Taxing stock options

OECD Observer
Page 6 

How can a multinational company offer stock or share options to its employees when the rules governing those options are different in the various countries where it operates? And how will they be taxed?

These thorny questions have made multinationals very cautious when introducing plans into different countries, so as to avoid unpleasant tax and regulatory surprises. But stock option schemes have a reputation as a good way of attracting staff, especially to start-up companies, and a good way of keeping employees loyal. They give employees the right to buy shares in the company they work for at a pre-determined, fixed price in the future. If share prices rise, the employee can buy shares at the lower, fixed price, then sell them at current market prices at a profit. If share prices fall, employees can simply let the options expire – nothing gained, but nothing ventured either.

Now the OECD is looking at how such schemes can do more to encourage entrepreneurship, particularly in start-ups. One report due out in November will assess the effectiveness of share option schemes and look at differences in the ways they are treated within the OECD area for tax and regulatory purposes. Some countries tax stock options when they are granted, for example, while others tax them when they are exercised and/or sold. Moreover there is a lively debate as to whether gains realised through the exercise of options should be treated as employment income, or more lightly taxed capital gains. OECD expert, Peter Avery, said the report would provide ideas for improving policies that govern options.

The OECD is also looking at cross-border tax issues related to stock options. Tax treaty experts from OECD countries will meet in Amsterdam in November to debate how stock options should be taxed when people move abroad, and who should get the revenue. Guidelines on this issue are expected some time after 2002.

©OECD Observer No 229, November 2001 

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