BIR Ruling [DA-181-01]

October 05, 2001 BIR RULING [DA-181-01] Joaquin Cunanan & Co . 29th Floor Philamlife Tower 6787 Paseo de Roxas, Makati City Attention: Ms. Myrna M. Fernando Partner Tax Services Department Gentlemen : This refers to your letter dated November 24, 1999 requesting in behalf of your client, ING Group (ING), for a confirmation of your opinion that the cash payment received by employees upon exercise of phantom share options constitutes additional taxable compensation income. It is represented that ING Group was organized under the laws of Netherlands, that its shares are listed and traded in the Amsterdam Stock Exchange; that as an incentive to its employees, ING Group has established a Global Share Option Plan (GSOP); that under the GSOP, employees are granted stock options which shall be exercisable at a later date and upon exercise, will enable them to purchase ING Group shares at a price lower than the prevailing market value at the time of exercise; that ING is proposing to extend this incentive to the employees of its Philippine subsidiary, ING Baring Securities (Philippines), Inc. in the form of a phantom share option plan; that under the phantom plan, employees receive grants of options over phantom shares whereby, instead of becoming entitled to buy actual shares, they will be entitled to a cash payment equivalent to the growth in the value of the shares from the date of grant until the date of exercise; that upon exercise, the employees actually receive a cash payment; that the phantom options were granted to eligible employees, whether managerial and supervisory or rank and file level, in March 1997 at market price, which was determined by the price at which they were traded on the Amsterdam Stock Exchange on the grant date; that the phantom options will become exercisable beginning March 2000 until March 2005; and that the cash benefit in the phantom option arrangement is given provided employment with the ING Group is continued. In reply, please be informed that Section 2.78.1 of Revenue Regulations Nos. 2-98 provides that the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code. The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like), fees including director's fees, if the director is at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which are subject to the fringe benefits tax under Section 33 of the Code; taxable pensions and retirement pay; and other income of a similar nature constitute compensation income. The stock option plan extended to the employees of the Philippine subsidiary of ING Group is an incentive as a means of promoting the efficiency of the employees. The reimbursement by the Philippine subsidiary to ING Group of the difference between the exercise price and the market value of the shares at the time of the exercise is an ordinary and necessary business expense deductible from its taxable income pursuant to Section 34(A)(1) of the Tax Code of 1997. Thus, the amount reimbursed to ING Group or the difference between the exercise price and the market value of the shares at the time of exercise is considered an additional compensation income to the employees subject to the income tax under Section 24(a) of the Tax Code of 1997 and consequently to the withholding tax prescribed under Section 79, Chapter XIII, Title II of the same Tax Code. (BIR Ruling No. 135-97 dated December 11, 1997) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group