Boom in Expat Stock Options Could Make Corporate Budgets Go Bust.

Valuable stock options held by U.S. expatriates may be a ticking financial time bomb for their corporate employers. The thriving economy and rising U.S. stock market have resulted in "a tremendous amount of wealth," according to New Jersey-based Cheryl Spielman, partner in charge of global equity for Ernst & Young's Global Equity Employment Solutions practice. As a result, she says, "Options are gaining more review by foreign countries. They're catching on that there's money for their coffers." And overseas tax rates--particularly in Japan, the U.K., France, China and Germany--may be substantially higher than domestic rates.

Until now, companies picked up the tab for the difference between what an employee would pay domestically and what the host country charges. Today, though, "A lot more people are out there and the values of options are going up. You can be talking about millions of dollars per employee. And key local nationals are affected, too," Spielman says. The question then becomes, she adds, "Who's going to pay the taxes overseas? Some countries have a potential jurisdiction of tax rate as high as 60 percent. That's 20 percent more than the U.S. maximum rate."

Spielman therefore recommends that companies "step back and do an inventory of who is out there and what they're sitting on in terms of potential tax liabilities. Many companies don't have a handle on it." Then, she suggests, "Do a due diligence on the different country tax and regulatory rules, including how and when options are taxed. Not all are taxed at exercise all around the world. Some are taxed at the granting date, some at the vesting date. Some are subject to income tax, some to social tax. Any company that has given grants to people who are traveling or living overseas needs an internal audit or checkup."

Finally, she says, "Ask whether your company has a withholding obligation. And ask what the company should be doing that it hasn't been doing."