BIR Ruling No. 119-12

February 22, 2012 BIR RULING NO. 119-12 Sections 32 (A) & (B) and 34 (A) of the Tax Code of 1997, as amended; 000-00 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. L. P. Ferrer Partner, Tax Services Gentlemen : This refers to your letter dated May 25, 2006 requesting in behalf of your clients, the Philippine companies of Procter & Gamble [Procter & Gamble Distributing (Phils.),Inc. ("PGDPI"),Procter & Gamble Philippines, Inc. ("PGPI") and Procter & Gamble Asia Pte. Ltd. ("PGAPL")],for confirmation of your opinions that: 1. Any income/gain derived by the P&G Philippine companies' present employees from their exercise of P&G stock options granted under the P&G Philippine companies' compensation program is considered as additional compensation subject to income tax and consequently to the withholding tax on compensation; and 2. The expenses incurred by the P&G Philippine companies, pertaining to the difference between the exercise price and the market value of the shares when its employees exercised their rights on stock options, are considered as ordinary and necessary business expense deductible for purposes of computing the P&G Philippine companies' taxable income. aASEcH It is represented that PGDPI and PGPI are corporations organized and existing under Philippine laws while PGAPL is a branch duly licensed to engage in business in the Philippines; that the P&G Philippine companies grant stock options to their employees as part of their compensation plan, that the P&G Philippine companies compensation program combines a variety of plans designed to reward employees for their contributions toward making P&G one of the most successful organizations in the world; that when the P&G Philippine companies' employees are granted stock options, they are given the right to buy a specified number of Procter & Gamble ("P&G") Company (United States) common shares, up to a specified time/period from the grant date (vesting period is 5 years and exercise period is 5-10 years),at a fixed price regardless of the stock's future market price; that the option has value only if, at the time of exercise, the stock is worth more than the price fixed on the grant date; and that the P&G Philippine companies shoulder any difference between the market value of, and the exercise price for the stocks paid by their respective employees and claim the difference as an expense. It is also represented that P&G Philippine companies' employees may be granted stock options in several ways, to wit: 1. Key Manager Stock Option Plan (SOP); 2. Short-Term Achievement Reward (STAR) Program; 3. Future Share Program; 4. Business Growth Program (BGP);and 5. Recognition Shares Program. The grant stock options under the Key SOP, the STAR Program, BGP and, the Recognition Shares Program are dependent on performance, outstanding business achievements and, exemplary organization, technical or business accomplishments/demonstrated expertise yielding significant effects on business/society, respectively. Under the Future Share program, virtually all full-time and most part-time employees were given on one-time number of shares upon employment. In reply, please be informed that under Section 32 (A) of the 1997 Tax Code, as amended, gross income includes compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions and similar items. The term "compensation: as defined under Sec. 2.78.1 of Revenue Regulations ("RR") No. 2-98, as amended, means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded under Section 32 (B) [Exclusions from Gross Income] of the Tax Code. It is provided further under the same regulations that the name by which remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, bonuses, including directors' 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 FBT under Section 33 of the Tax Code), taxable pensions, and retirement pay, and other income of a similar nature constitute compensation income. Since the grant of stock options under the Key SOP, the STAR Program, BGP and, the Recognition Shares Program are dependent on performance, outstanding business achievements and, exemplary organization, technical or business accomplishments/demonstrated expertise yielding significant effects on business/society and that virtually all full-time and most part-time employees were given a one-time number of shares upon employment under the Future Shares program, then any income/gain 1 derived by the P&G Philippine companies' present employees from their exercise of P&G stock options granted under the P&G Philippine companies' compensation program is considered as additional compensation to the employee subject to the income tax and consequently to the withholding tax on compensation. EDCcaS In the event, however, that the participating P&G Philippine companies' employees sell the P&G shares, the gain, if any, derived from the exercise of the stock options granted under the Key SOP, the STAR Program, BGP and the Recognition Shares Program is subject to ordinary income tax. Moreover, under Section 34 (A) (1) (a) of the 1997 Tax Code, as amended, all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are attributable to the development, management, operation and/or conduct of the trade, business or exercise of a profession are allowed as deduction form gross income. This includes a reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered. Thus, the expenses incurred by the P&G Philippine companies, pertaining to the difference between the exercise price and the market value of the shares when its employees exercised their rights on stock options, are considered as ordinary and necessary business expense deductible for purposes of computing the P&G Philippine companies' taxable income. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Computed by taking the difference between the stock's market price at the time of exercise and the price fixed on the grant date.