Negligence or disregard of rules and regulationso Substantial understatement of income tax

Solution and ConclusionSelf disclosure: 1. Can reduce penalties dramatically2. Your boss does not go to jail3. Process depends on employer withholding

requirements4. Country by country procedure

Case study

Initial Situation

Central plan administration

Issues

• Payments or vestings weren’t captured – neither through payroll nor elsewhere•Monetary benefit not considered•Declaration possible of taxes in retrospect• But what about social security?

How big was the impact?

How big was the impact?

•Who is impacted? Company and/or employee?• Employee – who, how many, which characteristics, which amounts?•Which Period?!

Set-up a project

• Project Goals• Project Team• Stakeholder Analysis• Project Plan• Communication Preparation

Root Cause Analysis

• Prevent future damage• Ability to fix the problem(s)• Proof that we (will) have the situation under control

Preparation

• Communication Plan• Letters• Tracking• Roles & Responsibilites•Documentation

Communication

Project Closure

• Settlement of Liabilities• Payroll Instructions• Recharge of cost• Lessons Learned

Case study - project approach in case of compliance violation

I. Identificationof the Issue

II. Data Gathering

III. Root Cause Analysis

Case Analysis

Project Set-Up

Commu-nication

Project Closure

IV. Definition ofProject Goals

V. Set-up Project Team

VI. StakeholderAnalysis

VII. Preparation of Project Plan

VIII.PreparationIX. Internal

CommunicationX. External

Communication

XI. Settlement ofLiabilities

XII. PayrollInstructions

XIII.Recharge ofcost

XIV.LessonsLearned

Case Study further experiencesThe issues • Didn’t follow advice on the taxation of share based compensation• Didn’t run share based compensation gains via payroll in EMEA• Didn’t report stock based compensation outside of payroll in a country in APAC• Employees relocating between countries and share based compensation was not taxed in the appropriate jurisdiction

Case Study further experiences cont.What had to be done• Identify the scale and potential liability to the company• Engaged advisors to understand what we could do to correct the position• Voluntary disclosure to tax authority – negotiated settlements • The projects were time consuming and costly• Had to implement processes to ensure the mistakes didn’t happen again

Case Study further experiences cont.My Learnings• Take advice up front and review that advice annually as things can change • If you are going to offer share based compensation in a country understand what you need to do as an employer.• Consider the impact to the employee - it may have a negative impact on them• Consider cost v benefit – both of offering and not offering

Questions

Thank You

Christopher JerebAvaloq

christopher.jereb@avaloq.com

Michael SterchiKPMG Switzerland

msterchi@kpmg.com

Andrew GewirtzKPMG US

agewirtz@kpmg.com

Greg WinThe Trade Desk

greg.win@thetradedesk.com

Thank You Thank you for attending GEO’s 18th

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