IT HAS BECOME customary for employers to grant equity-based payments -- the most common of which is the stock option -- to their employees in their desire to continuously recognize and incentivize employees as partners in the success and growth of their companies.
Generally, a stock option is defined as a privilege that gives the employee the right, but not the obligation, to buy a share of stock at a stipulated exercise price on or after a specific date.
Employees are not normally granted full ownership of the stock option on grant date. They must meet the vesting requirements prescribed by the employer before they can exercise their options. At exercise date, employees purchase the shares of stock at the exercise price.
On Oct. 31, the BIR issued Revenue Memorandum Circular (RMC) 79-2014 to clarify the tax treatment of stock option plans and other option plans.
RMC 79-2014 defines a stock option as an option granted by a person, natural or juridical, to a person or entity entitling said person or entity to purchase shares of stocks of a corporation, which may or may not be the shares of stock of the grantor itself, at a specific price to be exercised at a specific date or period (referred to as Equity-settlement Option). Even if no actual shares of stock are delivered or transferred, a stock option may also occur in a situation where a person or entity is given the right to obtain or receive, at a specific date or period, the difference between the actual fair market value (FMV) of the shares and the fixed nominal value of the shares set at grant date (referred to as the Cash-settlement Option).
In an equity-settled option, the employees not only become part-owners of the company but they also acquire the shares at discounted price. The discount (or the “spread”) that the employee enjoys is not without tax consequence. Sadly though, the Tax Code does not contain provisions specific to stock options. Prior to the issuance of RMC 79-2014, tax authorities did not have clear guidelines for determining the nature of the benefit and imposing the due tax.
Many BIR rulings used the Tax Code provisions on compensation income as basis to rule that the discount is subject to income tax and withholding tax on wages (WTW), regardless of whether the recipient employee was a rank-and-file or a supervisory or managerial employee. This was despite the introduction of the fringe benefits tax (FBT) on certain fringe benefits received by supervisory and managerial employees. In other rulings, the BIR subjected stock options to the FBT.
In a 2012 ruling, the BIR considered the compensatory nature of the plan and ruled that the stock option income received by employees, regardless of classification, is subject to WTW. Subsequently, however, the BIR said in RMC No. 88-2012 that notwithstanding this particular 2012 ruling, stock option plans granted to managerial and supervisory employees, which qualify as fringe benefits, are subject to the FBT.
The new RMC No. 79-2014 seeks to clarify, hopefully once and for all, the tax treatment of stock option plans and other option plans.
According to RMC No.79-2014, the difference between (i) the book value or FMV, whichever is higher, of the shares at the time of exercise and (ii) the price fixed on the grant date in the case of equity-settled options; or, in the case of cash-settled options, the excess of (i) the actual market value of the stock at exercise date and (ii) the fixed nominal value of the shares set at grant date, that is paid by the grantor to the holder of the option, will be considered as:
(1) Additional compensation subject to income tax and WTW if the stock option is exercised by a rank-and-file employee;
(2) Fringe benefit subject to the FBT if the employee who exercises the option occupies a supervisory or managerial position; and
(3) Additional consideration for the services rendered or goods supplied by a supplier, subject to the relevant withholding tax at source and other applicable taxes, if the option was granted to a supplier of goods or services.
RMC No. 79-2014 also distinguishes between options granted with a price and without a price. It states that in the event the option was granted due to an employee-employer relationship, and where the grantor is the employer and the grantee is the employee, and no payment was received for the grant of the said option in the year the option was granted, the grantor cannot claim deductions for the grant of the stock option. However, if the option was granted for a price, the full price of the option shall be considered capital gains, and shall be taxed as such.
The RMC also clarifies that:
• The issuance of the option is subject to documentary stamp tax (DST) at the rate of P0.75 on each P200 (or 0.375%), or fractional part thereof, of the par value of the stock subject of the option, or in the case of stocks without par value, the amount equivalent to 25% of the DST paid upon the original issue of the stock subject to the option.
• The sale, barter, or exchange of stock options is treated as a sale, barter, or exchange of shares of stock not listed on the stock exchange. Thus, any grant of an option for consideration, or transfer of the option, is subject to the 5%-10% capital gains tax (CGT) rates. If the option was granted without any consideration, the cost basis of the option for purposes of computing capital gains shall be zero.
• If the option is transferred by the grantee/subsequent owner without any consideration, the same shall be treated as a donation of shares of stock subject to donor’s tax. The basis shall be the FMV of the option at the time of the donation.
Finally, RMC 79-2014 prescribes the following reportorial requirements:
Within 30 days from the grant of the option, the grantor shall submit to the Revenue District Office where it is registered a statement under oath indicating the following:
• Terms and Conditions of the stock option;
• Names, TINs, positions of the grantees;
• Book value, FMV, par value of the shares subject of the option at the grant date;
• Exercise price, exercise date and/or period;
• Taxes paid on the grant, if any; and
• Amount paid for the grant, if any.
When the stock options are exercised, the issuing corporation is required to file a report on or before the 10th day of the month following the month of exercise stating the following:
• Exercise Date;
• Names, Tax Identification Numbers (TINs), positions of those who exercised the option;
• Book value, FMV, par value of the shares subject to the option at the exercise date/s;
• Mode of settlement (i.e. cash, equity);
• Taxes withheld on the exercise, if any; and
• Fringe benefits tax paid, if any.
While the RMC discussed stock options in particular, it also stated that the tax treatment and reportorial requirements set forth in the RMC are rules of general applicability that may also be applied to options other than stock.
Marlynda I. Masangcay-Ceralde is a Tax Senior Director of SGV & Co.
source: Businessworld
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