Sycip Gorres Velayo & Co.

December 28, 2007 BIR RULING [DA-697-07] 32 (A); 33; 34; RR 2-98 #135-97; DA-255-2005; DA-499-2006; DA-353-2007; DA-152-2007 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Emmanuel C. Alcantara Co-Head, Tax Services Gentlemen : This refers to your letter dated December 4, 2007 requesting on behalf of your client, CitisecOnline.com, Inc . ("COL") for a ruling on the tax implication, if any, of the discounted purchase of shares of stock pursuant to a Stock Purchase Plan. It is represented that CitisecOnline.com, Inc. (COL) is a corporation organized and existing under Philippine laws primarily engaged in the business of providing stockbrokerage services through innovative internet technology; that on July 12, 2000 and July 3, 2006, COL adopted a Stock Option Plan (SOP) to provide an opportunity for employees, executives, directors and consultants of COL, including employees of affiliates who are either Filipino citizens or aliens residing in the Philippines to share in the equity of COL so as to motivate them to greater dedication, loyalty and higher standards of performance; that the participants shall be granted the right to subscribe to a number of shares at par value of One Peso (P1.00) per share; and that any income arising from the exercise of the option, in case the exercise price of P1.00 per share be lower than the prevailing market value of the shares at the time of the exercise shall be considered additional compensation or fees on the part of participant and claimed as a deductible expense by COL for income tax purposes. The salient points of the SOP are summarized as follows: 1. The share incentive scheme under the SOP shall commence after one and one-half (1-1/2) years from the IPO Date and terminate ten (10) years from the IPO Date. 2. The following persons shall be eligible to subscribe to COL shares: a) Executives consisting of senior managers and officers of the Company, senior managers and officers of the Company's affiliates, directors of the Company; and directors of the Company's affiliates and b) Employees, consisting of employees of the Company; and employees of the Company's affiliates. 3. The Subscription Price for each Share in respect of which an Option is exercisable shall be the par value of One Peso (P1.00). 4. An Option may be exercised by a Participant giving notice in writing to the Company. Such notice must be accompanied by a remittance for the Aggregate Subscription Cost in respect of the Shares for which that Option is exercised. EcHaAC 5. The Company shall, within ten (10) Market Days after the exercise of an Option, allot the relevant Shares and issue to the Participant the corresponding stock certificates. 6. All taxes, national or local, (including income tax) arising from the exercise of any Option granted to any Participant under the Scheme shall be borne by the Participant while all fees, costs and expenses incurred by the Company in relation to the administration of the Scheme shall be borne by the Company. In reply, please be informed as follows: The three elements for the imposition of income tax are: (1) there must be gain or profit, (2) that the gain or profit is realized or received, either actually or constructively, and (3) the gain is not exempted by law or treaty from income tax ( Commissioner of Internal Revenue vs. Court of Appeals, et al. , G.R. No. 108576, January 20, 1999, 102 SCAD 119). Income in tax law is an amount of money coming to a person within a specified time, whether as payment for services, interest or profit from investment. It means cash or its equivalent. It is gain derived and severed from capital, from labor or from both combined. It should be noted that capital and income are different. Capital is wealth or fund; whereas income is profit or gain or the flow of wealth. The determining factor for the imposition of income tax is whether any gain or profit was derived from a transaction. In this case, the subscription cost of P1.00 per share which will be paid by the participants of the SOP upon exercise of their option is not subject to income tax being mere investment of capital. However, any discount received or the difference between the exercise price and the prevailing market value of the shares at the time of exercise shall be subject to income tax and consequently to withholding tax. For participant-employees, the discount provided under the SOP is a realized benefit actually received upon exercise or purchase of the COL shares which is considered as compensation subject to the income tax and consequently to the withholding tax on compensation in accordance with Sections 24 (A) and 31 of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, Section 2.78 thereof as amended. (BIR Ruling DA-353-2007 dated July 2, 2007) . That the discount is a realized benefit considered as additional compensation for the services of employee-participants becomes more evident by the fact that the Board Resolution of COL dated October 30, 2007 provides that any income arising from the exercise of the option under said SOP shall be considered additional compensation for tax purposes and the corresponding tax thereon shall be borne by the participant. For independent consultants and directors of COL, their purchase of COL shares pursuant to the SOP is subject to the expanded withholding tax as additional fees under Section 2.57.2 of Revenue Regulations No. 2-98 at the rate of 15% or 10% as the case may be. (BIR Ruling No. DA-499-06 dated August 15, 2006) Consequently, to the extent that COL employee-participants exercise to purchase COL shares under the SOP, COL should accordingly act as the withholding agent of the government and impose the appropriate withholding tax on compensation on the discount received by COL employee-SOP participants, pursuant to Chapter XIII, Withholding on Wages, of the Tax Code, as amended. (BIR Ruling No. 135-97 dated December 11, 1997) As for the discount granted on the purchase of COL shares by directors and employees of COL's affiliates who are Filipino citizens or resident aliens, the same is not subject to withholding tax since such payments are not among those enumerated in said regulations as they are neither employees or professionals rendering service to COL. However, the income derived therefrom by such participants residing in the Philippines is subject to the regular income tax under Section 24 (A) (1) of the Tax Code of 1997. CSEHIa Finally, please be informed that the following are the requisites for deductibility of business expenses from gross income: (1) The expense must be ordinary and necessary; (2) It must be paid or incurred during the taxable year; (3) It may be paid or incurred in carrying on the trade or business; (4) It must be supported by receipts, vouchers or documents. (see Zamora vs. Collector , L-15280, May 31, 1953) Since the SOP was adopted by COL as a share incentive scheme for executives and employees and is deemed helpful and beneficial in the development of COL's business, the expenses incurred in implementing the same, including the expense incurred for issuing shares at an exercise price lower than its prevailing market value at the time of exercise pursuant to the SOP, shall be considered an ordinary and necessary business expense which may be deducted from COL's taxable income pursuant to Section 34 (A) (1) (a) (i) of the Tax Code, as amended. (BIR Ruling No. DA-152-07 dated March 14, 2007, 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service