REVENUE MEMORANDUM CIRCULAR NO. 88-2012 issued on December 28, 2012 clarifies the tax implications of income or gain derived by an employee from the exercise of stock option plans.

            In BIR Ruling No. 119-2012, it was ruled that any income or gain derived by the employees from their exercise of stock options is considered as additional compensation subject to Income Tax, and consequently, to withholding taxes on compensation.

           Any  income  or  gain  derived  from  stock  option  plans  granted  to  managerial  and supervisory employees which qualify as fringe benefits is subject to fringe benefit tax imposed under Section 33 of the National Internal Revenue Code (NIRC) of 1997, as amended.

          The additional compensation or the taxable fringe benefit, is the difference of the book value (BV)/ fair market value (FMV) of the shares, whichever is higher, at the time of exercise of the stock option and the price fixed on the grant date. The option has value only if, at the time of the exercise, the stock is worth more than the price fixed on the grant date. The additional compensation or taxable fringe benefit arises whether the shares of stocks involved are that of a domestic or foreign corporation.

          If the shares to be issued at the exercise of the stock options come from the unissued shares of stock of the issuing corporation, the original issuance of said shares is subject to Documentary Stamp Tax (DST).

            In the event that employees subsequently sell, barter, exchange or otherwise dispose of shares of stock obtained from their exercise of the stock options, the tax treatment is as follows:

              a. If the shares involved are shares of stock in a domestic corporation not traded in the                       Stock Exchange, the gain, if any, is subject to Capital Gains Tax. Further, the sale or                          transfer  of the said shares is subject to the DST, upon execution of the deed                                    transferring ownership or rights thereto, or upon delivery, assignment or indorsement
                  of such shares in favor of another.
              b. If the shares involved are shares of stock listed and traded through the Local Stock                          Exchange, the transaction is subject to stock transaction tax.
              c. If the shares involved are shares of stock in a foreign corporation, the gain, if any, is
                  subject to ordinary Income Tax.