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Increasing Revenue scrutiny of Share Based Remuneration schemes

Increasing Revenue scrutiny of Share Based Remuneration schemes

Salesforce have been in the news in recent weeks.  The multinational employer circulated a memo to Irish staff advising them that they need to take care of their own tax obligations in relation to certain share-based remuneration awards from the employer.  The memo appears to have been prompted by Revenue conducting an audit of the company’s RSS1 returns covering a number of years.  A company is obliged to submit an informational Form RSS1 each year to detail various share events with employees, generally share options.

We suspect that this issue is not limited to Salesforce but is instead part of a broader compliance review of share-based remuneration schemes by Revenue.  We are aware of Aspect Query letters issuing from Revenue in recent weeks to employees of other multinational employers making specific reference to share options.

Share-based remuneration comes in many forms.  From our experience, the preferred schemes favoured by multinationals are:

Share Options – The employee receives an option to acquire a share, often at nominal or discounted value.  Income Tax is payable within 30 days of when the option is exercised, and the employee is responsible for their own tax affairs.  Owing to the tax obligations employees tend to avoid exercising options and holding shares, instead deferring the exercise of options until a time when they intend to cash in and sell shares.  We have noticed a move away from share options in recent years with RSU’s instead becoming commonplace.

Restricted Stock Units (RSU’s) – The employee receives shares in the company.  A tax point arises when the shares issue via payroll.  The employer sells sufficient shares at that time to settle the payroll tax liabilities, with the employee then holding paid up shares with a base cost.  When the employee comes to sell the shares, a Capital Gains Tax (CGT) event arises.  The employee at that point is required to pay and file any CGT to Revenue.

Employee Share Purchase Plan (ESPP) – The employee can purchase shares in the employer company at a discounted purchase price.  The purchase price is funded through deductions from the employee’s net salary or wages. The discount allowed is normally 15% of the market value of the shares; that discount however is a taxable event.

From our review of cases to date, the current ambiguity and confusion appears to specifically relate to ESPP schemes.  Generally, the discount applied to an ESPP scheme is treated as a share award, taxed via payroll.  Certainly, employees can be forgiven for misunderstanding their obligations as the Revenue website indicates this is an employer payroll obligation.

However, if the ESPP’s are structured as share options rather than straight up shares, the tax obligation moves from the employer (via payroll) to the employee.  The employee becomes obliged to submit an RTSO1 return, paying income taxes arising on the discount.  Additionally, the employee becomes a taxable person (if not already so) for Income Tax purposes and is obliged to pay and file a Form 11 Income Tax return.

In our view, the RTSO obligation is onerous on employees, particularly as the tax arising on the 15% discount will result in a relatively minor tax bill compared to the value of the shares awarded.  Likewise, the fact that many employer schemes have multiple awards each year puts multiple filing obligations on employees, not to mention tax advisor fees in relation to same.  And all of this happens before the employee earns a monetary return on their shares.

Unfortunately, without employers stepping in, the onus is falling on employees to bring their affairs up to date and to keep them in order going forward.  From the correspondence we have had sight of, Revenue are seeking unprompted voluntary disclosures from employees.  Interest and penalties will invariably arise making a further cost to employees.

Whilst we cannot turn back time, we are aware of the issues and are taking a proactive approach with employees facing this challenge.  We are here to help, please feel free to contact us.