bir ruling [da-152-07] (restricted stock unit plan)

Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 1

March 14, 2007

BIR RULING [DA-152-07]

33; 34; RR 3-98; DA-255-2005;DA-011-2007

Nestlé Philippines, Inc.Nestle Center, 31 Plaza DriveRockwell CenterMakati City

Attention: Mr. Peter A. NoszekExecutive Vice-President

Gentlemen :

This refers to your letter dated February 12, 2007 requesting for a ruling on theproper rate of tax due on the earnings or income received by your executiveemployees from a Restricted Stock Unit Plan.

The scheme under the Restricted Stock Unit Plan ("RSUP"), is as follows:

1. The RSUP provides selected executives of Nestlé Philippines, Inc.(NPI) with an opportunity to receive a number of shares of stock ofNestlé SA, a foreign company which is the sole stockholder of NPI(or their cash equivalent) at a specified future date.

2. In RSUP, actual shares or cash are delivered without furtherrestrictions. There is neither an exercise price nor a limitedexercise period. The benefit is the market price of the share at theend of the restricted period. CDESIA

3. Under the Plan, a certain number of shares are granted but are nottransferred during a restricted period of three (3) years from thetime of the grant. During this period, the Stock Units are


non-tradable and do not entitle the participant to any shareholderrights, e.g., dividend payments or voting rights, until the shares arevested and transferred to the participant at the end of the restrictedperiod.

4. Upon vesting, Nestlé S.A. shall determine whether shares, free ofcharge, or the cash equivalent of the shares, shall be transferred tothe participant.

5. Payment of Cash Equivalent shall be made as soon as possibleupon vesting. In case of grant of shares, the transferred shares shallbelong to the participant and are at his/her disposal.

6. Upon termination of employment of a participant as a result ofdeath, redundancy, disability, retirement, termination without causeor divestiture, all Restricted Stock Units shall vest at the date oftermination with the Company.

7. Upon voluntary resignation or termination of employment forcause of a participant, all Restricted Stock Units shallautomatically be terminated and become void without anycompensation, at the date of termination.

In reply, please be informed that Section 2.33(A) of Revenue Regulations (RR)No. 3-98 provides that a final withholding tax is hereby imposed on the grossed-upmonetary value of fringe benefit furnished, granted or paid by the employer to theemployee, except rank and file employees, whether such employer is an individual,professional partnership or a corporation, regardless of whether the corporation istaxable or not, or the government and its instrumentalities except when: (1) the fringebenefit is required by the nature of or necessary to the trade, business or profession ofthe employer; or (2) when the fringe benefit is for the convenience or advantage of theemployer.

The term "fringe benefit" means any good, service, or other benefit furnishedor granted by an employer in cash or in kind, in addition to basic salaries, to anindividual employee (except rank and file employee).

It is clear from your representations that the executives of NPI who arequalified under your RSUP receive benefits either in Nestlé SA shares or its cashequivalent which clearly constitute a fringe benefit under Section 2.33 (A) of RR No.


3-98. Such being the case, the benefits under your RSUP are subject to the fringebenefit tax under Section 33 (A) of the Tax Code of 1997, as amended, whichprovides, as follows:

"(A) Imposition of Tax. — A final tax of thirty-four percent (34%)effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999;and thirty-two percent (32%) effective January 1, 2000 and thereafter, is herebyimposed on the grossed-up monetary value of fringe benefit furnished or grantedto the employee (except rank and the employees as defined herein) by theemployer, whether an individual or a corporation (unless the fringe benefit isrequired by the nature of, or necessary to the trade, business profession of theemployer). The tax herein imposed is payable by the employer which tax shallbe paid in the same manner as provided for under Section 57 (A) of the saidCode. The grossed-up monetary value of the fringe benefit shall be determinedby dividing the actual monetary value of the fringe benefit by sixty-six percent(66%) effective January 1, 1998; sixty-seven percent (67%) effective January 1,1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter . . ."

From the above-quoted provision, NPI being the employer, is liable to pay afinal tax of 32% based on the grossed-up value of the benefit granted, whichrepresents the actual monetary value of the aforesaid benefit under your RSUP.Accordingly, the 32% tax is payable upon the delivery of the shares of stock or itscash equivalent.

Furthermore, Section 34 (A) (1) of the Tax Code of 1997, as amended,provides that —

"(a) In General. — There shall be allowed as deduction from grossincome all the ordinary and necessary expenses paid or incurred during thetaxable year in carrying on or which are directly attributable to, thedevelopment, management, operation and/or conduct of the trade, business orexercise of a profession, including:

(i) A reasonable allowance for salaries, wages, and other forms ofcompensation from personal services actually rendered, including thegrossed-up monetary value of fringe benefit furnished or granted by theemployer to the employee: Provided, That the final tax imposed under Section33 hereof has been paid.

xxx xxx xxx"


The following are the requisites for deductibility of business expenses fromgross 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. (seeZamora vs. Collector, L-15280, May 31, 1953)

For this purpose, it is clear that the deduction shall be made in the year whenthe related expense is incurred which in this case is at the time of the delivery of theshares of stock of Nestlé SA or its cash equivalent.

Such being the case, NPI can claim as deduction from gross income thegrossed-up monetary value of the benefit that is furnished to its executives under theRSVP, which is the value of the shares of stock of Nestlé SA at the time of itsdelivery to the executives participating in the RSVP, or its cash equivalent. EHScCA

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, thenthis ruling shall be considered null and void.

Very truly yours,

Commissioner of Internal Revenue

By:

(SGD.) JAMES H. ROLDANAssistant Commissioner

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bir ruling [da-152-07] (restricted stock unit plan)

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