US multinational entities face several income tax issues involving stock-based compensation for non-US-based employees. Income tax laws in each country are unique and may provide for tax deductions that differ from those permitted under US tax law. This may result in a different income tax accounting treatment than for a stock-based compensation award issued to a US employee.

A non-US subsidiary generally must bear the cost of a stock-based compensation award in order to be eligible for a local corporate income tax deduction. If the costs of a stock-based compensation award are recharged to the non-US subsidiary in return for cash, the recharge should be treated as the parent entity’s issuance of capital stock in exchange for cash or property, and generally should not result in a taxable transaction in the US.

When a US multinational entity issues stock-based compensation to its employees in non-US subsidiaries and it expects to receive a tax deduction in the local jurisdiction, the non-US subsidiary should record a deferred tax asset, based on the local tax rate, as it recognizes book compensation cost over the requisite service period. At the time of settlement, the non-US subsidiary would determine its excess tax benefit or deficiency based on the local jurisdiction tax deduction and reflect that adjustment in income tax expense.

Stock-based compensation deductions incurred by non-US subsidiaries also may have an indirect effect on the ultimate US taxes paid by the US parent entity. For example, amounts that are charged back to the US parent under transfer pricing agreements that are determined on a "cost plus" basis might include a deduction for stock-based compensation, thereby providing the US parent with a greater tax deduction than would have been the case absent the award. Such indirect tax effects should not be considered for purposes of either (1) establishing the deferred tax asset over the requisite service period or (2) measuring the excess tax benefit or deficiency at settlement of the award.