Global employee equity: Navigating local rules, tax and complexity for mobile employees

00:05 Chris Dohrmann: You’re listening to “Prosperity at Work” from J.P. Morgan Workplace Solutions, the podcast all about equity compensation, financial well-being, and more. I’m your host, Chris Dohrmann. Today, we’re going to be talking about navigating tax compliance and remote work in a global context, and I’m delighted to be joined by our special guest, Marlene Zobayan. Marlene’s background includes a start of her career in a big six firm doing expat tax work for U.S assignees in the U.K. She moved to another firm and did comp and ben consulting. Opportunity to move to the U.S in the late 1990s to work on a global stock plans for dot-com employees came and Marlene took advantage of it. Headhunted by the big five in the U.S to start their practice and then joined former partners who are now at Rutland to specialize in global stock plans and mobile employees. Marlene, welcome to the show.

 00:58 Marlene Zobayan: Thank you, Chris, for having me.

 01:01 Chris Dohrmann: So I wanted to start with the obvious. You’re in California. I’m in New York. So you are based in a state, as am I, that is a little bit more assertive, we’ll say, rather than using negative terms, in tax collection. So when we’re talking about mobility, how does that come into play and how do they actually manifest that? Or what does a payroll person or an admin person really have to look forward to when some of the states that they’re dealing with are a little bit more aggressive?

 01:29 Marlene Zobayan: That’s a really good question to start with, Chris, because I do think you’re getting at the crux of the issue, which is how do companies minimize their exposure? California has historically focused on executives, and that’s where companies should focus as well. We can go into a whole executive discussion later, but I think right now the biggest exposure area for a lot of California-based companies is where are their executives? And if executives have moved over to another state during the pandemic, now that offices are back open again, are they coming back to headquarters for meetings and are they tracking and complying with that? So yes, California has been on this issue for many, many years since the dot-com era, where they started realizing that individuals who made a lot of money of IPOs were suddenly going to Texas and then exercising their options, making a lot of money that they felt was California source. So now California has had a history of doing about 30 years of enforcement in this area.

02:32 Chris Dohrmann: That’s the kind of thing that California is trying to avoid, that all of the taxable gains are trying to be recognized in another jurisdiction when they were sourced in California or New York.

02:44 Marlene Zobayan: And I should say that a lot of my comments today, in fact, maybe all my comments today, are going to be based on employees. People who are public figures who make money of speeches or events, sports and pop stars, have different rules that apply to them. They’re based on event-based sourcing. And what I’m primarily focused on, and I believe you’re primarily focused on, is employees who might be sourced actually for California purposes on where they work and allocating income for equity compensation based on the period from grant to vest and sometimes if it’s stock options from grant to exercise.

 03:19 Chris Dohrmann: I’m going to ask an obvious question because if I asked you just why do you think that is, the obvious answer is increase the revenue from taxation. I think there might be something else there. And I’m just going to ask you, I think it’s California, New York, Illinois, Texas, any state now has much more access to data, particularly addresses and to doing data verifications than they ever did before. It’s a lot easier for them to send out mailings to make sure that they’re going to the last known address, all of that. So I just think that their ability to control the audit or the queries has given them a sense of empowerment because now they have access to do it. Why not do it? What do you think the reason is for the increased collection activities?

 04:02 Marlene Zobayan: I think you’re absolutely right. I think technology has really helped the tax authorities more than it’s helped companies trying to be compliant. Take New York, for example. The classic way that New York do their audits is they ask a company for a list of all the expense records in the U.S. And they look for anyone who has Manhattan, JFK, Newark, New York in their descriptions and look at hotel stays, taxi fares, airfare that go to New York-based hotels, and then look at did those individuals travel to New York? You can imagine 30 years ago if somebody had asked for that, they’d be led to a room or a warehouse with boxes and boxes of papers and they’d have to shuffle through.

 04:47 Marlene Zobayan: Now all you need to do is download all that information and write a query and boom, boom, boom. And I don’t know if they’re using AI, but if they’re using AI, that’s going to be a very easy way to find non-compliance. The other way that countries more so than states have started to do this is look at passport entries. So you scan your passport when you go into a country.

 05:09 Marlene Zobayan: Now there are several countries that then track how long was this person here to ascertain whether they made a taxable presence. And this isn’t even that recent, but when I was working at a big four company, one of my colleagues who was also a British citizen living in the U.S, got a letter from the U.K tax authority saying, we’ve noticed that you’ve been here for X many days this U.K tax year. If you breach 90 days, just know that you’ll have a U.K tax filing liability. If an American citizen has spent 90 plus days in the U.K, that may not necessarily be an issue, but for British citizens, we’re limited to 90 plus days before we incur a tax filing liability. So that was over 15 years ago. They were already doing that. So I do think technology has helped the wiser tax authorities much more than it’s helped companies seeking to be compliant.

 06:03 Chris Dohrmann: Just from my own experience, about a decade ago, passports started to be chipped so that they can track that, you know, for the countries you’re visiting or sovereign states you’re visiting or now facial recognition is becoming almost all over. It’s not localized any longer. They now have additional tools and why not take advantage of them? As you said, most of these are favoring the tax collectors. How do companies and payroll and stock administrators take that back a little? I think one way is to find out whether or not their data is correct before they’re audited or before they’re queried. So do the best you can to know where your exposure might be by making sure your data is up to date. Is that viable or is that something folks can do on a regular basis?

06:48 Marlene Zobayan: I have clients who do it. So yes, I do think it’s viable and doable. I think the first thing is to set in place policies. You’re not as concerned with a rank and file employee who may make an average income, who goes to another state for a few days of training or goes to another state to visit their parents and checks email while they’re there. Great. If you can get to that level of compliance, fantastic. You should be proud. But really, you’ve got to start with your largest exposure. You’ve got to start with people who either have moved permanently and therefore will have a trading liability for when it comes to equity that was granted in the other state and your executives. You’ve got to start there. You’ve got to get that fixed before you then widen the net. And I tell my clients, it’s an iterative process. So you start with your largest exposures first and you build on that.

07:39 Marlene Zobayan: And when a tax authority has typically seen that happening, I’m not saying you’re going to get out of non-compliance, but they tend to be a bit more lenient on companies who are putting a process in place and doing what they can with the resources they have available, as opposed to companies who are just burying their heads in the sand.

07:56 Marlene Zobayan: And I will also caution my clients, if you try and do it all at the same time, if you’re dealing with remote employees, people who transfer, business travelers, executives, it’s too much. You’re going to get overwhelmed. And I’ve seen a number of companies who say we want to be 100% compliant and try and go down that path and just really get bogged down. Much better to take it in steps, refine what you’re doing, and then build on your success as time goes on.

 08:22 Chris Dohrmann: You bring up a couple of great points. And I just want to, the latter one that you brought up about making sure that you have a process to show the regulatory authorities that you’re trying to do this is fantastic. The other part of this is whether or not they should focus their resources on the top of the house, because I think that’s what the regulators really want to see. So if they have their executives or even their middle management covered, that shows where to start rather than jumping into the deep end of the pool.

08:50 Marlene Zobayan: Yes. I mean, it makes no business sense. And I’m a tax person, so I should say I endorse 100% tax compliance. But if you’re going to spend hundreds of dollars chasing a $10 liability allocation, that makes no sense. You’ve got to make this a business decision, a business policy, and say, let’s spend our hundreds of dollars chasing thousands or millions of dollars of compliance. Like I said, it’s a business decision. I don’t think any tax authority has ever said you have a gap of $100 here or $10 there. It’s not effective to be concerned about that.

09:23 Chris Dohrmann: In the days of $5 trillion market cap companies, the executives are probably the target and not the individual rank and file. We’ve talked a lot about our current country and the aggressiveness of certain states. I want to go a little bit more abroad. What other countries pose difficulties? And I have two that I’m going to ask you about specifically for the individual payroll providers as well as the stock administrators.

09:47 Marlene Zobayan: So I would say in terms of equity awards, the U.K and Germany top the list. There is no U.K payroll audit that doesn’t ask about people that have moved. And it’s very easy for the U.K tax authorities to track this because if you remember, the companies have an annual filing where they have to report the grants that they’ve done. So unless you can show that employee has terminated and forfeited those grants, which incidentally companies also have to report, they’re going to say what happened to this employee? Where are their grants? So that’s probably my top.

10:20 Marlene Zobayan: And then Germany. Germany isn’t quite as aggressive, but so many of my clients have been audited and asked about their German outbound employees. And I know companies who’ve started mobility compliance following a German tax authority payroll. Also on that list is Canada. They’re not as aggressive when it comes to enforcement, but they definitely have the rules there to say this is what we want you to be doing, including rules around when you send employees to Canada. So let me step back a little bit. What companies don’t understand is that when it comes to mobility, there’s a personal tax obligation and a corporate payroll reporting and withholding obligation.

11:02 Marlene Zobayan: And those two are parallel. But just because somebody may not have a personal tax obligation does not mean the company doesn’t have a payroll reporting and filing obligation, even though it might mean that the employee might get money back. So what Canada has done is say, look, anyone who comes here on business, obviously if you’re living there or working there, you have a payroll obligation, period. In addition, anyone who comes to Canada on business, their employer has a reporting and filing obligation unless upfront they get clearance not to do that reporting and withholding. So companies have to apply to the Canada Revenue Agency to say, I’m going to be sending employees here. They’re going to be exempt under the treaty.

11:47 Marlene Zobayan: Can you please approve that we don’t need to apply payroll withholding on them? Otherwise, they’ll just have to file a return and get the money back. So the enforcement structure is there. The compliance structure is there in Canada. They haven’t been very aggressive pursuing it. But my sort of tax compliance ears go off whenever a country or a state introduces compliance regulations and says this is the way we want you to do it, because then it’s very easy for them to say, okay, now it’s time to audit.

12:17 Chris Dohrmann: At that point, they’re also throwing something else in, which is either compliance or non-compliance penalty. There’s really an extra large stick when you do that carrot and stick comparison.

12:28 Marlene Zobayan: Did I cover the countries that you were going to ask about?

12:31 Chris Dohrmann: You did. Definitely the U.K. And I was going to ask about Germany a little bit. But I wanted to see whether or not, because I see a mimicking based on some of the states in the U.S of Singapore, where you can’t leave Singapore if you have outstanding taxes even for future years. So they have tax at exit. It sounds like the U.S states are approximating that approach. Am I just being overly cautious?

12:57 Marlene Zobayan: I guess I can see it that way now that you mention it. The issue with Singapore, and I think they’ve been very clever about this, they’ve had their exit tax in for 20 plus years, as long as I remember. They don’t require withholding on employers. On a regular Singapore employee, you don’t do withholding for your payroll. But what the Singapore tax authorities have decided is we don’t want to go chasing people down to file their tax returns because that’s how they collect income taxes in Singapore is through the annual tax return process. So the authorities have decided we don’t want to go chasing individuals down after the fact. Let’s just catch them before they leave. And then they don’t have to worry about it again, and we don’t have to worry about it again. So that they’ve stopped being basically tax collectors.

13:41 Chris Dohrmann: Right. And that’s what I was thinking. Just so the listeners know, we started with our home states and did the comparison. Then we jumped a little bit to countries that are going to pose a problem for administrators and for payroll. Now I want to come back to the states, but I want to ask about cooperation, both at the national level and at the state level. I know people are doing this for like unclaimed property and a number of other things where states are cooperating to make sure that they’re collecting in unison funds that maybe do them. Have they started to do the same thing with mobility?

14:15 Marlene Zobayan: I am not aware of a cooperation between states that says Marlene was here last week, and then we know that she went to your state afterwards. I’m not aware of that level of cooperation. I do know that when you undergo an audit or they question a W-2 and something changes, so more like a personal tax audit, and you end up with a W-2C or something is highlighted in order, they will share that information, particularly between federal and state. But I’m not aware of them sharing mobility data on individuals where there is no compliance being found yet.

14:55 Chris Dohrmann: But is there any cooperation either from other countries or regions? Like for example, I think you had told me that the EU is cooperating with Australia.

15:05 Marlene Zobayan: So what the EU and Australia have independently done is they are tracking the movement of individuals in and out of the country. I haven’t seen a high level of enforcement yet, specifically from Australia, who implemented this a long time ago. I know the EU is better at cooperating within itself yet. Their system literally just went live, I want to say October of this year. I haven’t seen a lot of it yet, but I would not be surprised.

15:31 Chris Dohrmann: You and I and many stock administrators and payroll providers have to work with this all the time. So we suffer from the curse of knowledge where we know what’s going to happen. And certain people coming into this fresh really don’t realize. But I think one of the biggest issues in the recent past, the recent five years, that took what was usually a small percentage of the company moving during a year, maybe three to five percent. But the pandemic really increased digital nomads. So now people are realizing that when permitted by their employer, they’re allowed to work from anywhere in the world. This poses two problems for employers. One is keeping track. And the other is making sure that employees know that free movement, while some CEOs at the beginning of the pandemic encouraged that, most of their payroll and taxation departments said, please don’t encourage that because they need to keep us informed.

16:31 Chris Dohrmann: So it’s really now just additional tracking plus additional communication. Have you seen more of that coming on to the scene?

16:38 Marlene Zobayan: Definitely companies have gone through a learning curve where, yes, there were some CEOs, including some CEOs of my clients, who basically said, sure, we’ll work from anywhere. And then legal and HR and stock had to pull back and say, no, we can’t really do that. But you raise a really interesting point in that countries on the one hand want enforcement, but on the other hand, they’re welcoming professionals into their country. And it did start during the pandemic, this idea of a digital nomad where countries said, well, our tourism is down, but there are all these high income professionals that can work remotely. Why not have them work remotely from here? And suddenly the digital nomad visas went from zero to I think now it’s almost 70 countries that allow that.

17:30 Marlene Zobayan: And so what it is, is that a country will say, okay, we want individuals and they have to earn over an X amount. They have to be employed overseas and they can be here. And I think digital nomad visas allow somebody to live and work in a country from anywhere to three months to some allow a year, some allow renewals and some don’t.

17:51 Marlene Zobayan: So there’s a lot of different rules around digital nomads and the taxation differs between countries, too. Some say, well, if you’re here as a digital nomad, we don’t want your taxes. That’s fine. And others will say, no, we expect you to file a tax return and pay taxes here. But there is a contest between countries that want to attract high income individuals. And they look at white collar workers in that category because even if they’re not paying taxes, they’re still buying groceries, visiting restaurants, renting an apartment. So to parallel this, there are certain countries, certainly far less in number, who’ve said we also want those individuals in our country on a more permanent basis.

18:33 Marlene Zobayan: And I know Netherlands has had this program for a long time where you have the 30 % ruling, which basically says if you fit this criteria, you can come to the Netherlands and for a period of X many years, we will give you some tax breaks. Ireland had it for a while and then Spain and Italy and a number of others have introduced similar programs because they want educated, highly skilled workers going and living in their country. And hopefully that will cascade the type of work or whatever will initiate growth in that country. So there is an interesting competition between countries to attract highly skilled workers.

19:10 Chris Dohrmann: We talked about, in previous years, the corporate struggle for talent. That’s why they’re changing the different types of awards they’re giving out or changing vesting periods. It seems countries are doing exactly the same thing, trying to attract high-level, highly skilled employees and boost the economy in that way. So they have a dichotomy. Countries trying to identify collection and enforcement and then having that weighed against increasing their base of highly skilled employees. Now that I’ve said that, I know that I’m just bringing in other tangential issues because I think they impact mobility tax now that there’s additional enforcement. How does privacy come into play? Because you’ve talked about using travel and entertainment expense reports. You’ve talked about the fact that they probably have the ability to capture screenshots of when they log in and log out. You have entrance into a building, entrance out of the building, all of those things.

20:06 Chris Dohrmann: And I’ve seen far less, like including corporate emails, be classified by European GDPR rules as something that you can’t expose because it would be personally identifying information. Is data protection now something that data collection and tax collection for mobile employees, something that’s coming up more frequently?

20:25 Marlene Zobayan: It is coming up more frequently. I will say I am not a data privacy lawyer. I think the whole issue of data privacy has now required a level of expertise. It’s now not something that a lawyer can do in their spare time. You really need to be dedicated to it. So I would advise companies to consult with a data privacy lawyer and look at what can be done. I know that for regular business dealings, there are some exemptions. And I’m assuming, I don’t know, that if you are asked by a tax authority or a governmental body to provide data for compliance purposes, that probably is exempt in some locations. I will say, though, that anything that a company does on its own volition, such as starting to track mobility, while that’s important, I would definitely suggest that they seek the advice of a data privacy lawyer.

21:20 Marlene Zobayan: I was at a payroll conference last month talking about state mobility, and I was surprised how many companies use badging to look at where their mobile employees are. Some use VPN. I know a lot of my clients use self-reporting or travel report. There’s a variety of ways of doing it.

21:36 Marlene Zobayan: And yes, a company should consult with their data privacy lawyers to figure out what they can and cannot do. And it does vary by state and country.

21:46 Chris Dohrmann: I just want to thank you because I think we’ve touched a bunch of issues that people don’t normally think about when they think about tax mobility. And my favorite is the data and making sure the data is current and accurate. And I want to talk about one final exposure that I didn’t think fits into any of the categories we talked about, but it does fit into the search and competition for talent. How do PEOs, Private Employment Organizations, and EORs really come into play here? Because I think they are more popular, but much more difficult to administer than people think.

22:20 Marlene Zobayan: I think they’re a marvelous tool to attract and retain employees, but you have to know what you’re getting yourself into when you’re a company looking at that. These organizations have been around for a long time. They became extremely popular during the pandemic and continue to do so initially because companies were saying, we have somebody who we value that now wants to work in Peru, but we don’t have an entity in Peru. So putting their employment through an EOR, employer of record, was a way of retaining that employee during the pandemic times.

22:55 Marlene Zobayan: And then we suddenly had a crunch for talent that also arose during the pandemic. And using a PEO means you can employ anybody anywhere through the EOR structure without necessarily exposing your company to having to register or have an entity in that country. The issue that we see that I experience a lot with PEOs and EORs is that if you decide to hire somebody through one of those organizations and you want to give them equity, you have to make sure that they are ready for that, that their systems can handle equity because they are the ones that ultimately have the payroll registration in that country so there’s withholding and reporting to be done. They have to be able to do that for the equity compensation.

23:40 Marlene Zobayan: And I deal a lot with companies who have hired maybe smaller EORs or smaller PEOs and then find themselves in the unfortunate situation of having granted equity to those employees who are employed through that and then find that the EOR just cannot comply or will not comply with the results. And sometimes the tax authority comes back to the issuer, the company that has no on-site presence, saying, well, you granted this so we’re going to look at you to comply. So if you’re going down that route, it can be a great route, but definitely have the conversation about equity in advance of granting it.

24:16 Chris Dohrmann: This is why I love having this conversation with you because we’re not talking about the dry arithmetic of applying a rate to income. We’re actually talking about the other things that might be impacted. So you’ve been extremely generous with your time. I just want to conclude with maybe a little bit of a tougher question. If you had three things to tell your clients or to prospective clients that they should be mindful of when they’re thinking about mobility tax, what would those three be?

24:42 Marlene Zobayan: Definitely clean up your data. I think you’re right, Chris. You talk about data, and I talk about taxes, but I think tax is actually the easy part of it. Getting good data and figuring out where to collect it from, how to clean it up, and how to maintain it is key. Number two would be starting on the biggest exposures and making sure you address those first. That’s where you’re going to make the biggest savings if you do get audited. And I think number three has got to be communication, communication with internal stakeholders as well as communication to the employees. The gold standard is that you’ve communicated the process to all the stakeholders, they’re all buy-in, and you go out and communicate to the employees before they move. That is the gold standard. I will tell you that many companies don’t get there, but that’s okay. You’ve got to start one step at a time.

25:32 Chris Dohrmann: Thank you very much, Marlene. Just to let you know, your contact information will be in the postings when we make this podcast known, and I’m sure people will reach out because your advice has always been great. It’s always fun to have this conversation with you. Thank you very much.

25:46 Marlene Zobayan: Thank you, Chris. It’s always great to talk to you, and thanks to J.P. Morgan for having me on today.

25:52 Chris Dohrmann: And that brings us to the end of this episode of Prosperity at Work from J.P. Morgan Workplace Solutions. Thanks for listening. If you’ve enjoyed this episode, we hope you’ll review, rate, and subscribe to J.P. Morgan Workplace Solutions Prosperity at Work, available wherever you get your podcasts. You can find further insights on equity compensation, financial wellness, and more by following us on LinkedIn or over at jpmorganworkplacesolutions.com. The Prosperity at Work podcast is produced by dustpod.io for J.P. Morgan Workplace Solutions. Until next time, that’s Prosperity at Work. Bye.