Global Watch - Singapore - Deduction of share plan costs clarification 

Following the Circular issued on 30 June 2006, the Inland Revenue Authority of Singapore ("IRAS") issued a Supplementary Circular on 10 January 2007 to clarify the timing and amount of corporate tax deduction for treasury shares transferred under employee stock plans.
 
As a recap, companies that grant ESOs or share awards through treasury shares will be accorded a tax deduction with effect from Income Year 2006, on the premise that the company has incurred an actual outlay to buy back their own shares to fulfil the obligations.
 
Tax deduction amount
 
When new shares are issued to fulfil the ESO / share award obligation, no tax deduction will be allowed to either the parent or the Singapore subsidiary company on the cost incurred (if any) in issuing the new shares, regardless of whether the cost is recharged to the Singapore employer by the parent.  This was legislated on 13 February 2007.  The position previously was inherently unclear.
 
Where treasury shares of the employer are used to fulfil the ESO / share award obligation, the amount of deduction allowed is the cost to the company of acquiring those shares through market purchase based on certain valuation methods (any of which can be adopted by the company on a consistent basis) reduced by the amount payable by the employees for the treasury shares, i.e. the net amount incurred by the company.
 
However, where the shares in question are treasury shares of the Singapore employer's parent company and the parent recharges an amount to the Singapore employer, the amount of deduction allowed is restricted to the lower of (1) the recharge, or (2) the cost to the parent company of acquiring the treasury shares through market purchase reduced by the amount payable by the employees for those shares, if any.
 
Tax deduction timing
 
Where the shares are treasury shares of the Singapore employer company, a tax deduction will be allowed:

1. In the case of an ESO scheme, at the point of exercise for options that are exercised on or after 30 January 2006; and
    
2. In the case of a share award scheme, at the point of granting or vesting for shares that are granted (where there is no vesting) and shares that are vested (where there is vesting) on or after 30 January 2006, respectively.

It has also been clarified that in the case of global employee share plans, the timing of deduction is the date of exercise of the stock options or granting / vesting of the share awards, or the date the parent company recharges the Singapore employer for the shares transferred, whichever is later.

"The Bottom Line" The tax change will affect treasury shares transferred to employees by Singapore companies with effect from year of assessment 2007.  No tax deduction will be given for any cost recharged in respect of an issue of new shares with effect from 13 February 2007.