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 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.

2)

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
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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.
EcICDT

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. that under the general scheme, the shares are not forfeitable under
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2.
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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

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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.
TaDAHE

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.
EDISTc

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

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