OECD Tax Policy Studies

1990-0538 (online)
1990-0546 (print)
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This series consists of studies analysing the effects of tax policies that have occurred in the past or might be considered for the future. Its primary purpose is to assist policy makers in designing tax policies that are suited to their objectives.

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The Taxation of Employee Stock Options

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06 Feb 2006
9789264012493 (PDF) ;9789264012486(print)

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Employee stock option plans have become a common component of remuneration packages in multinational enterprises. This publication presents and examines the many important tax issues that arise for beneficiaries and companies.

Focusing first on domestic tax issues, it considers what tax treatment would provide no tax-related incentives for a company to either increase or cut the use of stock options, and would be neutral regarding the choice of either granting stock options or paying ordinary salary. The approach is non-prescriptive and serves to provide a benchmark for policymakers. This is complemented by a survey of taxation of stock options in OECD countries in 2002 that calculates the effective rate of tax and compares it with tax on ordinary salary.

Cross-border taxation issues are then discussed. Issues such as the timing of the benefits from stock options, the distinction between employment income and capital gains and the identification of the services to which they relate are relevant to the application of tax treaties, which are based on the OECD Model Tax Convention, and the resulting changes to the Model's Commentary are fully explained. Finally, the effects on transfer pricing are analysed in three circumstances: when an enterprise grants stock options to employees of a subsidiary in another country, when using transfer pricing methods that are affected by remuneration costs, and when employees benefiting from stock options are involved in activities that are the subject of a cost contribution arrangement.

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Table of Contents

Chapter 1. Tax Neutrality
Chapter 2. Effective Tax Rates
Chapter 3. Cross-Border Income Tax Issues
Chapter 4. Impact on Transfer Pricing

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