The Final Verdict: ESPP Part 3 - Employee: 0, Company: 1

A recap on previous post: Part1 and Part2

Due to the change in Malaysian taxation system on ESPP, some companies restructured their ESPP (known as "Scenario 2" outlined here) with regard to the applicable subscription price.

Recall,however, that "Scenario 1" is the norm, and it is as such from previous example in Part2, as below:

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Subscription price: $30
Subscription price less 15% discount: $25.50
Purchase (subscription) period last trading day closing price: $50



Taxable gain takes into account the purchase period last trading day closing price, AND the actual discounted purchase price.
In this case:  (50-25.50) x 50 = $1,225
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Of course, if you are aware of this, first thing which comes to mind --> your company is short-changing you, and the next thing you will do is to call your HR to complain. Then HR will probably need to explain to you it's not their mistake but it is due to LHDN. But HR doesn't have that much time to entertain the same enquiry by all "self-aware" staff. Issuing a memo highlighting LHDN new idiotic implementation isn't their cup of tea. HR is always the good guys *Cough*


A smart C&B director will instead, alter the ESPP policy regarding the applicable subscription price. What happened now is this: Your company will fix the rule that, for any purchase period in question, the corresponding last trading day stock closing price, less 15%, IS the Purchase Price.
In this case, it is $42.50


However, remember that, previously, if you were to purchase 50 shares at the price of $25.50, it means your accumulated salary deduction allocated for ESPP is $1,275. 


With the purchase price now fixed at $42.50, you can only purchase 30 shares units with $1,275, compared to 50 units previously.


Now, your total taxable income here is 30 x (50-42.50) = $225 !!!


Do you see the play of numbers here? Your taxable income is similar to the previous taxation scheme, but you, as an employee, still loses out because you just purchased the shares at a relatively higher price in this new company ESPP scheme. Not that you have a choice anyway!


This is what my (ex) company ESPP prospectus says:

Oopss...I mean, this.

Indeed this takes into effect starting Nov 2008.


In ChampDog's words, "...you hide a problem without people realizing it."


Again, HS Ooi's remarkable comment on this


From company standpoint, a company will save more by using the average window closing price because they only need to pay you the 15% discount of market price. Of course, when a company is using the lower window price, most probably the company will buy some call options to make sure that in case the market is going up very high(hence the call options are in-the-money) their ESPP cost is still fixed. But this also means that the company have to pay additional premium for the options position they are taking. In a downward market when the call options are out-of-money, they will lose all the premium of the call options position. I think companies will have to spend more if they choose to use the lower window subscription price instead of window closing price. You will probably see more and more companies change to window closing price. So, enjoy the extra benefits while you still can :-)

It is a win-win for company and government to use the window closing average price instead of lowest price of the windows. This move make smart sense for them, though it is not good for employees. 


As a employee, the only control you have over this situation is to set a reminder 2 weeks before the purchase period last share trading day. Pull out your accumulated salary deduction from ESPP to be refunded back to you if the current stock price/trend shows possibility of dropping in short term. Even if you let company purchase the stocks for you, it is not worth to hold ESPP stocks for long term unless huge potential of capital appreciation (but there's always market risk which you cannot foresee). One cannot be a passive "investor" anymore in this! Understand that the system (company + Government) works against you if you are not smart in managing your own money! At the end of the day, you will likely end up in a higher tax bracket and your net gain could be negative!!


SHARE THIS INFO WITH YOUR COLLEAGUE AND FRIENDS IN MNCs. ALL OF US DESERVE TO KNOW, THE LAST TIME I CHECKED, NO ONE TOLD ME AND NO INFO CAN BE FOUND ONLINE, EXCEPT CHAMPDOG'S ORIGINAL POST.

Employee Stock Purchase Plan Part 2 - Employee: 0, Government: 1

In my previous post on differing implementation of Employee Stock Purchase Plan, I quoted on an amendment in Malaysia taxation system on ESPP being the probable reason behind the change in the determination of applicable stock purchase price and date from Scenario 1 to Scenario 2.


Quoting ChampDog's original posting on this, lets assume the following constants.


Your company practises Scenario 1
Subscription price: $30
Subscription price less 15% discount: $25.50
Purchase (subscription) period last trading day closing price: $50
Number of shares purchased: 50 units


Previous Tax Scheme for ESPP
Taxable gain is the total discount in purchasing the shares. This is straightforward.
In this case: (30-25.50) x 50 = $225


Current Tax Scheme for ESPP
Taxable gain takes into account the purchase period last trading day closing price, AND the actual discounted purchase price.
In this case:  (50-25.50) x 50 = $1,225


Regardless whether you realize your capital gain (sell the shares) or not, you will be taxed upfront for the paper gain. This may not appear on monthly pay slip but it will show in the EA form.
However, we knew that capital gain is not taxable in Malaysia, so isn't this just plain idiotic? 


Abso-fucking-lutely

And what if the share price drops a lot after the purchase date, and you are still holding onto your shares purchased via ESPP? Doesn't matter, LHDN already locked onto your $1,225 worth of taxable income.
If so, it makes ESPP much less an attractive, especially if you plan to hold onto your stocks for long period, and the share is prone to price drop in the short term. It is very likely that you will be taxed more in this case for the Year of Assessment in question. Of course, if the share price appreciates further after that, you will feel less of an impact.


In the same posting at Journey to Become Financially Independent, financial consultant HS Ooi explained this well in his comments to this.


The government is finally getting smarter in catching up with the loophole of ESPP. It shows that how much lost revenue the government had suffered in the past!


In the past, when the government was taxing the "profit" of 15% subscription price discount enjoyed by employees, the government treated the discount as benefits received by employees. However, they forgot to take into consideration of "market gain" enjoyed by employees. You may argue that the market gain is a capital appreciation which shouldn't be taxed by the government. However, who is actually giving the employees the "market gain"? Is it truly market gain or employees compensation in the form of market gain?

If a company is giving out ESPP at a lower price of the offering window, in an upward market, the company is actually have to "compensate" employees for the gain. You haven't actually owned the stocks yet but you are able to buy the stocks at a lower price (plus 15% discount). The company is selling you the stocks at lower price when market price is higher at closing of the offering window. So, by definition, you are receiving "extra benefits" from the company. You are not getting capital appreciation from the stocks you owned. By taxing you based on the average price on the window closing day, the government is maximizing their tax revenue, which is a smart move by them. :-)

Key takeaway - LHDN screwed us big time. No surprise, though.

Employee Stock Purchase Plan Part 1 - Differing Implementation

Scenario 1 & 2 below are the past and present methods of implementation for Employee Stock Purchase Plan (ESPP) at a US multinational company in Penang, let's call it X. However, Scenario 1 is still practised in at least another MNC, let's call it Y.

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In this purchase period, assume I have enrolled into the plan and accumulated a sizeable amount of money via monthly salary deduction. And according to company's ESPP plan, staff is entitled to purchase the share at 15% discount.

Scenario 1

At the end of Purchase Period, company will purchase the shares at the lower of these 2 prices - Entry Stock Price on 1 Jan or Last Day Purchase Period Stock Closing Price, at 15% discount.  

Here's an example, an actual screenshot of my own ESPP shares purchase calculation. See the phrase "Your purchase price is 85% of the lower price", which happened to be the stock price on 31 Oct 2008.

Scenario 2

See a different phrase for the below - "Your purchase price is 85% of the Fair Market Value on purchase price", which always refer to the closing stock price on the last stock trading date within the defined Purchase Period. In this case, it is the stock closing price on 30 April 2009, which, coincidentally, is lower than its entry price on 1 Nov 2009.