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Philippines Clarifies Stock Option Tax Treatment

by Mary Swire,Tax-News.com, Hong Kong

07 November 2014


In Revenue Memorandum Circular 79-2014, the Bureau of Internal Revenue has clarified the treatment of stock option plans under the Filipino tax code.

Defining a "stock option" as an option granted to an entity or an individual entitling the purchase of shares in a corporation at a specific price (equity settlement option), or a right to the difference between the fair market value and the nominal value of the shares set out in the grant of the option (cash settlement option), at a specific date or period, the RMC confirms that "the grant, sale, transfer, or exercise of the option may result in taxable events."

If the option was granted under an employee-employer relationship, and no payment was received for the grant of the option, an employer cannot claim deductions for the grant of the stock option, but, "if the option was granted for a price, the full price of the option shall be considered capital gains, and shall be taxed as such."

Upon the issuance of the option, it is also subject to documentary stamp tax on the par value of the stock subject to the option.

The sale, barter, or exchange of stock options is also considered to be subject to capital gains tax. If the option was granted without any consideration, the cost base of the option for the purpose of computing capital gains will be zero.

If the option is transferred by the grantee without any consideration, it will be treated as a donation of shares, subject to donor's tax. The basis will be the fair market value of the option at the time of the donation.

In exercising an equity settlement option, the additional value of a "rank-and-file" employee's stock option will be considered as compensation and will be subject to income tax, while the additional value of a supervisor or manager's stock option will be treated as fringe benefit, subject to fringe benefit tax.

On the other hand, the additional value of an equity settlement stock option granted to a supplier will be considered additional payment for services rendered or goods supplied and will be subject to withholding tax at source, while that of a stock option granted to a non-supplier and non-employee will be treated as a donation subject to donor's tax.

The rules on equity settlement options, the RMC also confirmed, also apply to cash-settlement options, although, as no stocks are delivered under the exercise of the latter, the market value of the stock at the exercise date is compared to the option's exercise price to ascertain the additional value.

TAGS: individuals | capital gains tax (CGT) | tax | investment | business | revenue guidance | fringe benefits | employees | equity investment | Philippines | withholding tax | gift tax | individual income tax | business investment

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