Tax treatment of Stock Option Plans and other Option Plans

RMC 79-2014 summarized and clarified the tax treatment of stock options plans and other option plans and imposed compliance requirement for corporations issuing stock options.

A. Taxation of Stock Options

1. Grant of Option. The grantor-employer shall be liable to capital gains tax (CGT) if the option if granted to the employee-grantee for a price. If no payment was received from the grantee-employee, no CGT shall be due but the grantor cannot claim deductions for the said option in the year it was given.  DST on sale of shares (Sec. 175 of the Tax Code) is due upon issuance of the Option.

2. Sale or Transfer of Option.  The sale, barter or exchange of stock option is treated as a sale, barter, or exchange of shares of stock. Hence, CGT shall be due on the transfer or sale of stock options if transferred for a consideration.  Otherwise, the transfer of the stock options shall be subject to donor’s tax based on the fair market value of the stock at the time of the donation. 

3. Exercise of Options: Equity-settlement Option.  The RMC reiterated the tax treatment as provided in RMC 88-2012.  In the event the option is exercised, 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 treated as compensation/grant to the recipient and the tax consequence will depend on the relation of the grantor to the grantee. 

a) Grantee is an employee. If the recipient is a rank and file employee, the amount shall be subject to withholding tax on compensation. For supervisory employees, the amount shall be subject to fringe benefits tax.

b) Grantee is a supplier of goods and services.  If the option is granted to a supplier of goods and services, the amount shall be considered as additional consideration for services rendered or goods supplied and shall be subject to the proper withholding tax at source and other taxes. 

c) Grantee is neither an employee nor a supplier. In all other instances not covered by the above two scenario, the amount shall be considered donation subject to donor’s tax.

4. Exercise of Options: Cash-settlement Option. In cash-settlement options, there is no actual issuance of shares but the grantor pays the grantee the difference of the market value of the stock at the exercise date and the exercise price.  Tax treatment shall be the same as with equity-settlement option above.

B. Compliance requirements for grantors

In addition to the above clarification, RMC 79-2014 also mandates new compliance requirements for corporations issuing stock options.

1. Upon grant of the Option.  - Within 30 days, the grantor shall submit to the RDO a statement under oath indicating the following: 

a) Terms and conditions of the stock option

b) Names, TINs and positions of the grantees

c) Book value, fair market value, par value of the shares subject of the option at the grant date

d) Taxes paid on the grant, if any

e) Amount paid for the grant, if any.

2.  Upon exercise of the option.  On or before the 10th day of the month following the month of the exercise of the option, another report on the following shall be submitted:

a) Exercise date

b) Names, TINs, positions of those who exercised the option

c) Book value, fair market value, par value of the shares subject of the option at the exercise date

d) Mode of settlement ( i.e. cash, equity)

e) Taxes withheld at exercise, if any

f) Fringe benefits tax paid, if any.