Tax notes: Tax treatment of stock options

IN REVENUE Memorandum Circular (RMC) No. 88-2012 which was issued on Dec. 28, 2012, the Bureau of Internal Revenue (BIR) clarified the tax implications of income or gain derived by an employee from the exercise of stock option plans.

RMC 88-2012 provides that any income or gain derived by employees from the exercise of stock options is taxable as compensation income if given to rank-and-file employees.

It is, however, taxable as fringe benefits subject to fringe benefits tax (FBT) if given to managerial and supervisory employees.

Upon the exercise of the stock option, the additional compensation or the taxable fringe benefit (whichever is applicable) is determined by the difference between the book value (BV)/fair market value (FMV) of the shares, whichever is higher, on the exercise date 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) pursuant to Section 174 of the 1997 Tax Code, as amended.

In the event that the employees subsequently sell, exchange or otherwise dispose of shares of stock obtained from their exercise of 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 the stock transaction tax.

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

(Source: Punongbayan & Araullo)