ESOP in the Philippines

The concept behind ESOP

The labour force in the Philippines has been and will always be a significant contributor to the country's economic growth as they help increase the country’s Gross Domestic Product (GDP). But this only happens when companies know how to take care of their most important asset (employees) and when more job opportunities are created. To maximize the potential of labor capital, employers should recognize and reward their employees for their loyalty, dedication, talent, and efficiency, as it is deemed to be the highest recognition that can be given to them.

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In the corporate sector, the relevance of labor capital has been recognized over time due to its progressive growth. And this led to the creation of the concept of the Employment Stock Ownership Plan, also known as ESOP. Adopting the Employees Stock Ownership Plan (ESOP) provides the employees an ownership stake in the company. It is a great way to retain the top-performing employees in a company.

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How does ESOP work?

Based on NCEO, the ESOP begins as a trust fund to which the contributions can be in the form of new shares of the company's stock or cash to purchase existing stock. It is tax-deductible to a certain amount, and then the shares will be allocated to all the individual employee accounts. For instance, after completing at least one year of service with the organization, new employees who join the plan will begin receiving their allocations or shares. The employee has a right to the increasing number of shares of stocks resulting from depending on their employment term.

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If the employees leave the company and are members of an ESOP, they have a right to receive their stock. Additionally, if they retire or separate from the company, their shares are sold, the employee gets reimbursed.

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When was ESOP adopted/institutionalised in the Philippines?

The Employees Stock Ownership Program (ESOP) was established in the Philippines around mid-2005, through the Employees Stock Ownership Program Act of 2005, which was introduced and authored by Sen. Ramon B. Magsaysay, and aims to increase the number of people in the Philippines who own businesses, improve business production capacity, increase revenues, profits, and capital, and investments in economic and commercial activity, and improve the productivity, income security and wealth of the Filipino workers and their families.

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Institutions responsible for regulating ESOP

The Philippine Information Agency and the Department of Labor and Employment are responsible for the information campaign and other similar educational training on the ESOP program and the processes, privileges, rights, and duties.

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There are also regulatory, accounting, and taxation policies for the ESOP. A Revenue Memorandum Circular (RMC) 79-2014 was issued by the Bureau of Internal Revenue to help clarify the tax treatment of the ESOP to the Philippines, while the PFRS 2, which is for share-based payment such as the Restricted Stock Units (RSU) and Employee Stock Purchase Plans (ESPP), is issued by the Philippine Financial Reporting Standards. Also, the Securities and Exchange Commission (SEC) has issued the implementing rules and regulations of the Securities Regulation Code, with some provision that covers the ESOP. And the Securities and Exchange Commission (SEC) is the one that generally approves the offer for sale to the ESOP.

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To guide you with the requirements and procedure, check out this registration form established by the SEC. Meanwhile, if you want to know more about the provision, you may visit the website of the Senate of the Philippines.

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Current situation of ESOP in the Philippines

The National Center for Employee Ownership or known as the NCEO website believed that the ESOP is not attractive to the business sectors in the Philippines.

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For businesses, making their employees their investors would mean that the company will have more people who are more engaged in the firm's operations. This may lead to greater demands for examining financial statements and an increased number of people who are engaged in business planning and strategy. This may lead to unnecessary delays.

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On the other hand, employees may find ESOP unappealing because most Filipinos prefer to earn their benefits and rewards in cash. Another issue that may arise is during their exit. As such, employees may refrain from engaging in the ESOP because they may face difficulties during the time when they want to leave the firm.

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That being said, there are ways to mitigate the challenges highlighted above and both the company and its employees can gain value from ESOP. With proper planning, now is the right time for Philippine businesses to take this seriously.

Incentives to Enterprises, Firms, and Entities as well as to Cooperatives adopting the ESOP in the Philippines

The firms, entities, and cooperatives that adopt ESOP that is duly registered under the preceding provision under the Employees Stock Ownership Program Act of 2005 is entitled to receive the following incentives:
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1. A thirty percent (30%) income tax credit for a price reduction, discount, or contribution toward the payment of the value of ownership shares provided or granted by the employers

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2. Exemption from all kinds of taxation for ESOP transactions, including capital gains tax and taxes on dividend payback plans if dividend payments are kept as such for at least five (5) years.

a.  Any gain resulting from the cooperative's sale of stock or any distribution of profits to members is based on the capital gains tax or income; and

b.  Income tax on any dividends or interest received from the cooperative's stocks, as well as any income distributed to members.

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3. Cooperatives, in addition to the tax exemptions offered by R.A. No. 6938, or the Philippine Cooperative Code, exemptions from:

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4. Any retirement or separation benefits, whether or not covered by an eligible tax plan, that are held in the ESOP for not less than five (5) years are exempt from income tax; and

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5. Exemption from registration, but not reporting, obligations under the Corporation Code for shares of stock in a corporation involved in the transactions.

Bottomline

ESOP can benefit both firms and employees. Despite some of the drawbacks, Filipino businesses and founders might want to consider the benefits and value that ESOP brings. ESOP recognizes the contributions of employees and can provide a financial reward in the future during a liquidity event. Having an ESOP may also build a foundation of trust among the owner, company, and employees.

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For more updated information, you may want to speak with a lawyer who will be able to advise you. We are happy to connect you with a Filipino lawyer.