Employees are often the heart and driving force of a business. With this, employers must find effective and efficient ways to remunerate and motivate employees.
Equity-based remuneration, such as share options or restricted shares, have always been an attractive way to incentivise key employees and align them with the performance of the business. They are able to provide employees with skin in the game, which is an effective motivator for employees to align themselves with the business whilst requiring no immediate cash outlay for companies, making it a popular compensation tool for start-ups.
However, equity grants (Employee Stock Option Plans (ESOPs) and Employee Share Ownership Plans (ESOWs)) can come with their own set of challenges for reporting and taxability. Globally mobile individuals add an additional layer of complexity as they may even be caught with taxes in more than one country. Back at home, Singapore has a unique set of rules which can catch employers and employees off, leaving them with a challenging mess to unravel and taxes to fund.
For completeness, the other typical ways to remunerate employees have their own challenges. For example, we explored the complicated issues arising from cash-based remuneration and benefits previously.
Although many are unaware, there are penalties (Section 95 of the SITA) levied for errors in tax returns (even when there is no intention to evade taxes) of up to 200% of the undercharged tax, up to SGD 5,000 fine, and/or imprisonment. The amount of undercharged tax can be substantial if value of shares has surged during the period of holding. Additionally, directors (or other key people in the business) may be summoned to court where at the discretion of the Comptroller. Remember, ignorance of the law is not an excuse.
Going back to equity, Singapore has been known to have a simpler tax system with lower tax rates than many other countries, but simplicity can come with its own complexities. We outlined some of the key issues that we come across when advising employers and employees on equity in Singapore.
Similar to how benefits can come in many forms, equity plans can also have variation, and this impacts the taxability and reporting in Singapore. The tax point is generally when the right to the underlying share is obtained, unless there are sales restrictions that defer the tax liability (more details below). There is no requirement to process the gains through payroll (unlike cash payments) but the employer must ensure that the gains are correctly reported in the employer’s forms.
Some plans may have hybrid settlements (part share, part cash), some are not determined at grant, and given the individuality of each plan companies can also include specific clauses that differ from a vanilla plan. One common issue we see clients face is not knowing how their equity plans work, and often misreporting this based on online guidance (which may apply to more straightforward plans than they have).
Legislation on employee equity schemes are relatively new. The implied idea of taxability of ESOW/ESOP was that employees receive, and are able to realise, the benefit of share ownership at vest (for ESOW) or exercise (for ESOP), and therefore the gain from employment arises at this point.
The challenge is then what constitutes a "restriction on the sale of shares so acquired" to delay the tax point. Although some earlier interpretations are available, there is still little guidance on what a restriction is for definitive application (e.g. whether Board of Directors approval or administrative delays would be sufficient to be a restriction on the individual to 'cash-in' their benefit to delay the tax point). Clarification can be sought from the IRAS, or for companies to obtain professional advice on their specific plan
Eventually, once you have determined that the equity is taxable - what are they worth? Typically listed companies would have readily available prices online to determine this. For privately owned enterprises, tax is charged on the open market value, but this may not be readily ascertainable and therefore net asset value (NAV) of the shares on the tax date can be used (at the Comptrollers discretion).
Uncertainty of the nexus between the NAV and the share price could render this unreliable and often when there is an upcoming liquidity event that could skew the valuation a lot higher in not long after, the current NAV used for ESOP gain reporting could be unrepresentative.
This is a unique rule in Singapore. A “dry tax” charge is applied upon tax clearance when non-Singapore Citizens leave their Singapore employment or leave Singapore for a length of time. Unexercised options / unvested shares get caught by this rule, potentially resulting in a substantial tax bill at departure. Given these ESOPs/ESOWs have not crystalised to shares that the individual can sell to cover the tax, individuals may be left with cash flow challenges where they have to fund the tax from their own pocket.
Communication and managing expectations of foreigners in Singapore then becomes even more important for them to estimate the potential liabilities before they relocate out of Singapore or change jobs locally.
Additionally, when these options / shares are ultimately exercised/vested in the future, there is a chance that the gains from the actual exercise/vesting get taxed in the current location where the employees are exercising employment. This not only creates anxiety to the employees but also to the employers on how to manage such issues.
Often, share schemes are implemented by the overseas HQ and only a few select individuals working in the Singapore entity participate in this. Further, equity-based remuneration is not reported through payroll in Singapore. So how will local teams pick up the relevant information to report the correct gains in a timely manner? Owners of this information may even extend outside of the payroll and finance teams, increasing the difficulty of information flow.
Only ESOWs/ESOPs granted in respect of one’s Singapore employment is sourced to Singapore. Otherwise, gains from the vesting of shares or exercise of options that are not Singapore sourced – although triggered whilst the individual is in Singapore – is neither reportable nor taxable in Singapore. Therefore, teams need to be aware of the different tranches and ascertain the sourcing of these gains before assessing the reporting requirements.
Companies should be aware of the nuances of employee equity schemes and put in place proper communication channels involving the relevant teams, facilitating information sharing to comply with local reporting requirements.
There are many more situations that make ESOP/ESOW reporting complicated. It is quite easy for companies to miss out on reporting this altogether, given the lack of information and knowledge of the reporting requirements. Organisation structures can also add layers to the complexity (e.g. trust / mirrored shares / SPVs etc).
As attractive as these schemes are with the great potential upsides, without clear awareness of how this works and associated costs and compliance requirements, this could also trigger a lot more inconvenience for the employer (from a reporting requirement) to large unforeseen tax costs to the individuals. Companies should look into getting advice on their employee equity schemes, and issue appropriate communication to teams and employees on the impact of this implementation and participation.
This article addresses the characteristics of ESOP/ESOW reporting that you should be aware of, and hopefully sparks a conversation (either internally or with us) on navigating employer reporting.
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