Reimbursement by the Philippine Subsidiary to Kimberly-Clark 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

December 11, 1997 BIR RULING NO. 135-97 29 (a) (1) (A) 000-00 135-97 Quisumbing Torres & Evangelista 11th Floor, Pacific Star Building Makati Avenue cor. Sen. Gil J. Puyat Avenue Makati City Attention: Attys . Jose P . Sandejas and Marivic K . Punzalan-Espiritu Gentlemen : This refers to your letter dated July 31, 1997 stating that Kimberly-Clark is a corporation organized under the laws of the State of Delaware; that its shares are listed in the New York Stock Exchange, Chicago Stock Exchange and the Pacific Stock Exchange; that as an incentive, Kimberly-Clark has established a Global Stock Option Plan (Plan) under which it issues stock options, with respect to its common stock, to its employees worldwide; that the stock options will enable the employees, on specified dates, to purchase shares of stock of Kimberly-Clark at a price ("exercise price") lower than the prevailing market value at the time of exercise; that Kimberly-Clark's Philippine subsidiary proposes to request Kimberly-Clark to extend the Plan to the Philippine employees of the subsidiary so that they can avail of the incentives; that for the employees of the subsidiary to be able to participate in the Plan, the subsidiary should request Kimberly-Clark and should sign a reimbursement agreement (the "Agreement") with Kimberly-Clark; that among other things, the Agreement provides that the subsidiary shall, upon exercise of the stock option by its employees, reimburse Kimberly-Clark for the difference between the exercise price and the market value of the shares at the time of the exercise. cdta In connection therewith, you are requesting confirmation of your opinion that "(a) The subsidiary can claim the reimbursement to Kimberly-Clark as an expense for income tax purposes; "(b) The amount reimbursed to Kimberly-Clark or the difference between the exercise price and the market value of the shares at the time of exercise constitutes additional taxable compensation income of the employees from which the subsidiary should withhold taxes." In reply thereto, please be informed that all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business are deductible from gross income pursuant to Section 29(a)(1)(A) of the Tax Code, as amended and as implemented by Section 65 of Revenue Regulations No. 2. Expenses which are "ordinary and necessary" generally contemplate expenses which are directly connected with and proximately resulting from carrying on the business and must be shown to be appropriate and helpful in the development of the taxpayer's business for the acquisition or pursuit of income or profit. (Gancayco v. CIR, 1 SCRA 980) The stock option plan extended to the employees of the Philippine subsidiary of Kimberly Clark is an incentive as a means of promoting the efficiency of the employees. Accordingly, the reimbursement by the Philippine subsidiary to Kimberly-Clark 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 29(a)(1)(A) of the Tax Code, as amended. Moreover, the amount reimbursed to Kimberly-Clark 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 21(a) of the Tax Code, as amended and consequently to the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code, as amended by B.P. Blg. 135 and implemented by Revenue Regulations No. 6-82, as amended. This ruling is based on 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, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue