Background
Equity-based compensation covers all types of employee equity schemes that come in different forms such as stock options, restricted stock units, stock appreciation rights, and restricted share awards, which may or may not pertain to the shares of stock of the grantor itself, but which all have the common feature of being granted to existing employees of the grantor as a performance incentive for services rendered by the employees and are typically dependent on performance, outstanding business achievements and exemplary organizational, technical or business accomplishments.
Definitions
RR No. 13-2022 provides the following definitions of equity awards:
- Stock options – Stock options merely entitle the employee to purchase shares at a future date. Thus, unless the options are exercised, the employees do not become shareholders. The period between the grant of stock options and the date when they become exercisable represents the vesting period.
- Restricted share awards – The award may or may not be subject to a vesting period, as may be specified in the grant. If subject to a vesting period, any unvested shares shall be forfeited if employment is terminated.
- Stock Appreciation Rights (SARs) – The terms and conditions are similar to stock options. However, under the SARs, the optionee may receive (a) shares, (b) cash or (c) a combination of shares and cash, as determined by the grantor.
- Restricted Stock units – As with restricted shares, stock units may or may not be subject to a vesting period, as will be specified in the grant. Settlement of vested stock units may be made in the form of (a) shares, (b) cash or (c) a combination of shares and cash.
Income tax treatment
Section 32 (A) of the NIRC, as amended, defines gross income as all income derived from whatever source, including compensation for services in whatever form paid, including but not limited to, fees, salaries, wages, commissions and similar items. As implemented, compensation includes payment in a medium other than money.
According to RR No. 13-2022, the equity grants under the applicable equity schemes of the grantor will give rise to a realized benefit on the part of the grantee-employees. The equity grants to be awarded to the employees are for the services being rendered by the employees.
Consequently, the equity grants under the equity plans, once exercised or availed of by the grantee-employees, are considered compensation to be taxed as such under Section 32 of the NIRC. This rule will be applied regardless of the employment status of the grantee-employee who could either be rank-and-file or occupying a supervisory or managerial position, considering that Section 32 of the NIRC and all applicable issuances do not make a distinction for purposes of applying the tax implication on all forms of compensation, including equity-based compensation. This is a departure from the BIR's previous position that equity-based awards received by non-rank-and-file employees are subject to fringe benefits tax.
The BIR expressly declared that the provisions of Revenue Memorandum Circular (RMC) No. 079-2014 dated 31 October 2014 and any regulations, rulings or orders, circulars, or portions thereof that are inconsistent with the provisions of RR No. 13-2022 are revoked, repealed or amended accordingly.
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