28 November 2022
The Philippines Bureau of Internal Revenue (BIR) recently announced the proposed abolition of the distinction between the tax treatment of share plans for managerial/supervisory staff and ‘rank and file’ employees.
Currently, the taxation treatment of share plan income in the Philippines depends on the position of the employee at vest/exercise. Income from share plan awards for employees at managerial and supervisory level is taxed as Fringe Benefits Tax (FBT). Income from share plan awards for other 'rank and file' employees is taxed as income. These terms are broadly defined and depend upon function rather than title.
FBT is a tax imposed on the employer rather than the employee, so it is the employer who is obliged to report and pay the FBT. If FBT is payable, the employee is no longer required to report or pay tax on the share plan income. The employer may only pass on the costs of FBT to an employee if this is agreed by the employee.
What has changed?
On 7 October 2022, the BIR released Revenue Regulation No. 13-2022 (RR13-2022) which removed the distinction between managerial/supervisory staff and ‘rank and file’ employees in terms of the tax treatment for employee share plans. The effect of this is that all share plan income will now usually be subject to income tax at vest/exercise, regardless of the employment status of the recipient of the award, who may be in a managerial/supervisory role or part of the ‘rank and file’ workforce.
When will the changes takes effect?
RR 13-2022 takes effect 15 days following publication in the Official Gazette or in a newspaper of general circulation. We are advised by our local counsel that RR 13-2022 was published in The Manila Times on 14 October, so is expected to take effect on 29 October 2022.
In simplifying the tax treatment of share plans, this will be a welcome development for companies offering equity plans in the Philippines. This change will also provide equality in the tax treatment of awards for local employees, which is a helpful result.
It is worth noting that employer tax withholding obligations vary in the Philippines, depending on whether or not the cost of the plan has been recharged to the local employing company or the local subsidiary records the plan as an expense in its local accounts. Our recommendation is that companies review their share plan tax processes in the Philippines to prepare for the new change to take effect.
We would like to thank our partner firm in the Philippines, Quasha Law, for their assistance with this alert.
As always, if you have questions about any of the content of this alert, or there is any assistance you need in relation to your share incentives, do not hesitate to contact us.
Sonia Taylor and Sharon Thwaites