Title
Tax rules on stock option plans
Law
Bir Revenue Memorandum Circular No. 79-2014
Decision Date
Oct 31, 2014
BIR Revenue Memorandum Circular No. 79-2014 clarifies the tax treatment of stock option plans, detailing the tax implications for grants, sales, transfers, and exercises of both equity-settlement and cash-settlement options, along with associated reportorial requirements.
tax treatment
stock options
equity

Scope: stock options and other options

  • A “stock option” is an option granted by a person—natural or juridical—to a person or entity entitling the holder to purchase shares of stock of a corporation at a specific price to be exercised at a specific date or period.
  • A stock option can be an Equity-settlement Option, where the grant results in the right to obtain the difference between the fair market value of the shares and the fixed nominal value set in the option, at a specific date or period, even if no shares are actually transferred.
  • A stock option can also be a Cash-settlement Option, where no actual shares are required to be delivered and the holder receives the difference between market value at the exercise date and the exercise price.
  • Stock options are treated as “shares of stocks” under Section 22(L) of the National Internal Revenue Code of 1997 (NIRC), as amended.
  • The rules on tax treatment and reportorial requirements apply not only to stock options but also to options other than stock.
  • The Circular enjoins all concerned revenue officials and employees to give the Circular wide publicity.

Equity-settlement option: grant taxation

  • Where an option is granted due to an employee-employer relationship, with the grantor as employer and grantee as employee, and the employee receives no payment for the option, the grantor cannot claim deductions for the grant of the stock option in the year the option was granted.
  • Where the option is granted for a price under an employer-employee relationship, the full price of the option is considered capital gains and is taxed as such.
  • Upon issuance of the option, a documentary stamp tax applies at Seventy-five centavos (P0.75) on each Two Hundred pesos (P200), or fractional part thereof, of the par value of the stock subject of the option.
  • For stock without par value, documentary stamp tax is computed as twenty-five percent (25%) of the documentary stamp tax paid upon the original issue of the stock subject of the option.
  • The documentary stamp tax computation is anchored on Section 175 of the National Internal Revenue Code of 1997, as amended.

Sale or transfer: capital gains and donation

  • 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.
  • Any grant of an option for consideration or any transfer of the option is subject to capital gains tax imposed under Section 24(C) of the NIRC.
  • If the option was granted without any consideration, the cost base of the option for computing capital gains is zero.
  • If the option is transferred without consideration by the grantee/subsequent owner, the transfer is treated as a donation of the shares of stock subject to donor’s tax.
  • In the donation scenario, the basis for donor’s tax is the fair market value of the option at the time of the donation.

Exercise of option: equity-settled rules

  • In an equity-settled option, the grantee/subsequent owner pays the exercise price to the grantor, and the grantor must deliver the stocks to the option holder.
  • For options involving the employer’s own shares (or shares it owns) exercised by a rank-and-file employee, the employer must recognize an additional compensation equal to the difference between the book value/fair market value, whichever is higher, at the time of exercise and the price fixed on the grant date.
  • That additional compensation for a rank-and-file employee is subjected to income tax and consequently to withholding tax on compensation.
  • For options involving the employer’s own shares exercised by an employee occupying a supervisory or managerial position, the same difference between book value/fair market value (whichever is higher) at exercise and the grant-date fixed price is treated as a fringe benefit subject to fringe benefit tax under Section 33 of the NIRC.
  • If the option is granted to a supplier of goods or services, the difference between book value/fair market value (whichever is higher) at exercise and the grant-date fixed price is recognized as additional consideration for goods/services and is subject to the relevant withholding tax at source and other applicable taxes.
  • If the option is granted to a person (natural or juridical) who is not an employee and is not a supplier of goods or services to the grantor, the difference between book value/fair market value (whichever is higher) at exercise and the grant-date fixed price is treated as a donation subject to donor’s tax, among others.

Cash-settlement options: treatment

  • The equity-settlement exercise rules also apply to cash-settlement options.
  • Cash-settled options do not require the actual delivery of stocks.
  • In cash-settlement options, the market value of the stock at the exercise date is compared with the exercise price.
  • The difference, if favorable, is paid by the grantor to the holder of the option.

Reportorial requirements: grant and exercise

  • Within 30 days from the grant of the option, the issuing corporation must submit to the Revenue District Office where it is registered a statement under oath showing:
    • the terms and conditions of the stock option;
    • the names, TINs, and positions of the grantees;
    • the book value, fair market value, and par value of the shares subject of the option at the grant date;
    • the exercise price, exercise date, and/or period;
    • the taxes paid on the grant, if any; and
    • the amount paid for the grant, if any.
  • During the exercise period, the issuing corporation must file a report on or before the 10th day of the month following the month of exercise containing:
    • the exercise date;
    • the names, TINs, and positions of those who exercised the option;
    • the book value, fair market value, and par value of the shares subject of the option at the exercise date/s;
    • the mode of settlement (i.e., cash, equity);
    • taxes withheld on the exercise, if any; and
    • fringe benefits tax paid, if any.

Tax characterization and general application

  • Stock options are treated as shares of stocks under Section 22(L) of the NIRC.
  • The Circular establishes that the grant, sale, transfer, or exercise of options may result to taxable events, and the tax rules apply based on the stage and nature of the option.
  • Revenue officials and employees must apply the Circular as a matter of general applicability to options other than stock.
  • All concerned revenue officials and employees are instructed to ensure wide publicity of the Circular.

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