How Esops from firms listed abroad increase compliance burden on employees
Just like start-ups are offering stock options to their employees, some multinationals listed abroad are also rewarding their employees with employee stock option plans (Esops) during the covid-19 pandemic.
According to tax experts, the compensation structures of these multinational corporations (MNCs) are getting linked to the global performance of the companies. While the mode of acquisition of Esops may differ slightly, their taxation is similar to stock options offered by an Indian company. However, Esops from a company listed abroad can slightly increase the tax compliance burden when filing returns.
Similar to Esops offered by an Indian company, the taxation of stock options by an MNC happens at two stages. First, when employees receive the stocks and then when they sell them.
The day a company offers stocks to employees, it is called a grant date. An employee receives a letter stating the number of stocks offered, the price, when can those be availed, and other details. At this stage, there is no taxation.
When an employee acquires the shares, it’s called vesting of options. At this stage, the employee needs to pay tax. Usually, companies offer stocks at a value lower than the market price. The employee has to pay tax on the difference between the market price and the price at which he buys the shares.
If Company A’s listed price is $50. The employee is offered the stocks at $20. The employee will need to pay tax on $30, the difference between the two prices. “This difference between the fair market value (FMV) on the date of allotment and the actual buying price is taxed as perquisite, which is under the head ‘Income from Salaries’. The employer will deduct the applicable tax,” said Divya Baweja, partner at Deloitte India.
According to Baweja, as the company is listed overseas, a category 1 merchant banker will need to determine the fair value of shares. In case, the company is listed at more than one exchange, there is a method listed to determine the share price, which includes taking the stock price on the exchange where the turnover is higher.
On the sale of stocks, an employee is taxed for the second time. The tax will be on the gains made, which is the difference between the FMV and the selling price. If the shares are sold after 24 months of holding, the profits made will be taxed as long-term capital gains (LTCG) at 20% after indexation benefit. This is excluding the tax and surcharge.
If the stocks are sold within 24 months, the individual will be liable to pay short-term capital gains tax (STCG). The profit will be added to the income and taxed based on the applicable slab. Do remember, even the dividends earned are also taxed in India. As the stocks are not listed on an Indian stock exchange, the taxation is different.
As the stocks belong to a company listed outside the country, the employee will need to report all the details of the shares in the Foreign Asset Reporting schedule and also the asset and liability schedule in the income tax return (ITR) form, which is the additional compliance burden that comes with Esops of a company listed overseas.
Make sure that you make all the required disclosure, as non-compliance can result in stringent penalties.