Employee Stock Option Taxation in the Philippines

Stock Option Definition

Employee Stock Options TaxationA stock option is a contract which gives the holder the right but not the obligation to buy shares in a corporation at a predetermined price on or before a specified date. Stock options may be purchased or granted “Equity-settlement Option” (usually to employees).

Another kind of stock option is a contract which gives the holder the right to obtain the difference between the actual fair market value of shares and the fixed nominal value of the shares set in the grant option on a specific date, although no shares of stock are transferred “Cash-settlement Option”.

Stock Option Grants

Stock options granted to employees (grantee) of Philippines corporations by their employers (grantor) without any payment are not subject to compensation taxes or Capital Gains Tax (CGT). “However, if the option was granted for a price, the full price of the option shall be considered capital gains, and taxed as such.” The grantor has the obligation to pay the CGT.

Upon the issuance of the Option, the same is subject to a documentary stamp tax amounting to 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, or in the case of stock without par value the amount equivalent to twenty-five percent (25%) of the documentary stamp tax paid upon the original issue of the stock subject of the option, as provided for in Section 175 of the National Internal Revenue Code of 1997, as amended.

Sale or Transfer of Option

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. Thus, any grant of an option for consideration, or 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 the purposes of computing capital gains shall be zero.

If the option is transferred by the grantee/subsequent owner without any consideration, the same shall be treated as a donation of shares of stock subject to donor’s tax. The basis shall be the fair market value of the option at the time of the donation.

Taxes on Exercise of Option

(a) Equity – Settlement Option – An option is exercised when the grantee pays the exercise price to the grantor, the grantor is then under the obligation to deliver the stocks to the owner of the option.

Shares Not Traded on the Local Stock Exchange

Rank-and-file Employees: any difference between the book value/fair market price (whichever is higher),at the time of the exercise of the stock option and the price fixed on the grant date is considered taxable income and subject to withholding tax on compensation.

Managerial and Supervisory Employees: any difference between the book value/fair market value of the shares (whichever is higher), at the time of the exercise of the stock option and the price fixed on the grant date, shall be treated as fringe benefit subject to fringe benefit tax imposed under Section 33 of the National Internal Revenue Code of 1997, as amended (NIRC).

Shares Traded on the Local Stock Exchange

If the shares involved are shares of stock listed and traded through the Local Stock Exchange, the transaction is subject to stock transaction tax imposed under Section 127(A) of the NIRC, as amended; a tax at the rate of one-half of one percent (1/2 of 1%) of the gross selling which shall be paid by the seller.

(b) Cash Settlement Option – The above rules on Equity-settlement also apply in cases of Cash-settlement Options. Cash-settled Options do not require the actual delivery of shares. Instead, the market value, at the exercise date, of the stock is compared to the exercise price, and the difference (if in a favorable direction) is paid by the grantor to the holder of the option.

The Waiting Game in Employee Stock Option Taxation

When stock options are exercisable over a number of years, its advantageous for employees who are rank and file to not exercise their options until they are promoted to supervisory or managerial positions to avail of a better tax treatment, though more costly to the employer.

Stocks of a Foreign Corporation

If the shares involved are shares of stock in a foreign corporation, the gain, if any, is subject to ordinary income tax.

BIR STOCK OPTION REPORTORIAL REQUIREMENTS

  1. Grant Option

Within 30 days from the grant of the option, the issuing corporation shall submit to the Revenue District Office where it is registered a statement under oath indicating the following:

  1. Terms and Conditions of the stock option
    ii. Names, TINs, positions of the grantees
    iii. Book value, fair market value, par value of the shares subject of the option at the grant date
    iv. Exercise price, exercise date and/or period
    v. Taxes paid on the grant, if any
    vi. Amount paid for the grant, if any.
  1. Exercise of Option

During the exercise period, the issuing corporation shall file a report on or before the 10th day of the month following the month of exercise stating therein the following:

  1. Exercise Date
    ii. Names, TINs, positions of those who exercised the option
    iii. Book value, fair market value, par value of the shares subject of the option at the exercise date/s
    iv. Mode of settlement (i. e. cash, equity)
    v. Taxes withheld in the exercise, if any.
    vi. Fringe benefits tax paid, if any.

Sources BIR Revenue Memorandum Circulars: 79-2014 & 88-2012