(Second of two parts)
In last week’s article, I discussed performance-based pay, de minimis benefits and equity-based compensation as some of the common compensation-linked workforce retention strategies adopted by empłoyers. For this second part, I will elaborate on equity-based compensation and the establishment of a retirement plan.
Under Revenue Regulations (RR) No. 13-2022, equity-based compensation granted to employees, regardless of the employee’s classification (i.e., rank-and-file or supervisory and managerial) shall be treated as additional compensation and will form part of the gross income of the employee, subject to income tax and social tax, and will therefore be subject to payroll withholding and reporting. The Bureau of Internal Revenue (BIR) later issued Revenue Memorandum Circular (RMC) No. 143-2022 which further clarified the income tax treatment of equity-based compensation. Therefore, any exercise or availment of equity-based compensation by an employee-grantee, regardless of position on or before Oct. 29, 2022 (the effectivity date of the RR), is subject to withholding tax on compensation.
The RMC also enumerated the mandatory tax returns to be filed starting November 2022 and onwards (for equity-based compensation exercised starting the effectivity date of the RR which include the following):
• BIR Form No. 1601-C (Monthly Remittance Return of Income Taxes Withheld);
• BIR Form No. 1604-C (Annual Information Return of Income Taxes Withheld on Compensation; and
• BIR Form No. 2316 (Certificate of Compensation Payment and Tax Withheld).
In relation to reporting requirements, the following rules still apply based on RMC No. 79-2014:
Grant of Equity-Based Compensation
Within 30 days from the grant of the equity-based compensation, the issuing corporation or employer-grantor, shall submit to the Revenue District Office (RDO) where it is registered, a statement under oath on the following:
• Terms and Conditions of the stock option;
• Names, Tax Identification Numbers (TINs), positions of the grantees;
• Book Value, Fair Market Value, par value of the shares subject of the option at the grant date;
• Exercise price, exercise date and/or period;
• Taxes paid on the grant, if any; and
• Amount paid for the grant, if any.
Exercise of Equity-Based Compensation
During the exercise period, the employer-grantor must file a report on or before the 10th day of the month following the month of exercise stating therein the following:
• Exercise Date;
• Names, TINs, positions of those who exercised the option;
• Book value, fair market value, par value of the shares subject of the option at the exercised dates;
• Mode of settlement (i.e., cash, equity); and
• Taxes withheld on the exercise date, if any.
Establishing a retirement plan which could either provide higher retirement pay benefits to employees or the minimum retirement pay as mandated by law encourages employees to stay with an organization.
Retirement plans can be divided into two major categories: defined-benefit plans and defined-contributions plans. A defined-benefit plan is the traditional pension plan while a defined-contribution plan allows the employees to contribute and invest in the retirement fund and other investments such as mutual funds over the time of employment to save for retirement.
Under Republic Act No. 7641, also known as the Retirement Pay Law, an employee is to receive such retirement benefits as he may have earned under existing laws and any collective bargaining agreement and other agreements, provided, however, that an employee’s retirement benefits under any collective bargaining and other agreements not be less than those provided herein.
In the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment, an employee upon reaching the age of sixty to sixty-five years, who has served at least five years in the establishment, may retire and will be entitled to retirement pay equivalent to at least one-half month salary for every year of service, a fraction of at least six months being considered as one whole year. Note that there is no requirement to set up a retirement plan or contribute to a fund; hence, most companies pay retirement benefits on a “pay-as-you-go” basis.
Unless the parties provide for broader inclusions, the term one-half month salary means 15 days plus one-twelfth of the 13th month pay and the cash equivalent of not more than five days of service incentive leaves.
Generally, for retirement pay to be exempt from income tax, regardless of whether the benefit is under an established reasonable private benefit plan or under RA No. 7641, there are certain conditions that must be met:
• The retiring employee has been in the service of the same employer for at least 10 years;
• The retiring employee is not less than 50 years of age at the time of retirement; and
•The benefit (i.e., the tax exemption) has been availed of only once by the employee.
However, it is noteworthy that if the retirement payment is under a reasonable private benefit plan, there is an additional requirement which is to have the plan registered with the BIR. Failure to meet any one of the prescribed conditions renders the retirement pay taxable and subject to the progressive tax rates.
Companies should be agile in developing compensation-linked employee retention strategies. While several compensation strategy approaches can be used, a market-based and performance-linked approach seems to be the most viable option. Setting compensation must be based on industry benchmarks to ensure that the compensation remains competitive within the market. On the other hand, providing compensation linked to the employees’ performance ensures that higher compensation and benefits are given to high performing and top tier employees.
People remain the most vital asset to any organization, and will always be at the heart of achieving its goals and vision. As such, every organization should make substantial efforts to ensure that its people are taken care of and nurtured in every aspect to keep them engaged, leading to long-term retention.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Marvin L. Madrigalejo is a director at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.