The Inland Revenue Authority of Singapore (“IRAS”) has published the 9th Edition of the e-Tax Guide on Transfer Pricing Guidelines (“TPG9”) on 4 June 2026, which clarifies and refines the tax treatment of Share-Based Compensation (“SBC”) under the application of the Transactional Net Margin Method (“TNMM”) for intercompany service transactions. With effect from Year of Assessment (“YA”) 2026, a concession is introduced whereby uncharged and notional SBC costs will be excluded from the service income of the Singapore entity, while still being included in the cost base for the purpose of determining the arm’s length mark-up.
Overview
In the context of rapid business expansion, where companies seek to scale operations while incentivizing key employees without immediate cash outflows, SBC arrangements are increasingly used as an alternative or complement to salaries. SBC awards are often granted by a group entity other than the Singapore employing entity, most commonly the parent company. Depending on the group’s arrangements, the associated SBC costs may or may not be recharged to the Singapore entity. As a result, the accounting, tax, and transfer pricing treatment of SBC costs has been the subject of ongoing debate in recent years, and has now been further clarified under Singapore Budget 2025 and TPG9.
Deductibility of SBC under Employee Equity-Based Remuneration schemes
Under Section 14L of the Income Tax Act 1947 (“ITA”), Singapore companies were previously allowed to claim a tax deduction for Employee Equity-Based Remuneration (“EEBR”) only where the awards were satisfied using treasury shares. EEBR settled through newly issued shares was not deductible, even where the cost was recharged by a parent company to the Singapore entity.
Singapore announced in Budget 2025, and subsequently legislated under Section 14MA ITA, that with effect from YA 2026, companies would be entitled to claim a tax deduction for payments made to a parent company or a special purpose vehicle (“SPV”) for the issuance of new shares under an EEBR scheme. 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 amount paid or payable by the employee for such shares.
From a transfer pricing perspective, it is only with TPG9 that the IRAS has significantly refined its approach to SBC costs, clarifying their treatment in the determination of the cost base and service income under the TNMM for intercompany service transactions.
New developments introduced by TPG9
In paragraph 5.120 of TPG9, IRAS addresses the tax treatment under the TNMM of SBC costs where shares are issued by a group entity other than the Singapore entity, and distinguishes three scenarios:
- Incurred SBC cost: SBC costs are charged to the Singapore entity by a related company and recognized in its financial accounts.
- Uncharged SBC cost: SBC costs should have been charged but were not, and are not recognized in the accounts.
- Notional SBC cost: SBC costs are not charged, but are recognized in the financial statements in accordance with applicable Financial Reporting Standards.
TPG9 confirms that, in all three scenarios above, SBC costs should in principle be included in the cost base for the purpose of determining the arm’s length mark-up and total service income. However, with effect from YA 2026, IRAS introduces a concession for uncharged and notional SBC costs. Under this concession, SBC costs remain included in the cost base for the purpose of computing the arm’s length mark-up, but are excluded from the final service income of the Singapore entity. The treatment of incurred SBC costs remains unchanged.
Summary of changes to the treatment of SBC costs:
| SBC cost | Pre-YA 2026 | From YA 2026 |
|---|---|---|
| Incurred SBC cost | Included in both the cost base and service income | Remains included in both the cost base and service income |
| Uncharged SBC cost | Included in both the cost base and service income | Included in the cost base, but excluded from service income |
| Notional SBC cost | Included in both the cost base and service income | Included in the cost base, but excluded from service income |
Why this matters
Under the previous framework (YA 2025 and prior), SBC costs were included in the final service income computation, even where no recharge was effectively made by the other group entity to the Singapore entity in practice. At the same time, SBC costs relating to newly issued shares by the parent entity were not tax-deductible in Singapore.
This resulted in a mismatch, leading to higher taxable service income from a transfer pricing perspective, without a corresponding tax deduction at the income tax level. The introduction of the new concession effectively removes this mismatch and aligns the tax and transfer pricing outcomes more closely.
If your business has an entity in Singapore operating under a TNMM-based transfer pricing model, we recommend assessing whether the updates introduced under TPG9 may impact your current transfer pricing position. Should you require any assistance, RBA’s advisory team would be pleased to provide tailored guidance and support in evaluating the implications of these changes for your business.
