Philippines: Clarifications on taxation of equity-based compensation
Given the clarifications, taxpayers need to take note of their implications on tax reporting
Given clarifications, taxpayers need to take note of their implications on tax reporting
The Bureau of Internal Revenue (BIR) issued (on 9 November 2022) Revenue Memorandum Circular (RMC) No. 143-2022, “Clarifying Issues Relative to RR 13-2022 on Income Tax Treatment of Equity-Based Compensation,” to address questions regarding the tax treatment of equity-based compensation.
- At grant, no capital gains tax (CGT) and documentary stamp tax (DST) is imposed.
- 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.
- 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 would be imposed also on the actual issuance of shares of stock to the employee-grantee.
Filing of tax returns
For equity-based compensation exercised on the below periods, employers need to take note of the following shift in tax reporting:
Starting 29 October 2022
Prior to 29 October 2022
(For equity-based compensation exercised by employees occupying managerial or supervisory positions)
BIR Form No. 1601-C (Monthly remittance return of income taxes withheld)
BIR Form No. 1603Q (Quarterly remittance return of final income taxes withheld on fringe benefits paid-to employees other than rank and file):
BIR Form No. 1604-C (Annual information return of income taxes withheld on compensation)
BIR Form No. 1604-F (Annual information return on income payments subjected to final withholding taxes)
BIR Form No.2316 (Certificate of compensation payment/ tax withheld).
BIR Form No. 2306 (Certificate of final tax withheld at source)
Employers who previously reported their equity-based compensation as subject to fringe benefits during the 1st to 3rd quarters of tax year 2022 will not be required to amend their previously filed tax returns.
The reporting requirement at grant remains the same. 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:
- Within 30 days from the grant, the employer-grantor must submit to the Revenue District Office (RDO) when it is registered a statement under oath indicating the following 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
- Amount paid for the grant if any
- On or before the 10th day of the month following the month of exercise, the employer-grantor must file a report stating the following 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)
- Taxes withheld on the exercise, if any
Given that the BIR has now provided clarifications, taxpayers need to take note of their implications on tax reporting. They also need to provide 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.
Read a November 2022 report prepared by the KPMG member firm in the Philippines
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