Equity compensation raises tax reporting complications, experts say

Singapore’s simpler tax systems and unique rules create unique problems

Equity-based remuneration may be an effective incentive scheme for employees but they are causing issues in tax reporting even in Singapore which prides itself on simple and low taxes, according to experts from Grant Thornton.

In a note, experts at the accounting firm delved into the reporting and taxability challenges that come with equity grants such as employee stock option plans and employee share ownership plans. They said Singapore already has a simpler tax system and lower tax rates compared to other countries but there are still a lot of situations that can make reporting complicated for both employers and employees.

For instance, they said companies can easily miss out on their reporting duties due to a lack of information or lack of knowledge about the requirements. Many are also not aware that hefty penalties are levied for errors in tax returns and undercharged tax, even if these were unintentional. 

Legislation on employee equity schemes is relatively new, posing challenges to interpretation, while there is still uncertainty in determining the worth of equity deemed taxable. Globally mobile employees also run the risk of being taxed in more than one country, according to the experts.

Another key issue involves the ‘dry tax’ charge to non-Singaporean citizens leaving employment in the city-state or leaving the city-state for an extended period of time. 

A unique rule to Singapore, unexercised options or unvested shares are victims to this rule as equity plans accorded these employees cannot be sold to cover the tax, leaving them to fund the tax out of pocket.

The last key issue raised was the ability of the local teams to pick up and communicate reportable information when at times these share schemes are implemented overseas with only a few participating in the Singapore entity, or these types of compensation are not reported through payroll in the city-state.

“As attractive as these schemes are with the great potential upsides,” Grant Thornton experts said. “Without clear awareness of how this works and associated costs and compliance requirements, this could also trigger a lot more inconvenience for the employer to large unforeseen tax costs to the individuals.”