Tax Alert No. 57 [Revenue Memorandum Circular (RMC) No. 143-2022 dated 9 November 2022]

15 Nov 2022

Clarifying Issues Relative to Revenue Regulations (RR) No. 13-2022 on Income Tax Treatment of Equity-Based Compensation

RMC No. 143-2022 has been issued to further clarify and provide guidelines in the implementation of RR No. 13-2022 in relation to the tax treatment of equity-based compensation to employees.

RR No. 13-2022 took effect on 29 October 2022 and shall be applied prospectively. Any exercise or availment of the granted equity-based compensation starting 29 October 2022 by any kind of employee, regardless of whether rank-and-file or occupying a managerial or supervisory position, shall be considered compensation subject to withholding tax on compensation (WTC).

The following points are further emphasized in the Circular:

No capital gains tax (CGT) shall be imposed upon grant of equity-based compensation, regardless if there is an option price or not, since no capital gain was realized on the part of the employer-grantor. No documentary stamp tax (DST) shall also be imposed.
The subsequent sale, barter, or exchange of the equity-based compensation shall be treated as a sale, barter, or exchange of stocks not listed in the stock exchange subject to CGT if the transfer is made with consideration. If the transfer is without consideration, donor’s tax shall be imposed on the fair market value (FMV) of the shares at the time of donation. In case the granted equity-based compensation is transferable to the grantees’ successors or heirs, and such successors or heirs exercised the same within the prescribed period, the same rules for the donor’s tax computation shall apply.
The difference between the FMV/book value of shares, whichever is higher, at the time of exercise of the equity-based compensation, and the price fixed at grant date, shall be treated as additional compensation subject to WTC. The same rules shall apply regardless if the shares issued pertain to the employer’s own shares or not.
Only the actual issuance of shares to the employees shall be subject to DST.
Starting November 2022, the employers shall file the following BIR forms for equity-based compensation exercised on or after 29 October 2022: (1) BIR Form No. 1601C; (2) BIR Form No. 1604C; and (3) BIR Form No. 2316.
For equity-based compensation exercised by employees occupying managerial or supervisory positions prior to the effectivity of RR No. 13-2022, the employers shall still be required to file the following tax returns within the prescribed deadline: (1) BIR Form No. 1603; (2) BIR Form No. 1604F; and (3) BIR Form No. 2306.
Upon the grant and/or exercise of share-based compensation, the employer-grantor is required to submit a statement under oath to its registered Revenue District Office (RDO) containing the required information provided under Sec. IV of the Circular. The reportorial requirement shall be submitted within thirty (30) days from the grant date, or within ten (10) days of the month following the exercise date, as applicable.