IRAS has updated its Transfer Pricing Guidelines (Ninth Edition), released on 4 June 2026, to clarify the treatment of share-based compensation costs under the Transactional Net Margin Method (TNMM).
The Inland Revenue Authority of Singapore (IRAS) has updated its Transfer Pricing Guidelines (Ninth Edition), released on 4 June 2026, to clarify the treatment of share-based compensation costs under the Transactional Net Margin Method (TNMM).
The update introduces a new frequently asked question addressing whether share-based compensation should be included in the cost base when a Singapore taxpayer provides services to a related party and applies a full cost mark-up as its profit level indicator.
Under the example provided, Company A in Singapore incurs service-related costs of SGD 200,000 in providing services to related party Company B. In addition, Company A’s employees receive share-based compensation valued at SGD 10,000 for activities connected to those services. IRAS states that share-based compensation constitutes remuneration for services performed by employees and should therefore form part of Company A’s cost of rendering services.
As a result, the SGD 10,000 share-based compensation cost must be included in the cost base used to calculate the TNMM mark-up, increasing the total cost base from SGD 200,000 to SGD 210,000. Consequently, service income would generally comprise the SGD 210,000 cost base plus the applicable mark-up on that amount.
IRAS noted that this position is consistent with the OECD publication The Taxation of Employee Stock Options.
The guidance identifies three possible scenarios for the SGD 10,000 share-based compensation cost:
- Incurred share-based compensation cost – where the cost is charged to Company A by related parties and recognised in its financial accounts.
- Uncharged share-based compensation cost – where the cost should have been charged by related parties but is neither charged nor recognised in Company A’s accounts.
- Notional share-based compensation cost – where the cost is not charged by related parties but is recognised in Company A’s financial statements under applicable Financial Reporting Standards.
IRAS said that, from a technical transfer pricing perspective, the SGD 10,000 should be included in the cost base in all three scenarios. Accordingly, the mark-up should be applied to a total cost base of SGD 210,000.
However, to balance technical consistency with practical considerations, IRAS will, with effect from Year of Assessment (YA) 2026, allow uncharged share-based compensation costs and notional share-based compensation costs to be excluded from service income.
Under this approach:
- For incurred share-based compensation costs, the treatment remains unchanged. The cost base remains SGD 210,000 and service income continues to include the full SGD 210,000 plus the mark-up on that amount.
- For uncharged and notional share-based compensation costs, the cost base remains SGD 210,000 for purposes of calculating the mark-up, but service income will comprise SGD 200,000, excluding the SGD 10,000 share-based compensation amount, plus the mark-up calculated on the full SGD 210,000 cost base.
The updated guidance also includes a summary table showing that, from YA 2026, incurred share-based compensation costs continue to be included in both the cost base and service income, while uncharged and notional share-based compensation costs remain included in the cost base but are excluded from service income. Before YA 2026, all three categories were included in both the cost base and service income.
