October 11th, 2022
House Ways and Means Chair Joey Sarte Salceda (Albay, 2nd district) announced Monday that equity-based compensation, also known as employee stock option plans, are now subject to simpler and fewer taxes under personal income taxes, following a request from the House leadership, through Salceda as tax panel chair, for the same.
“Equity-based compensation is now subject to personal income tax upon the gains being realized. It used to be subject to a whole host of taxes, including documentary stamp taxes, donor’s taxes, and other tax costs. Now, it’s more straightforward. No taxes until the shares are sold,” Salceda said.
Salceda made the announcement following the issuance of Revenue Regulation No. 13-2022, which amends RMC 79-2014 on the taxation of stock options. The RR has not yet been released to the public, but was issued following a request by Salceda to Finance Secretary Diokno on the same on September 29, 2022.
“After meetings and other activities during the President’s state visit to the United States, the House leadership has resolved that one way to attract more investments by technology startups in the Philippines is to have laws that are not onerous on stock options as employee compensations,” Salceda wrote in the letter.
“Nearly all tech startups provide Incentive Stock Options as a means of aligning the company’s interests with those of the employees, as well as a substitute for higher salaries during the initial stages of a company’s founding. However, our employee stock option tax rules overburden both grantor and grantee of the stock options.”
Under the new RR, equity-based compensation will now be subject to withholding taxes on compensation only once the shares are sold.
The RR also clarified that “Stock options merely entitle the employee to purchase shares at a future date. Unless the options are exercised, the employees do not become shareholders.”
“With simpler and fewer taxes on employee stock options, we will be able to better attract startups. These companies are known to give employee stock options instead of cash at the initial stages of operations, because they are not yet profitable at those stages.”
“The old rules made it almost impossible to give employee stock options if you were a company just starting out, because the very grant of options used to be subject to tax. The reason a small startup company grants stock in the first place is because it doesn’t have cash yet.”
“Moving forward, this new policy will make us more attractive to the future Teslas or Microsofts of the world.”