Tax Notes: How to tax equity-based compensation

Equity-based compensation is an employee benefit given in the form of stock options, restricted share awards, stock appreciation rights, and restricted stock units, which may or may not pertain to the shares of stocks of the employer-grantor itself. This is commonly used as part of employee-retention programs.

The BIR issued Revenue Regulations (RR) 13-2022 changing the tax treatment of equity-based compensation. Under the issuance, any kind of equity-based compensation is considered taxable compensation subject to the withholding tax on compensation once exercised or availed of by the grantee-employees. This tax treatment is applicable regardless of the employment status of the grantee-employees, which could either be rank-and-file or occupying managerial/supervisory positions.

Prior to RR 13-2022, the tax treatment for equity-based compensation was dependent on the employment status of the grantee-employee. For rank-and-file employees, it will be considered as taxable compensation income subject to the withholding tax on compensation, while for supervisory or managerial employees, it will be treated as fringe benefit subject to fringe benefits tax.

To further clarify the new tax treatment on equity-based compensation, Revenue Memorandum Circular (RMC) 143-2022 was issued. According to the RMC:

No capital gains tax (CGT) and documentary stamp tax (DST) shall be imposed upon the grant of equity-based compensation.

In case of the sale or transfer of equity-based compensation with consideration, the difference between the sales price and option price shall be subject to CGT. If such a sale is without consideration, it is treated as a donation of shares of stock subject to the donor’s tax.

* Upon the exercise of equity-based compensation, the difference between the book value and fair market value of the shares, whichever is higher, and the price fixed on the grant date, shall be considered as additional compensation subject to income tax, and consequently, to withholding tax on compensation.

* DST shall be imposed only upon the actual issuance of shares of stock to the employee grantee.

The following BIR forms shall be filed starting November 2022 for equity-based compensation exercised starting Oct. 29, 2022:

* BIR Form 1601-C (Monthly Remittance Return of Income Taxes Withheld);

* BIR Form 1604-C (Annual Information Return of Income Taxes Withheld on Compensation); and

* BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld).

The employer-grantors are still required to file the same tax returns relating to the equity-based compensation by their respective employee-grantees occupying managerial or supervisory positions.

Please be guided accordingly.


P&A Grant Thornton

Certified Public Accountants