Fringe benefit tax on stock options to hit MNC expats
September, 27th 2007
The fringe benefit tax (FBT) on employee stock option plans (Esop) could hit expatriate employees of multinational companies as credit cannot be claimed against it under double taxation avoidance agreements (DTAA).
Thus, expat employees of multinationals who have received stock options could end up paying tax twice: once as FBT and the second time as income tax in the homeland. This is because the government has allowed employers to pass on the cost to their employees.
Otherwise, FBT has to be paid by employers. Most of the developed countries like the US and the UK treat stock options as a perk and tax it in the hands of the employee. MNCs who have issued stock options to expat employees located in India include Coke, Dell and Adobe.
While some employers may be benevolent and pay FBT themselves, others may ask employees to bear the burden. Incidentally, none of the tax treaties recognise FBT. Thus, entities cannot claim credit against it in their homeland as they can do for income tax.
Says Ernst & Young partner Amitabh Singh, "Expatriates who continue to be taxed residents in their home countries will be taxed there upon exercise. Imagine their plight if, at the same time, their Indian employers recover FBT payable in India. Since the FBT is not eligible for foreign tax credits, almost 50-60% of their gains, and that too notional gains, will be gone. I am sure many expatriates will reconsider their deputation to India if this is the case. I feel the government should consider issuing appropriate clarifications to allow such FBT recovery to be considered eligible for tax credits."
According to existing provisions, FBT liability arises when an employee exercises the stock option given to him. FBT is applicable on all fringe benefits given by companies to their employees based in India. The country has opted for taxation of fringe benefits at the level of the employer as it makes collection easier. FBT on Esops has to be paid at the rate of 30%.