SHARE-BASED payments have become prevalent in the corporate world, especially for publicly listed companies. One of the most common share-based payments is the stock option plan (SOP) or stock-based compensation for employees. Just recently, the Securities and Exchange Commission (SEC) allowed a publicly listed company to exercise its employees’ SOP amounting to as much as P7 billion.
Stock-based compensation has been acknowledged as an effective means of rewarding and motivating employees, attracting and retaining the best talent, and enhancing employee commitment and performance.
Stock plans could take various forms. In an SOP, the employee is given the option to purchase a specific number of shares on specified dates at a specified price which is lower than the market value of the stocks.
There are three important events in SOP -- the grant date, the vesting period and the exercise date
The grant date is the date on which the employee is given a stock option by the employer. The vesting period is the time that an employee must wait in order to be able to exercise employee stock options. The exercise date is when the employee/option holder notifies the company that he or she would like to buy the stock at the strike price/option price indicated in the SOP.
In 2012, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular No. (RMC) 88-12, which provides clarifications on the tax treatment of SOPs. Recently, RMC 79-14 was issued to further clarify the taxability of SOPs and other option plans.
RMC 79-14 is more detailed than RMC 88-12. The former contains the tax treatment from the grant to the exercise of a stock option. It even discusses the tax implications of the sale or transfer of options and the reportorial requirements. The tax implications on the subsequent sale of the shares of stock obtained from the exercise of the option were not discussed in RMC 79-14 but these were covered in RMC 88-12.
While RMC 79-14 contains more discussions on the tax treatment of stock options, there are still some issues that must be clarified.
Based on the new RMC, if the option was granted by the employer to its employees and no payment was received for the grant of the said option, the grantor/employer cannot claim a deduction on grant date. This is consistent with the provisions of the Tax Code since at the time of grant, the actual benefit of the employees cannot be determined yet until the employee exercises the option. Therefore, no actual expense is incurred yet by the employer upon grant of the option.
However, it is also provided under the said RMC that if the option is granted for a price, the full price of the option shall be considered capital gains and shall be taxed at such. The new RMC does not provide exceptions on this. Hence, it seems that the price received for the option shall be taxable to the grantor, regardless of the conditions or circumstances. There are various instances, however, where the shares of stock to be issued will come from the unissued shares of the grantor. Would it be proper to treat the price received as taxable income or part of the capital of the grantor? If the price received is refundable upon fulfillment of the conditions, when will you consider the taxable event -- upon receipt or upon the occurrence of the condition? These are some of the issues that I believe should be further clarified.
Moreover, based on the new RMC, upon issuance of the option, the same is subject to documentary stamp tax (DST) provided under Section 175 of the 1997 Tax Code, as amended. It is not clear, however, if the imposition of DST refers only to the option granted for a price. Please note that the grant date is normally different from the exercise date and the grantee may or may not exercise the option. Hence, the sale/transfer or subscription (in case of original issuance) of shares of stock will occur only upon exercise and not upon issuance of the option. Accordingly, DST on shares of stocks subject of the option should be imposed upon the exercise. Again, this is one of the areas that needs further clarification.
On the other hand, in the event that the option is transferable (although in most cases, options are non-transferable especially in the case of employee stock option plan), the RMC 79-14 clarified that the sale, barter or exchange of the stock option is subject to capital gains tax. If the option was granted without any consideration, the cost base of the option for purposes of computing the capital gains shall be zero. Moreover, if the option is transferred by the grantee/subsequent owner without any consideration, the same shall be treated as a donation subject to 30% donor’s tax. The basis shall be the fair value of the option at the time of the donation.
Upon exercise of the option, the benefits (i.e., the difference between the book value or fair market value, whichever is higher, at the time of the exercise of the option and the option price) shall be subject to withholding tax on compensation if provided to rank-and-file employees. If such benefit is granted to supervisory and managerial employees, it will be subject to FBT. The same rules apply in case of Cash-settlement Option. In a cash-settlement option, the actual delivery of the stock is not required. Rather, the difference between the market value of the stocks at the exercise date and the option price is paid by the grantor to the holder of the option.
RMC 79-14, however, does not provide for the timing of the deductibility of the benefits given to employees. But in BIR Ruling 119-12, it was found that the expenses incurred by the employer pertaining to the difference between the exercise price (i.e., price fixed on the grant date) and the market value of the shares when its employees exercised their rights on stock options, are considered ordinary and necessary business expenses deductible for purposes of computing the employer’s taxable income.
On the other hand, the RMC also provides that in the event that the option was granted to a supplier of goods or services, the difference between the book value and fair market value -- whichever is higher at the time of the exercise and the price fixed on grant date -- shall be recognized as additional consideration for the purchases. Hence, the same is subject to the relevant withholding tax at source and other taxes applicable.
The issues cited in are just some of the concerns on the taxation of option. There are still various issues that must be clarified, and in some cases, the BIR’s positions must be re-evaluated. A clear position and simple guidelines in implementing to tax laws will help in ensuring compliance and administering tax collections. As former US Senator Max Baucus pointed out, “tax complexity itself is a kind of tax.”
Edward L. Roguel is a Partner with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.
source: Businessworld
No comments:
Post a Comment