REVENUE MEMORANDUM CIRCULAR NO. 79-2014 issued on November 3, 2014 clarifies the tax treatment of stock option plans and other option plans.

    Stock option are “shares of stocks” as defined by Section 22(L) of the National Internal Revenue Code (NIRC) of 1997, as amended, and are taxable as such. In the event that the said option was granted due to an employee-employer relationship, and where the grantor is the employer and the grantee is the employee, and no payment was received for the grant of the said option, on the year an option was granted, the grantor cannot claim deductions for the grant of the stock option. However, 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 issuance of the Option, the same is subject to a Documentary Stamp Tax amounting to P 0.75 on each P 200.00, 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 25% of the Documentary Stamp Tax paid upon the original issue of the stock subject of the option, as provided for in the Section 175 of the NIRC of 1997, as amended.

          Any grant of an option for consideration, or transfer of the option is subject to Capital Gains Tax. If the option was granted without any consideration, the cost base of the option for 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.

      In equity-settled options, the grantee/subsequent owner pays the exercise price to the grantor and the latter is obligated to deliver the stocks to the owner of the option. 

           In the event the option was granted by an employer involving the employer’s own shares of stock or shares it owns, upon the exercise of the option by a rank-and-file employee, an additional compensation equivalent to the difference of 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 recognized and subjected to Income Tax and consequently to Withholding Tax on compensation. However, if the employee which exercises the option occupies a supervisory or managerial position, the difference of 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 a fringe benefit subject to Fringe Benefit Tax.

      In the event the option was granted to a supplier of goods or services, the 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 recognized as additional consideration for the services rendered or goods supplied by the said supplier, and shall be subject to the relevant Withholding Tax at source and other taxes applicable.

         In the event the option was granted to a person, natural or juridical, who is not an employee, or a supplier of goods or services to the grantor, the 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 considered a donation, and shall be subject to Donor’s Tax, among others.

         The above rules on equity-settlement option also applies in case of cash-settlement options. Cash-settled options do not require the actual delivery of stocks. 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 issuing corporation shall submit to the Revenue District Office where it is registered a statement under oath within 30 days from the grant of the option indicating the following:

1. Terms and condition of the stock option
2. Names, TINs, positions of the grantees
3. Book value, fair market value, par value of the shares subject of the option at the grant date
4. Exercise price, exercise date and/or period
5. Taxes paid on the grant, if any
6. Amount paid for the grant, if any

          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
2. Names, TINs, positions of those who exercised the option
3. Book value, fair market value, par value of the shares subject of the option at the exercise date/s
4. Mode of settlement (i.e. cash, equity)
5. Taxes withheld on the exercise, if any
6. Fringe Benefits Tax paid, if any