A prologue to RR 13-2022: DoF opinion on equity-based compensation

The public is seldom privy to tax developments prior to the issuance of formal rules/regulations by the Bureau of Internal Revenue (BIR). It is worth noting, however, that the BIR’s release of clarificatory regulations on Oct. 7 — in the form of Revenue Regulations (RR) No. 13-2022 — was borne out of a taxpayer’s request for the opinion of the Department of Finance (DoF) on the tax treatment of equity-based compensation.

On Oct. 6, the Secretary of Finance issued DoF Opinion No. 016-2022 clarifying that equity grants awarded to employees under various stock option plans are considered compensation, and are therefore, subject to withholding tax on compensation (WTC) regardless of the status of the employee-grantee.

At the outset, the DoF acknowledged that the rationale for the opinion-request arose from the varying tax treatments of equity-based compensation. Specifically, Revenue Memorandum Circular (RMC) No. 79-2014 provides that stock option plans and other option plans received by supervisory and managerial employees are treated as fringe benefits subject to fringe benefits tax (FBT); while these same benefits are subject to WTC if received by rank-and-file employees.

In the opinion, the DoF agreed with the taxpayer’s position that all equity-based awards, employment status notwithstanding, are considered compensation for services rendered subject to WTC (rather than a fringe benefit). Consequently, the DoF concurred with the legal bases cited by the taxpayer in its request for opinion, viz:

• Pursuant to Section 32(A) of the National Internal Revenue Code of 1997, as amended (Tax Code), gross income includes compensation for services in whatever form paid;

• Philippine withholding tax regulations (RR No. 2-1998) provide that compensation income subject to WTC also covers compensation paid in some medium other than money; and

• Four rulings issued by the BIR prior to RMC No. 79-2014 (but after the effectivity of the Tax Code and the withholding tax regulations) consistently held that any income derived by employees from the exercise of their share-based compensation (e.g., stock options and stock awards) are considered additional compensation subject to WTC.

Moreover, the DoF also agreed with the taxpayer that equity-based awards are compensatory in nature and are not “perks” within the conventional description of items subject to FBT under Section 33 of the Tax Code. The fact that these awards are, by their nature, subject to a vesting period — within which the employees are required to perform their services — further supports the position that equity-based income is indeed granted in exchange for services rendered by the employee.

Additionally, the taxpayer also stated in its opinion-request that the FBT regulations in Australia, on which our local FBT rules are based, treat equity income as income subject to compensation tax.

Given the foregoing, the DoF stated that its opinion would effectively supersede parts of RMC No. 79-2014 which were inconsistent with its findings. Specifically, share-based compensation received by managerial and supervisory employees is no longer considered fringe benefits subject to FBT. In closing, the Finance Secretary advised that the DoF would issue, through the BIR, a corresponding RR on the matter — i.e., RR No. 13-2022.

Although it took the tax authorities eight years, the DoF’s opinion and RR No. 13-2022 are welcome developments as the rules on equity awards are now aligned with the provisions of the Tax Code and prevailing regulations. Likewise, the DoF opinion further reminds taxpayers that, aside from requesting a review of an adverse ruling from the BIR, they may also opt to seek tax clarifications from the DoF by initiating a request for opinion.

However, this author wishes to highlight that DoF opinions alone, when taken exclusively, are neither laws nor jurisprudence. They are administrative rulings which are only interpretative in nature. Thus, these would be more effectively implemented if the BIR issues the corresponding regulations or circulars to enforce the Finance department’s rulings or opinions, such as it has done in this case.

Nonetheless, as the BIR’s mission is “… to collect taxes through just enforcement of tax laws for nation-building and the upliftment of the lives of Filipinos,” tax authorities and taxpayers must continue cooperating to clarify any ambiguous tax positions or challenge any questionable tax rules. This ensures the equitable administration of taxes and keeps up with the rapidly changing times.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.

Bon Yannicka M. Chua is an assistant manager at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.

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