In a prior article, Guerdon Associates described the impact sweeping changes to US taxes would have on executive remuneration, and particularly on ASX listed companies operating in the US (see HERE). We noted that the changes may permit Australian and other foreign companies to have a competitive advantage in the cost of executive pay, and how it is structured. However, there will be exceptions as a result of an expansion in the definition of “Publicly Held Corporation”.

Section 162(m) of the US Internal Revenue Code limits the deductibility of annual compensation paid to certain “covered employees” of a publicly held corporation to $1 million per executive. Prior to the Act, “covered employees” included each of the CEO and the next three highest paid executive officers (excluding the chief financial officer (“CFO”)), determined as of the end of a taxable year, and the limit applied to covered employees of a corporation with publicly traded equity. In addition, s162(m) previously provided that performance-based compensation (which included stock options and other performance-based equity awards) and commissions were not subject to this deduction limit.

The new Act eliminates the performance-based exception to the $1 million per-executive annual limit on the deductibility of compensation for certain public company executives under s162(m). This change will result in a significant increase in disallowed tax deductions (see our prior article).

 While s162(m) had previously only applied to corporations with publicly traded equity, the Act expands the companies subject to s162(m) to include corporations with publicly traded debt and foreign companies publicly traded through American depositary receipts ADRs). Previously, foreign private issuers (“FPIs”) were not subject to the s162(m) deduction limitation based on various IRS private letter rulings; however, the conference report states that the definition of “covered employee” would now include “such officers of a corporation not required to file a proxy statement but which otherwise falls within the revised definition of a “publicly held corporation”, which could include FPIs. Further guidance is expected from the Treasury Department regarding the extension of s162(m) to all FPIs, but the timing is not yet known.

This will capture many of the larger ASX listed companies with US operations, as they have ADRs and/or publicly traded debt. To an extent, the impact on Australian, UK, German and other foreign companies with US operations will not be as severe, given that they tend to pay higher fixed pay than their US competitors. However, as with most US listed corporations, the impact on the non-tax deductibility of performance based pay in excess of US$1m will be dwarfed by the savings emanating from the reduction of the overall company tax rate from 35% to 22%.

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