Tax and Transfer Pricing Challenges of Stock-Based Compensation in Singapore

Singapore’s tax treatment of employee stock-based compensation (SBC) is at a crossroads. Companies may face a double burden when Singapore subsidiaries provide services to foreign affiliates under a cost-plus model: the Inland Revenue Authority of Singapore requires notional SBC costs to be included in the cost base (and marked up), even when no actual recharge occurs, while those same SBC expenses have historically been non-deductible for income tax. This article explores the transfer pricing implications, referencing a recent Irish case that permitted exclusion of SBC from the cost base, and considers Singapore’s tax framework and the OECD Transfer Pricing Guidelines. It also examines the deductibility of SBC expenses in Singapore, as proposed in the 2025 Budget, which introduces a new tax deduction for certain SBC-related payments. The article contextualizes the current treatment of SBC in Singapore and outlines planning and compliance strategies to address the challenges of non-deductibility and transfer pricing adjustments.

Introduction

Singapore’s tax treatment of employee stock-based compensation (SBC) has taken the spotlight in the last couple of years. Companies may face a potential double burden when their Singapore subsidiaries provide services to foreign affiliates using a cost-plus model: the Inland Revenue Authority of Singapore (IRAS) takes the position that notional SBC costs should be included in the cost base (and marked up), even where no actual recharge is made. At the same time, these SBC expenses have historically been non-deductible for income tax purposes.

This article examines the transfer pricing issue in depth, including analysis of a recent landmark Irish case that allowed the exclusion of SBC from the service fee cost base. It considers the implications under Singapore’s tax framework and the OECD Transfer Pricing Guidelines. It also discusses the deductibility of SBC expenses in Singapore, noting a significant 2025 Budget change that introduces a new tax deduction for certain SBC-related payments. The discussion outlines the tax framework, compares international guidance and highlights practical implications, as well as possible approaches and compliance strategies.

To illustrate, consider a US-headquartered multinational group in the technology industry, the Snapple Group. The Singapore subsidiary, Snapple Pte. Ltd., functions as a regional headquarters for the Asia-Pacific region and provides business development and marketing support services to its US parent, Snapple Inc., under a cost-plus 10% arrangement. Employees of Snapple Pte. Ltd. receive share-based awards under a group-wide equity plan administered by the parent (with a value of 20).

In 2025, Snapple Pte. Ltd.’s total costs amount to 100, so it charges a service fee of 110 (100 + 10% of 100) to Snapple Inc. However, the IRAS takes the view that, for transfer pricing purposes, the notional cost of the SBC (20) should be included in the cost base of the service fee charged by the Snapple Pte. Ltd. to Snapple Inc, increasing the service fee to 132 (120 + 10% of 120). This results in higher taxable profit in Singapore due to the 10% markup on the higher base. At the same time, since there is no actual outlay or recharge, the SBC expense is disallowed as a tax deduction. The net effect is a higher taxable profit (12 vs. 10) without corresponding tax relief.