PPh 21 on Stock Awards and Share Options: Price Reduction Facility as Benefit in Kind

In modern remuneration schemes, providing shares or stock options (Employee Stock Option Plan - ESOP) is often used by companies to motivate employees. Since the implementation of the latest regulations regarding Benefits in Kind (BIK) (Minister of Finance Regulation No. 66 of 2023 and its affirmation in the Memorandum of the Director General of Taxes No. ND-14/PJ/PJ.02/2024), the tax treatment for these shares has become more specific.

Granting the right to purchase company shares at a certain price in the future is categorized as a Price Reduction Facility (Discount), which is an object of Income Tax Article 21 (PPh 21) in the form of Benefit in Kind (Kenikmatan).

When is Tax Due?

It is important to understand that at the time the stock option is Granted (Grant Date), no tax is due. Tax becomes payable only when the option is Exercised (Exercise Date), i.e., when the employee actually buys or receives the shares.

How to Value the "Benefit" of Shares

Unlike calculating ordinary investment gains, the value of the benefit that forms the basis for PPh 21 withholding is calculated based on the difference between the cost incurred by the employer and the price paid by the employee.

According to Memorandum Number ND-14/PJ/PJ.02/2024, the gross income value is calculated as follows:

1. If shares originate from Buyback: (Cost incurred by the company to buyback shares) - (Price paid by the employee to redeem shares).
2. If shares originate from New Issuance: (Nominal value of shares + issuance cost) - (Price paid by the employee to redeem shares).

If the price paid by the employee is higher than the cost incurred by the company, there is no PPh 21 object.

PPh 21 Calculation Mechanism: TER Method

Since the income from stock options or stock awards is irregular (occurring only occasionally), the PPh 21 calculation is combined with the salary in the month the transaction occurs (at the time of exercise). The mechanism used is the monthly Average Effective Rate (TER) in accordance with Government Regulation No. 58 of 2023. The value of the share benefit is added to the gross salary of that month, then multiplied by the TER rate according to the employee's PTKP status.

Case Example and Calculation

Scenario:

Mr. A (Status K/1 - Married, 1 child) is a permanent employee at PT X Tbk.

• Monthly Salary: Rp20,000,000.
• Case: In 2022, PT X granted stock options to Mr. A. In July 2024, Mr. A exercised his option to buy 10,000 shares.
• Employee Redemption Price: Rp2,000 per share.
• Company Cost (Buyback): PT X fulfilled this option with shares bought back from the market (buyback) at Rp2,500 per share.

Step 1: Determine Benefit Value (PPh 21 Object)

Benefit Value = (Company Buyback Cost - Employee Redemption Price) x Number of Shares = (Rp2,500 - Rp2,000) x 10,000 shares = Rp500 x 10,000 = Rp5,000,000.

Note: This Rp5,000,000 value is recognized as irregular income for Mr. A.

Step 2: Calculate PPh 21 for July 2024 (Using TER)

• July Gross Salary: Rp20,000,000
• Share Benefit: Rp5,000,000
• Total July Gross Income: Rp25,000,000

Check TER Table Category B (for K/1 status): Income of Rp25,000,000 falls under the 9% TER bracket.

PPh 21 Payable for July: 9% x Rp25,000,000 = Rp2,250,000.

The company withholds Rp2,250,000 tax from Mr. A's cash income for that month. Later, this income will be recalculated in the Final PPh 21 Tax Period calculation (December) using the annual Article 17 rate.

Conclusion

The provision of shares or stock options to employees now has a firm legal basis as an object of PPh 21 under the category of benefits in kind/price reduction facilities. The key lies in the valuation of the benefit—which is based on the real costs incurred by the company, not solely on the market price of the shares at that time.

Regulatory References:

1. Government Regulation Number 58 of 2023 concerning Article 21 Income Tax Withholding Rates on Income in Connection with Work, Services, or Activities of Individual Taxpayers.
2. Minister of Finance Regulation Number 66 of 2023 concerning Income Tax Treatment on Reimbursement or Compensation in Connection with Work or Services Received or Obtained in the Form of In-Kind and/or Benefits (Article 22).
3. Minister of Finance Regulation Number 168 of 2023 concerning Implementing Guidelines for Withholding Tax on Income in Connection with Work, Services, or Activities of Individual Taxpayers.
4. Memorandum of the Director General of Taxes Number ND-14/PJ/PJ.02/2024 (Attachment A Number 3 regarding Examples of Granting Stock Options).