Tuesday, May 06, 2008 Tax notes: Tax treatment of director’s fees
IN Revenue Memorandum Circular (RMC) 34-2008, the Bureau of Internal Revenue (BIR) clarified the tax treatment of directors’ fees for income and business tax purposes.
For directors who are at the same time employees of the corporation, the fees they received are treated as compensation income for income tax purposes. Hence, the fees are subject to the applicable withholding tax on compensation, which the corporation-employer would be required to withhold.
But as compensation received for services rendered by individuals pursuant to an employer-employee relationship, the fees are exempt from value-added tax (VAT).
If the fees are paid to a director who is not an employee of the corporation paying such fees (i.e., whose duties are confined to the attendance of and participation in the meetings of the board of directors), the directors’ fees shall not be treated as compensation income.
Accordingly, the payment of the fees shall not be subjected to withholding tax on compensation by the corporation.
Instead, these shall be treated as income derived from the conduct of business or exercise of a profession.
As such, the fees, per diems, allowances and other forms of income payment made to the director shall be subject to the creditable withholding tax at the rate of 10 percent if the gross income of the director for the current year does not exceed P720,000, or 15 percent, if the same exceeds P720,000.
What is distinct from RMC 34-2008 is the classification of the directors who are not employees of the corporation as sellers of services.
Being sellers of services, their fees shall be subject to business taxes on account of such receipt of income, which may either be the 12 percent VAT or the three percent percentage tax if the director’s gross annual sales and/or receipts do not exceed P1.5 million.
Having these guidelines clearly set, other than simply paying the applicable taxes, directors who are not employees of the corporation would also need to comply with some documentation and other compliance requirements, such as filing of percentage tax or VAT returns, whichever is applicable.
And if the director is a VAT taxpayer, he will be required to issue VAT official receipts to the corporation so the latter could claim the VAT as input tax. And like any VAT taxpayer, the director is also entitled to claim input taxes as credits against his output VAT, but these should be fully substantiated.
