IRAS has updated its Transfer Pricing Guidelines to clarify how share-based compensation should be treated when determining cost bases and service income for transfer pricing purposes.
The new guidance applies from Year of Assessment 2026 and is particularly relevant to Singapore entities providing intra-group services where employees participate in share-based incentive arrangements.
Key impacts
Transfer pricing cost base remains broad
For transfer pricing purposes, share-based compensation continues to form part of the relevant cost base. Where a cost-plus method is applied, the mark-up should still be computed on total costs, including share-based compensation amounts.
Service income may be reduced under specific concessions
The IRAS has introduced a concession allowing certain share-based compensation amounts to be excluded from service income. This applies to:
- share-based compensation costs that are not charged to the Singapore service provider; and
- notional share-based compensation costs.
This may affect the amount of service income recognised for tax and transfer pricing purposes, particularly for entities that apply a cost-plus model for intra-group services.
Greater focus on employee stock option arrangements
The updated guidance includes examples involving services performed by employees who benefit from employee stock option plans. This suggests that the IRAS expects taxpayers to evaluate the economic connection between employee remuneration, service provision, and related-party charging arrangements.
Potential financial reporting and tax alignment issues
Entities may need to reconcile differences between accounting treatment, payroll or HR records, tax deductions, recharge arrangements, and transfer pricing calculations. Where share-based compensation is recognised for accounting purposes but not recharged within the group, additional analysis may be required.
Practical issues
- Identifying relevant compensation costs: Businesses will need to determine whether share-based compensation is actually charged, uncharged, or notional.
- Updating transfer pricing models: Cost-plus calculations may need to be reviewed to ensure the cost base and service income are computed consistently with the new IRAS guidance.
- Documentation requirements: Taxpayers should document the basis for including share-based compensation in the cost base and for applying any concession to exclude amounts from service income.
- Systems and data challenges: Finance, tax, payroll, and HR systems may not classify share-based compensation in a way that directly supports transfer pricing analysis.
- Group recharge policies: Multinational groups may need to revisit intercompany service agreements and recharge mechanisms to ensure they reflect the updated treatment.
- Judgment areas: The distinction between actual charged costs, uncharged costs, and notional costs may require careful interpretation, especially where equity incentives are granted by a foreign parent company.
Conclusion
Taxpayers with Singapore entities providing intra-group services should review their transfer pricing policies for Year of Assessment 2026 onwards. Particular attention should be given to cost-plus arrangements, employee stock option plans, intercompany recharge policies, and supporting documentation.
Accounting firms should consider helping clients:
- map share-based compensation flows across the group;
- assess whether any IRAS concession applies;
- update transfer pricing computations and working papers;
- revise intercompany agreements where necessary; and
- ensure consistency between financial reporting, tax filings, and transfer pricing documentation.
Source: IRAS website, 4 June 2026.