September 13, 2004

BIR RULING NO. 009-04

32 (A) (1)
Joaquin Cunanan & Co.
29th Floor Philamlife Tower
8767 Paseo de Roxas
1226 Makati City
Attention:

Ms. Myrna M. Fernando

Partner
Tax Services

Gentlemen :
This refers to your letter dated February 21, 2003 requesting for confirmation of your opinion, viz:
1)
That the shares granted under the ANZ ESAP Plan which are subject to disposal restriction and
forfeiture clause (the latter applies to ESAP shares under incentive scheme) at the time of grant shall
not be taxed until the disposal restriction is lifted; and
2)
That dividends from ANZ ESAP shares which are mandatorily reinvested through the ANZ
Dividend Reinvestment Plan (DRP), with the same disposal restrictions and/or forfeiture clauses as the
original shares, shall not also be taxed until the disposal restriction is lifted.
It is represented that ANZ Bank was organized under the laws of Australia; that its shares are listed and
traded in the Australian Stock exchange; that in order to increase employee motivation and to create a
stronger link between increasing shareholder value and its employee reward system ANZ Bank has
established the ANZ Employee Share Acquisition Plan (ESAP) to provide employees with the
opportunity to participate in the growth of the Bank; that the salient features of the Plan are as follows:
1.
Under the ESAP, all employees, including executive officers, with at least one year of service
with the Bank will be offered Australian registered shares in ANZ Bank free of charge. There are two
schemes under the plan: (1) the general scheme and (2) the incentive scheme.
The following plan features are common to both the general and the incentive schemes:

There is a trading lock preventing employees from disposing the shares; until the earlier of (a) a
period of three years from the date the shares are awarded, or (b) termination of employment with ANZ
in the case of the general scheme and a period of three years from the date the shares are awarded in the
case of the incentive scheme.

During the trading lock, a Trustee will hold the shares on behalf of the employees.

Dividends accruing to the employees during the trading lock are required to be reinvested in
ANZ shares under the compulsory participation requirement of the Dividend Reinvestment Plan
(DRP). As such, employees cannot receive cash dividends; the cash dividends will be received in the
form of additional ANZ shares. The additional shares will be released from restriction at the same time

the participant's plan shares are released.

that the main distinction between the two schemes relate to the forfeiture provisions;
1.
that under the incentive scheme, the shares and any accumulated DRP shares will be forfeited if
the employee resigns or is dismissed before the end of the three year restriction period; that however, if
the employee retires or is made redundant, the shares will not be forfeited; that they will be transferred
to him following termination of employment.
2.

that under the general scheme, the shares are not forfeitable under any circumstances.

and that when the shares cease to be restricted shares under both scheme, the Trustee can elect whether
to transfer the shares to the participant or sell the shares and pay the net proceeds of sale to the
participant/employee.
In reply, please be informed of the following:
1.
Section 32 (A) (l) of the Tax Code of 1997, provides that the term "gross income" includes
compensation for services in whatever form paid including, but not limited to, fees, salaries, wages,
commissions, and similar items. On the other hand compensation is defined under Section 2.78. (A) of
Revenue Regulations (RR) No. 2-98 as "all remuneration for services performed by an employee for
his employer under an employer-employee relationship, unless specifically excluded by the Code". The
regulations further provides that compensation may be paid in money or in some medium other than
money, as for example, stocks, bonds or other forms of property.
However, Section 2.83.6 of RR 2-98 provides that:
"xxx
xxx
xxx
Sec. 2.83.6. Applicability of constructive receipt of compensation. The withholding tax on
compensation shall apply to compensation actually or constructively paid. Compensation is
constructively paid within the meaning of these Regulations when it is credited to the account of or set
apart for an employee so that it may be drawn upon by him at any time although not then actually
reduced to possession. To constitute payment in such a case, the compensation must be credited or set
apart for the employee without any substantial limitation or restriction as to time or manner of
payment or condition upon which payment is to be made, and must be made available to him so that it
may be drawn upon at any time, and its payments brought within his control and disposition. A book
entry, if made, should indicate an absolute transfer from one account to another. If the income is not
credited, but it is set apart, such income must be unqualifiedly subject to the demand of the taxpayer.
Where a corporation contingently credits its employees with a bonus stock, which is not available to
such employees until some future date, the mere crediting on the books of the corporation does not
constitute payment. (Emphasis supplied).
xxx
xxx
xxx"
Thus, the shares granted pursuant to an employer-employee relationship under the ANZ ESAP Plan
which are subject to disposal restriction and forfeiture clause at the time of grant shall not be taxed until
the disposal restriction is lifted, that is, for a period of three years from the date the shares are awarded
or the termination of employment with ANZ in case of the general scheme and a period of three years
from the date the shares are awarded in the case of the incentive scheme whichever is earlier, as the
same will only be taxable when actually or constructively received.

2.
With respect to dividends, the same should be recognized on the date of declaration, the date on
which the payment of dividends is approved. The reason is that when dividends are declared, the
stockholder has already the right thereto so much so that if the stocks are subsequently sold, the sales
price normally includes the accrued dividends. Once a dividend has been declared, a legal liability
binding on the corporation is created.
However, stock dividends whether of the same class or different are not income. The reason is that
there is no distribution of the assets of the corporation. The stock dividends create only a change in the
composition of the stockholders' equity, that is, a transfer from retained earnings to capital stock.
Thus, dividends from ANZ ESAP shares which are mandatorily reinvested through the ANZ Dividend
Reinvestment Plan, with the same disposal restrictions and/or forfeiture clauses as the original shares,
shall not also be taxed until the disposal restriction is lifted.
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, then this ruling, shall be considered null
and void.
Very truly yours,
(SGD.) GUILLERMO L. PARAYNO, JR.
Commissioner of Internal Revenue