Share-based compensation in Singapore: IRAS updates Transfer Pricing Guidelines to address the cost base mismatch

INTRODUCTION

On 4 June 2026, the Inland Revenue Authority of Singapore (IRAS) published the ninth edition of its Transfer Pricing Guidelines (TPG), with a single but significant amendment: a new paragraph 5.120 addressing the transfer pricing treatment of share-based compensation (SBC). This update provides long-awaited relief for multinational groups whose Singapore subsidiaries provide intra-group services on a cost-plus basis. This, together with the tax deduction introduced in Budget 2025, addresses a longstanding mismatch that has affected many companies operating in Singapore. From Year of Assessment (YA) 2026, uncharged and notional SBC costs will be excluded from the service income of the Singapore entity, while remaining in the cost base for purposes of determining the arm's length markup.

 

THE ISSUE

The mismatch has been a key concern for many multinational groups operating in Singapore. Where a Singapore subsidiary provides services to a foreign affiliate on a cost-plus basis, the IRAS took the position that SBC forms part of the cost of those services and must be included in the cost base and marked up, even where the parent company issued shares directly and did not charge the subsidiary. At the same time, Singapore's domestic tax rules historically did not allow a deduction for the corresponding SBC expense where no actual cash outlay was incurred. The net effect was a double burden: higher taxable service income on the transfer pricing side, with no corresponding tax relief on the income tax side.

We have been closely engaged with this issue over the years and have published a detailed analysis of the tax and transfer pricing challenges of SBC in the Asia-Pacific Tax Bulletin (IBFD, 2025), examining the mechanics of the mismatch, the OECD framework, and international case law developments.

 

BUDGET 2025: THE DEDUCTIBILITY FIX

Singapore's Budget 2025 introduced a meaningful first step by allowing companies a corporate tax deduction for payments made to a holding company or SPV for the issuance of new shares under an Employee Equity-Based Remuneration (EEBR) scheme, effective from YA 2026. The deductible amount is capped at the lower of the payment made and the fair market value of the shares at the time of grant to the employee, less any employee contributions.

However, this reform addressed only the deductibility side. The transfer pricing treatment remained unchanged: where no recharge was made, SBC could still inflate taxable service income without corresponding relief.

 

THE IRISH CASE

International developments added further momentum. In May 2024, the Irish Tax Appeals Commission (TAC) issued a landmark ruling (Determination 59TACD2024) holding that a subsidiary need not include the notional cost of parent-company stock awards in its service fee cost base, since those costs did not represent an economic cost to the subsidiary. The TAC emphasized that accounting entries alone are not determinative under the arm's length principle and that a company cannot mark up a cost it did not actually incur.

Although not binding in Singapore, the Irish decision dealt with an almost identical fact pattern to that faced by many Singapore service entities and provided persuasive reasoning grounded in the OECD Transfer Pricing Guidelines.

 

THE NEW PARAGRAPH 5.120

The ninth edition of the TPG introduces a new FAQ at paragraph 5.120 that directly addresses SBC in the context of cost-plus and TNMM pricing. The IRAS identifies three scenarios:

1. Incurred SBC cost: SBC is charged to the Singapore entity by a related company and recognized in its accounts.
2. Uncharged SBC cost: SBC should have been charged but was not, and is not recognized in accounts.
3. Notional SBC cost: SBC is not charged but is recognized in accounts under Financial Reporting Standards.

The IRAS reaffirms its technical position that SBC is remuneration for services performed and should be included in the cost base in all three scenarios. However, and this is the key change, IRAS states that "to balance technical alignment with practical considerations," it is prepared to exclude uncharged and notional SBC from the service income from YA 2026.

In practice, this means:

For the many Singapore subsidiaries that do not have a formal recharge in place, the SBC amount is still included when computing the arm's length markup, but that SBC component is no longer treated as part of the entity's taxable service income. This directly eliminates the additional tax that previously arose from the inclusion of uncharged or notional SBC in the service fee.

 

COMBINED EFFECT

Taken together, the Budget 2025 deduction and the updated TPG address both sides of the SBC mismatch:

For groups with a recharge arrangement, the subsidiary can now deduct the SBC payment and the full service income (including SBC) is reported. Only the markup represents additional taxable profit, which is the intended outcome under a normal cost-plus model.

For groups without a recharge, the updated TPG ensures that uncharged or notional SBC no longer inflates taxable service income. The historic "double whammy" is effectively removed.

This is a pragmatic and welcome approach by the IRAS. It preserves the concept of the arm's length principle by keeping SBC in the cost base, while acknowledging that taxing revenue on a cost that the Singapore entity did not bear or deduct produces a commercially unreasonable outcome.

 

WHAT COMPANIES SHOULD DO

Companies affected by this change should consider the following steps:

1. Identify your SBC scenario. Determine whether your Singapore entity's SBC is incurred, uncharged, or notional, as the transfer pricing treatment from YA 2026 depends on this classification.
2. Evaluate whether to implement a recharge. Groups that establish a formal SBC recharge can now claim a tax deduction under the Budget 2025 rules. The choice between recharging and not recharging has different implications and should be assessed based on the group's specific circumstances.
3. Update transfer pricing documentation. TP documentation should clearly identify the SBC component, articulate the basis for its treatment, and ensure the benchmarking analysis is consistent with the approach adopted.
4. Assess historic exposure. The new guidance applies from YA 2026 and is not retroactive. Companies with open positions in prior years should evaluate whether proactive engagement with the IRAS is advisable.
5. Coordinate across functions. The approach to SBC recharging has implications for intercompany cash flows, share plan administration, and broader tax compliance. HR, finance, and tax teams should be aligned.

To learn more, please contact Barbara Voskamp or Anne Klaassen.