Employee Stock Bonuses: Tax and regulatory considerations
When Article 64 of the Business Accounting Law was amended on May 24 2006, removing the rule that said earnings distributed to employees as dividends or bonuses "shall not be recorded as expenses or losses", expensing employee bonuses at once became a hot topic of discussion among enterprises in Taiwan, and it made enterprises start to reexamine their employee compensation systems. Most compensation systems currently in use include employee stock bonuses, stock option grants or transfers of treasury shares to employees, and the Ministry of Economic Affairs, in its draft amendment of the Company Law, also includes compensation with restricted stock. When businesses go about choosing a compensation system to suit them, they need to consider the effect their choice will have on their financial statements. Beyond that, other important factors to consider are the tax effects on the company itself and on the employees whom the compensation is intended to motivate.
Regulatory Considerations
In general, when a corporation plans its employee compensation system, the factors it must take into consideration include: Choice of cash or stock incentive tools; revision of the company's articles of incorporation to accommodate a particular incentive tool; issues involving the hiring of employees dispatched abroad; rules governing who may receive different types of compensation; and whether employee stock bonuses are to come from the company or its majority shareholder(s). Then are other important factors to consider in order to properly motivate employee performance in the future, including the formulation of employment contracts, share lock-up mechanisms, share buy-back mechanisms, and non-competition agreements. As for tax aspects, besides the question of employee stock bonuses being expensed or not, if the recipients of compensation include the employees of subsidiaries, then the attribution of bonus share cost will also involve issues relating to transfer pricing with related companies.
Tax Issues
Up to now, personal income tax has been levied on the face value of employee stock bonuses, but the minimum tax system was implemented in 2006, and income is to be taxed using the market value concept. Then again when the implementation period for the "Stature for Upgrading Industries" comes to an end on December 31 2009, employee bonuses may again be governed by the rule in Article 14, item 2 of the Income Tax Act, under which income for tax purposes is calculated using the price of shares at the time they are acquired. In addition, if employees of affiliated overseas enterprises are among the recipients of employee bonuses, then double taxation may result.
For example, say a parent company in Taiwan allocates employee bonuses to the employees of its subsidiary in the US. As Taiwan's National Tax Administration sees things at present, the employee bonuses received by the employees of that US subsidiary constitute distributed earnings, which is viewed as Taiwan-source income (regardless of where the labor services were provided), so the parent company should, when granting the shares, withhold and pay tax on them as it would with other salary income. However, under the US tax code, since the employees provided their services in the US, the bonuses are viewed as US-source income that must be reported together with local income, and under IRS rules, the tax paid in Taiwan can not be credited against the US taxes because the income is considered to have been earned in the US from services provided there. Thus, the difference between Taiwan and the US in how they recognize the same income produces a serious double taxation situation. As a result, we remind group enterprises to be aware of their obligation to withhold tax when giving employee stock bonuses to their employees posted overseas, and they should know whether their overseas subsidiaries assist their employees file and pay income taxes, as well as whether those employees need to file local income tax on their share income. The sooner they do the necessary planning the better.
(This article was completed with assistance from Senior Manager Pei-Hsuan Lee)