Clarifications on Taxation of Equity-Based Compensation

When the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 13-2022, entitled “Income Tax Treatment of Equity-Based Compensation”, it came as a surprise to some employers, specifically those who treat the equity-based compensation of their employees as fringe benefits. Although the RR clearly stated that equity-based compensation of any kind is considered as compensation subject to withholding tax on compensation regardless of the employee’s position, questions still arose regarding the impact of the shift in tax reporting, including the timing of application and reportorial requirements.

To address such questions, the BIR issued Revenue Memorandum Circular (RMC) No. 143-2022, entitled “Clarifying Issues Relative to RR 13-2022 on Income Tax Treatment of Equity-Based Compensation,” on 9 November 2022.  

Following fifteen (15) days from the RMC’s issuance in the Manila Times article on 14 October, its effectivity date is on 29 October 2022. It was also stated that it will be applied prospectively, such that any equity-based compensation exercised or availed on or after 29 October shall be considered as compensation subject to withholding tax. 

The tax treatment at grant and sale or transfer remains the same as what is stated in RMC No. 79-14, but the difference now lies in the tax treatment at exercise. Contrary to what is stated in RMC No. 79-14, RMC No. 143-22 provides that there is no longer a distinction on the tax treatment of equity-based compensation of employees holding rank-and-file and occupying a supervisory or managerial position at the date of exercise. The tax treatments are as follows:

1. At grant, no Capital Gains Tax (CGT) and Documentary Stamp Tax (DST) shall be imposed.
2. At sale or transfer, the granted equity-based compensation with consideration will be subject to CGT. If it was granted with a price, the difference between the sales price and the option price is subject to CGT. However, if the same were granted without a price, the cost base of the option for computing the CGT is zero. On the other hand, if the transfer is without consideration, it shall be treated as a donation subject to donor’s tax.
3. At exercise, the difference between the book value/FMV and the grant price upon exercise of the equity-based compensation granted by employers to its employees (whether rank-and-file or occupying a supervisory or managerial position) will be considered an additional compensation subject to withholding tax on compensation. DST shall be imposed also on the actual issuance of shares of stock to the employee-grantee.

For equity-based compensation exercised on the below periods, employers shall take note of the following shift in tax reporting:  

With that said, employers who previously reported their equity-based compensation as subject to fringe benefits during the 1^st to 3^rd quarters of tax year 2022 will not be required to amend their previously filed tax returns. 

The reportorial requirement at grant remains the same as what is stated in RMC 79-14. On the other hand, there is a change in the requirement upon exercise of the equity-based compensation. The detailed reportorial requirements are as follows:

1. Within 30 days from the grant, the employer-grantor shall submit to the Revenue District Office (RDO) where it is registered a statement under oath indicating these details: Terms and Conditions of the stock option; Names, TINs, positions of the grantees; Book value, fair market value, 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.
2. On or before the 10th day of the month following the month of exercise, the employer-grantor shall file a report stating these details: Exercise Date; Names, TINs, positions of those who exercised the option; Book value, fair market value, par value of the shares subject of the option at the exercise date/s; Mode of settlement (i.e., cash, equity); and Taxes withheld on the exercise, if any.

Given that the BIR has now provided clarifications, taxpayers should take note of their impact on tax reporting. They should also ensure that they are compliant with the regulations and are strictly adhering to them, as any non-compliance will have a consequence and may result in applicable penalties.