Singapore tech workers face volatile share price, tax burden with stock options

AS SHARE prices of tech companies rallied over the last decade, generous stock grants and options dished out by companies led to windfalls for many employees. But with the recent slump in tech stocks, maximising gains from such instruments has become trickier.

Jane (not her real name), a Singapore-based employee of Amazon, experienced this first-hand when she was hit with a tax bill this year that was more than triple her monthly net salary. Even if paid in instalments over 12 months, the tax bill would eat up a quarter of her pay cheque every month.

The hefty bill arose because a portion of her restricted stock units (RSUs) or employee stock option plan (Esop) vested when Amazon’s share price was over the US$150 mark, close to its highest level in 2022.

She did not sell her Amazon shares then, and when she received her tax bill in May, the company’s share price had already fallen to just over US$100. It did not make sense to sell the shares for a lower value than what they were taxed at.

While she was able to pay her taxes with her savings, Jane was aware that some of her colleagues had to sell their shares at a poor price just to pay off the taxes. This is a double whammy for many expats, who are also “squeezed this year because of the increase in rent”, she said.

The situation came as a shock as “this was probably the first time in a very long time – potentially in a decade – when we were experiencing such a sharp (drop) in share price”, she added.

In April, Amazon announced that it would reduce RSU awards by a “small amount”, amid the uncertain economic conditions.

Last year, the share prices of tech giants such as Meta and Sea – all of which have a sizeable workforce in Singapore – sank after hitting all-time highs during the pandemic.

Meanwhile, the share prices of tech companies that debuted in the past two years, including Grab and GoTo, have been on a downward trend.

RSUs granted to tech workers typically vest over four years. Employees gain the right to purchase the stock awards for an exercise price.

Under Singapore’s regulations, gains from stock awards are taxed when the instrument is exercised, unless there are selling restrictions on the underlying shares.

Once the instrument is exercised and converted to shares, the taxable income that needs to be reported is typically “locked in”, noted Amit Majumder, head of South-east Asia, Australia and New Zealand at equity management platform Qapita.

During the bull market of the past decade, holding onto stock awards for the long term was a no-brainer for many tech workers. Even if the tax bill was high, they could simply offset it by selling a small portion of the vested shares, the value of which kept going up.

But uncertainty in the economic environment has complicated plans for tech workers to cash out on vested stock. Many now need to balance potential gains with downside risks and tax implications.

Amazon employees like Jane are not alone. John (not his real name), a Singapore-based Grab employee, never gave his stock compensation much thought until he received a tax bill this year that stood at about 1.7 times his monthly salary. Meanwhile, Grab’s share price had gone down to almost half of what it was in early 2022.

Other Grab employees had raised concerns about the size of their tax bills during the company’s town hall, sources told The Business Times. In response, Grab offered salary advances last year to employees who needed the cash flow to pay their tax bills, BT understands.

John said: “If RSUs are a big chunk of your overall compensation, then it actually does hit you quite heavily with the tax bill… This year, I’ve basically planned to sell a bunch of shares just so I can cover the tax bill.”

Employees face another challenge – the selling restrictions imposed during quarterly earnings, which limit when they can cash out. John hasn’t been so lucky. In Grab’s case, “whenever we’re out of a blackout period, the share price for some reason always seems to dip”, he said.

More education

Industry players that BT spoke to said that more employee education is needed on how stock option plans work, so that they can plan ahead better.

“There are, of course, employees who are upset that they paid tax based on the higher valuation, now that the shares have fallen in price,” said Ong Ken Loon, head of tax and private client services at law firm Drew and Napier.

However, the tax bill should not be unexpected, as long as employees do their homework. “For employees receiving a significant component of their remuneration in Esop, it is usually a good idea to obtain professional advice before signing on the dotted line,” she added.

Majumder of Qapita said that employees could consider joining companies with longer exercise windows, so that they have more flexibility.

He also highlighted that expats need to be aware of the “deemed exercise rule”. It taxes the hypothetical gain on all the outstanding stock awards, both vested and unvested, when a foreigner ceases employment in Singapore.

The rule applies even to those on overseas work assignments with their company for periods longer than three months, he said.

This can put employees in a “tricky situation”, particularly if the company is unlisted, or if the options are unvested, which would mean that the equity cannot be easily liquidated for cash.

Majumder reckons that expats should work with their companies to consider alternative award instruments and structures to manage the timing of taxation.

In this tech winter, it is not just employees who have grown more cautious on Esops and RSUs, but the tech companies themselves as well.

Ng Zhao Yang, a local principal at law firm Baker McKenzie Wong & Leow, observed that Esop schemes were more generous in the past, but have now become more targeted, such as by being tied to key performance indicators.

He has also come across companies that eschew Esop for unorthodox instruments, although such cases remain few. For instance, a company that designs web games was looking into partly remunerating its employees with in-game currency that could be cashed out to crypto, and eventually, cash.

That said, such novel structures always come with a caveat. “The funkier you get, the more it requires that employees have faith in the company,” said Ng.