A number of companies have introduced global plans which do not seek to obtain tax approval in any country. The reasons given for this are:
- they are simpler to set up
- they do not need tax approval and are therefore more flexible
- they are easier to operate
- they are cheaper
- they ensure equality of treatment between employees in different parts of the world.
Each of these contentions is contestable and in some cases are undoubtedly wrong.
Let us deal with them in turn.
Approved plans often need tax authority approval but if one follows the precedents which are normally easily available this is not particularly difficult to achieve. In the UK’s case this is actually becoming easier as the approval process which required the revenue to examine every document is being replaced by a registration process whereby the adviser certificates that the scheme complies with legislation.
The big advantage of approval/registration is that the framework for the plan is set out and therefore the administration of the plan will often be more straightforward because it follows a well worn path. This does not mean that every approved plan is the same and they certainly can be adapted to suit certain company requirements but it does mean that one is not starting from the beginning with a blank piece of paper.
Of course non-approved plans are more flexible as there are no tax regulation constraints but there are other constraints on unapproved plans such as guidance from the Association of British insurers and other bodies which represent shareholder opinion . These regulations have become ever more comprehensive as the effect of shareholder disquiet regarding executive remuneration has become louder. By contrast approved plans are rarely if ever challenged by shareholders because shareholders to generally take the view that if the government has given a plan tax relief then the plan is unlikely to bestow excessive rewards.
Approved plans are also not necessarily more expensive than unapproved plans. Companies need to take account of the fact that
1) approved plans are often exempt from employer social security
2)an employer needs less shares or options in an approved plan to create the same amount of benefits to the employee because of the tax advantages
3) approved plans are normally not subject to tax withholding.
Unapproved plans are increasingly subject to tax withholding in most OECD states. The operation of calculating tax, selling the requisite number of shares to cover the tax and putting it through the payroll is potentially an expensive business. Hence the claim that operating an unapproved plan is cheaper than an approved one rests on shaky foundations which become shakier, the longer the plan operates.
Finally companies deploy the argument of equity between employees in different parts of the world to justify seeking no tax relief. Superficially this seems to be a very attractive argument. However just because one country taxes its employees at a high rate does not mean that one equalises a person’s net pay in another country. Just because some countries do not give incentives to share schemes should not mean that the company ignores the incentives that are available in other countries. It would seem perverse to penalise employees in the UK because France has abolished nearly all its share scheme incentives.
In conclusion I believe that although there may be some additional work in implementing a scheme which requires tax approval, this effort pays large rewards in reducing burdens during the lifetime of the scheme and delivering greater cost savings to companies whilst giving greater benefits to employees.