INTM440220 | Transfer pricing: Types of transactions: share options: summary of treatment

Treatment of equity settled transactions

If the Provider of the share plan facility (see INTM440210) is the company whose shares are being used in the plan, typically, there are two elements comprised in the facility being provided:

• An element that is the provision to the employees of the Employer of shares or share options. Any payment for this element will usually have to be recognised within investments in the Provider’s accounts. If so, this amount will not appear in the Provider’s profit and loss account or need to be included in the Provider’s tax calculation (this is referred to below as the ‘Share Award’); and

• An element that comprises administration services involved in the operation of the share plan. Any payment for this element should be reflected in the taxable income of the Provider (this element is referred to below as the ‘Administration Services’).

Where a payment from the Employer to the Provider is imputed under transfer pricing rules, the tax treatment of the imputed receipt is exactly the same as that of an actual receipt.

The value of the whole facility for transfer pricing purposes should reflect what the Provider would expect to receive for providing the overall facility to a third party and what the Employer would expect to pay to obtain the facility from a third party. Looking at each element:

• A company providing a Share based payment for a third party would expect to receive the value of the share awards (eg share options) provided, and the Employer would expect to have to pay that amount to a third party, and;

• A company providing share plan administration services would expect to charge an arm’s length price for these services, and the Employer would expect to pay that price to obtain such services.

In general terms, the value of a facility as a whole may differ from the sum of the values of its parts. However in this particular case there is no reason why the Provider would expect to receive more or less than the sum of the value of the Share Award and the Administration Services provided, or why the Employer would expect to pay more or less than this amount. (Note: “value” is not the same as cost; for example, typically, the value of the administration services will be their cost plus a profit margin.)

The corporate tax deductibility of costs incurred by the Provider in providing the share incentive plan will fall to be considered under the normal corporation tax rules. The costs relating to administration services elements will normally be an allowable deduction and CTA09/Part 12 does not affect this.

The allowable amount for transfer pricing purposes would follow the OECD Guidelines on intra-group services, and the appropriate transfer pricing method should be used.

CTA09/Part 12 sets out how relief is given for tax purposes for the costs of providing the shares. CTA09/Part 12 sets out who can claim the relief, the period in which relief will be available and the amount of the relief.

In a group situation it will normally be the Employer who will be able to claim (in its CT computation) any statutory deduction available under CTA09/Par12

If the Employer obtains a tax deduction (whether in the UK or abroad) for a payment that is out of line with this guidance (eg if the Employer a makes a payment in excess of the fair value of options at the time of grant, or without adjustment to reflect the outcome of vesting conditions), then for payments up to 31 December 2016 the potential application of the arbitrage receipts rule in TIOPA 2010/S249 should be considered (see INTM595500 onwards).

Accountancy background

Under IFRS2 the reporting entity will typically measure the value of the services received in return for share-based payment by reference to the “fair value” of the share-based payment calculated using the detailed guidance Appendix B of IFRS2.FRS 102 has broadly similar requirements.

When applying transfer pricing rules, if it becomes necessary to calculate the value of the Share Award component of the overall facility provided to the Employer then the approach in the relevant accounting standard should be used for this purpose also (but see paragraphs 24 and 25 below).