BIR Releases Clarification on Tax Treatment of Equity-Based Compensation

On 7 October 2022, the Bureau of Internal Revenue (“BIR”) released Revenue Regulations No. 13-2022 or “Income Tax Treatment of Equity-Based Compensation” in order to clarify the tax treatment of equity-based compensation.

Equity-based compensation includes all types of employee equity schemes which may be stock options, restricted stock units, stock appreciation rights, and restricted share awards. The shares of stock may or may not pertain to the shares of stock of the grantor itself as long as they are granted to existing employees of the grantor as performance incentives for services rendered. The grant of such incentives is usually dependent on performance, outstanding business achievements and exemplary organizational, technical, or business accomplishments. 

Once the equity grant under the equity plans is exercised or availed of by the grantee-employees, this shall be considered compensation that is subject to tax under the National Internal Revenue Code. This is because the equity grants will give rise to a realized benefit on the part of the grantee-employees and the fact that the grants are for services being rendered by the employees.

Under the law, gross income includes all income derived from whatever source, including compensation for services in whatever form paid. Compensation includes payment in some form of medium other than money. Further, under the provision on withholding tax on compensation, compensation includes compensation paid in kind in the form of stocks, bonds, or other forms of property.  

The rule applies regardless of the employment status of the grantee-employee, whether he or she is occupying a rank-and-file, supervisory, or managerial position.