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Stock-based compensation

Applies
FY2024 onwards
Reviewed
Rule
P2-SBC-2024.1
By

Can the tax deduction replace stock-based compensation expense?

Yes, by five-year election. If an option lapses unexercised, the amount already deducted is added back to GloBE Income in that year.

Per GloBE Model Rules (Pillar Two), December 2021, Article 3.2.2, stock-based compensation election

At the election of the Filing Constituent Entity, a Constituent Entity may substitute the amount allowed as a deduction in the computation of its taxable income in its location for the amount expensed in its financial accounts for a cost or expense that was paid with stock-based compensation. If the expense arises in connection with an option that expires without exercise, the total amount previously deducted is included in GloBE Income or Loss for the Fiscal Year in which the option expires. The election is a Five-Year Election and must be applied consistently to the stock-based compensation of all Constituent Entities located in the same jurisdiction for the year in which it is made and all subsequent Fiscal Years. If it is made after some of the compensation has been recorded in the financial accounts, the excess of the cumulative amount allowed as an expense in previous Fiscal Years over the cumulative amount that would have been allowed had the election been in place is included in GloBE Income or Loss for that year.

Where local tax deducts a share award at its value on exercise, a rising share price makes the tax deduction larger than the accounting expense. The election removes that permanent difference from the Effective Tax Rate.

An election by jurisdiction, with three recaptures

Without the election

The accounting expense stands, and deferred tax on it is taken into account under Article 4.4.

With the election

  • The accounting expense for the year is taken out
  • The amount allowed as a deduction in computing taxable income is put in
  • Amounts previously deducted for options that expire without exercise are included as income
  • In the first year, any excess of the expense already allowed over what the election would have allowed is included

The whole jurisdiction, for five years

It covers the stock-based compensation of every Constituent Entity located in the jurisdiction, from the election year onward, until revoked. It can be made for some jurisdictions and not others.

On revocation

The amount deducted under the election in excess of the accounting expense accrued is included in the revocation year, for compensation not yet paid. Awards already exercised are not disturbed. This recapture is not computed here.

Who takes the deduction

The Constituent Entity that received the services, and only if local tax allows it a deduction — not the entity whose shares are used. Where the expense is held only at consolidated level, it must be reliably and consistently traceable to the entity.

Order of testing

  1. 1

    Inputs requiring your determination

    Every input the computation reaches must be supplied; nil is entered, not left blank.

  2. 2

    The Five-Year Election

    Without it no adjustment; with it the tax deduction replaces the accounting expense.

Examples

Illustrative scenarios — ours, not the authority’s — each computed live by this rule. Change any fact and the outcome is the rule’s, not a hand-written answer.

Options exercised after a rise in the share price

EUR 10 million expensed in the accounts and EUR 25 million deductible on exercise, with the election in force.

Computed

An adjustment of (EUR 15,000,000) is made to Financial Accounting Net Income or Loss as computed (Article 3.2.2): the election substitutes the tax deduction of EUR 25,000,000 for the accounting expense of EUR 10,000,000. The election binds every Constituent Entity in the jurisdiction for the year and all later years; a recapture on revocation is not computed here. Deferred tax on the compensation is recomputed on the substituted amount. Based on the figures you supplied.

Workings

Accounting expense taken outArticle 3.2.2 — the amount expensed in the financial accounts, as supplied
EUR 10,000,000
Tax deduction substitutedArticle 3.2.2 — the amount allowed in computing taxable income, as supplied
(EUR 25,000,000)
Recapture on options expired without exerciseArticle 3.2.2 — the total previously deducted, included in the year the option expires
EUR 0
Adjustment to Financial Accounting Net Income or LossArticle 3.2.2 — a negative figure is a larger deduction than the accounts gave
(EUR 15,000,000)

Decided by the five-year election

No election

The same awards with no election made.

Computed

No adjustment is made under Article 3.2.2 as computed: the substitution of the tax deduction for the accounting expense is available only at the election of the Filing Constituent Entity, and you have indicated that no election is in force. The stock-based compensation expensed in the financial accounts stands in GloBE Income or Loss. Based on what you supplied.

Decided by the five-year election

An election made part-way through an award

First year of the election: EUR 30 million already allowed in earlier years against EUR 12 million that the election would have allowed.

Computed

An adjustment of EUR 24,000,000 is made to Financial Accounting Net Income or Loss as computed (Article 3.2.2): the election substitutes the tax deduction of EUR 4,000,000 for the accounting expense of EUR 10,000,000, and EUR 18,000,000 is recaptured because the election was made after some of the expense had been allowed. The election binds every Constituent Entity in the jurisdiction for the year and all later years; a recapture on revocation is not computed here. Deferred tax on the compensation is recomputed on the substituted amount. Based on the figures you supplied.

Workings

Accounting expense taken outArticle 3.2.2 — the amount expensed in the financial accounts, as supplied
EUR 10,000,000
Tax deduction substitutedArticle 3.2.2 — the amount allowed in computing taxable income, as supplied
(EUR 4,000,000)
Recapture on options expired without exerciseArticle 3.2.2 — the total previously deducted, included in the year the option expires
EUR 0
Cumulative expense previously allowedArticle 3.2.2 — in GloBE Income or Loss of previous Fiscal Years
EUR 30,000,000
Cumulative expense had the election appliedArticle 3.2.2 — as supplied
EUR 12,000,000
Recapture in the first year of the electionArticle 3.2.2 — the excess of the first over the second, not below nil
EUR 18,000,000
Adjustment to Financial Accounting Net Income or LossArticle 3.2.2 — a negative figure is a larger deduction than the accounts gave
EUR 24,000,000

Decided by the five-year election

Options lapse unexercised

EUR 8 million previously deducted on options that expired in the year.

Computed

An adjustment of EUR 8,000,000 is made to Financial Accounting Net Income or Loss as computed (Article 3.2.2): the election substitutes the tax deduction of EUR 0 for the accounting expense of EUR 0, and EUR 8,000,000 previously deducted for options that expired without exercise is included as income. The election binds every Constituent Entity in the jurisdiction for the year and all later years; a recapture on revocation is not computed here. Deferred tax on the compensation is recomputed on the substituted amount. Based on the figures you supplied.

Workings

Accounting expense taken outArticle 3.2.2 — the amount expensed in the financial accounts, as supplied
EUR 0
Tax deduction substitutedArticle 3.2.2 — the amount allowed in computing taxable income, as supplied
EUR 0
Recapture on options expired without exerciseArticle 3.2.2 — the total previously deducted, included in the year the option expires
EUR 8,000,000
Adjustment to Financial Accounting Net Income or LossArticle 3.2.2 — a negative figure is a larger deduction than the accounts gave
EUR 8,000,000

Decided by the five-year election

Try it

Supply the facts and this rule computes the outcome in your browser, live. Leave a determination undecided and it blocks the result — it is never read as a no.

Not computed yet

1 input still need your determination:

  • Is a Five-Year Election under Article 3.2.2 in force for the jurisdiction? It is made by the Filing Constituent Entity and covers the stock-based compensation of every Constituent Entity located there.

Computed in your browser from the figures you supply. Nothing is sent anywhere, and the result is a computation against a rule — reference, not tax advice.

Sources

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Reference, not tax advice.

Pankaj Agarwal — Tax Technology Leader