RMC No. 79-2014: Clarifies the tax treatment of stock option plans and other option plans

Summary

RMC No. 79-2014 clarifies the tax treatment of stock option plans and other option plans, including the taxes due on grant, transfer and exercise of options.

Key points

1. Nature and grant. Stock options are shares of stock under Section 22(L) of the NIRC and are taxable as such. If an employer grants an option to an employee for no payment, the grantor cannot claim a deduction in the year of grant; if the option is granted for a price, the full price is capital gains.
2. Documentary Stamp Tax. On issuance, the option is subject to Documentary Stamp Tax of P 0.75 on each P 200.00, or fractional part, of the par value of the stock. For no-par stock, the tax is 25% of the Documentary Stamp Tax paid on the original issue, under Section 175 of the NIRC.
3. Capital gains and donor’s tax. A grant for consideration, or a transfer of the option, is subject to Capital Gains Tax, and the cost base is zero if the option was granted for no consideration. A transfer without consideration is treated as a donation of shares subject to Donor’s Tax, based on the option’s fair market value at donation.
4. Tax on exercise. For a rank-and-file employee, the difference between the higher of book value or fair market value at exercise and the grant-date price is additional compensation subject to income tax and withholding tax on compensation. For a supervisory or managerial employee, it is a fringe benefit subject to Fringe Benefit Tax.
5. Suppliers and other grantees. For a supplier of goods or services, the difference is additional consideration subject to the relevant withholding tax and other applicable taxes. For a grantee who is neither an employee nor a supplier, it is a donation subject to Donor’s Tax, among others. The same rules apply to cash-settlement options.
6. Reports. The issuing corporation files a sworn statement with its Revenue District Office within 30 days from the grant, with the details listed in the circular. During the exercise period, it files a report on or before the 10th day of the month following the month of exercise.

Who is affected

• Issuing corporations
• Employees and grantees of stock options
• Suppliers of goods or services granted options

Deadlines and effectivity

• Sworn statement: within 30 days from grant of the option
• Exercise report: on or before the 10th day of the month following exercise

Summary by Tax Resources PH. It is not a substitute for the full text of the issuance or professional advice.