BIR gives definitive guidelines for equity-based compensation income tax treatment

Equity-based compensations are a boon for any hardworking employee. These compensations give dutiful employees access to incentives based on their performance, with benefits including shares of stock owned by the employer. New regulations have been implemented due pursuant to the provisions of Sections 244 and 245 of the National Internal Revenue Code (NIRC), as amended.

The Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) 13-2022 on October 7, 2022, to give more definitive guidelines, procedures, and requirements for the correct income tax treatment needed for granting any equity-based compensation.  

Updated definitions

The RR begins by defining a few terms utilised in its recent guidelines; these are:

1. Stock Options – stock options merely entitle the employee to purchase shares at a future date. Thus, the employees do not become shareholders unless the options are exercised. The period between the grant of stock options and the date when they become exercisable represents the vesting period.
2. Restricted share awards – the award may or may not be subject to a vesting period, as specified in the grant. If the subject to a vesting period, any unvested shares shall be forfeited if the employee is terminated.
3. Stock Appreciation Rights (SARs) – the terms and conditions are like 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.
4. Restricted Stock units – as with restricted shares, stock units may or may not be subject to a vesting pool, as 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. 

Guidelines on Income Tax Treatment and Equities  

The RR then defines gross income based on the amendments to Section 32 (A) of NIRC 1997. Where it’s described as being taken from any source, including compensation for services in any paid form, which includes but is not limited to, fees, salaries, wages, commissions, and similar items. The RR clarifies that implemented compensations include payment in some medium other than money.

The RR then highlights section 2.78.1 from previous RR No. 2-98, which, as amended, is as follows:

“Section 2.78.1 of 2.78.1 Withholding Tax on Compensation Income –
(A) Compensation Income Defined.
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(1) Compensation paid in kind. Compensation may be paid in money or in some other medium other than money, as for example, stocks, bonds or other forms of property. If services are paid for in a medium other than money, the fair market value of the thing taken is the payment to be included as compensation subject to withholding. If the services are rendered at a stipulated price, in the absence of evidence to the contrary, such price will be presumed to the fair market value of the remuneration received. If the corporation transfers to its employees its own stock as renumeration for services rendered by the employee the amount of such remuneration is the fair market value of the stock at the time the services were rendered.”

The RR notes how equity grants under the applicable equity schemes of the owner lead towards realized benefits to employees. With their rendered services being used as the source for their equity grants.

Additionally, the RR highlights that equity grants under equity plans are taken as compensation to be taxed if exercised or availed by employees due to amendments to Section 32 of the NIRC and guidelines of RR 2-98. This taxation is applicable regardless of employee’s status, be they rank-and-file or in a supervisory/managerial position. 

The RR notes that all applicable issuances don’t make any distinctions so that the BIR can apply the tax implication on all forms of compensation, including equity-based compensation.

Other Amendments

If in the case, certain provisions within the regulations are declared invalid by a competent court, the other regulations present in the RR will still be in force and in effect. Each regulation is unaffected by the invalidity of the other.

It must be noted that any previous provisions, regulations, rulings, orders, or circulars given by Revenue Memorandum Circular 079-2014 on October 31, 2014, are hereby revoked, repealed, or amended if they are inconsistent with the regulations made in this RR, all announcements made in RR 13-2022 must be maintained/adopted accordingly.

All regulations prescribed in this RR will take effect on October 22, 2022, fifteen (15) days following its publication in the Official Gazette or a generally circularised newspaper.