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Behind
the success of every business lies challenges that have
to be dealt with and decisions that have to be made. And
at the forefront of these business decisions are
individuals who may be few in number yet have the
responsibility of facing the diverse and countless
challenges the business world has to offer. These men
and women working behind the scene at the top of the
corporate hierarchy are known as the directors.
Members
of the board of directors are elected from among the
stockholders or members of a corporation and, at the
same time, may or may not be employees of the same. And
like any recipient of income, the directors’ fees cannot
escape the burden of taxation. Recently, the Bureau of
Internal Revenue issued Revenue Memorandum Circular
34-2008 which further 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 are treated as compensation income
for income-tax purposes. Being so, the fees are subject
to the applicable withholding tax on compensation, for
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).
These
tax treatments will apply whenever it is established
that the director and the corporation have an
employer-employee relationship (e.g. a president of a
corporation sitting as a member of the board of
directors). When in doubt as to whether or not a
director is, at the same time, an employee, the court
had laid down the fourfold test in determining the
existence of an employer-employee relationship, which
are: (1) the power to hire; (2) the payment of wages;
(3) the power to dismiss; and (4) the power to control.
The power to control is the most important among the
four elements.
In the
absence of an employer-employee relationship, i.e., the
duties of the director are confined to the attendance of
and participation in the meetings of the board of
directors, the 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, specifically as professional fees, talent
fees or other similar type of fees. 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.
These
rules are not new as these had already been provided for
in previous regulations. What is distinct from this new
circular is the characterization 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 on their
gross receipts or the 3-percent percentage tax if the
director’s gross annual sales and/or receipts do not
exceed the threshold, which is at present at P1.5
million. It is to be noted, therefore, that directors
who are not employees of the corporation paying the fees
shall be subject to both the income tax and the business
tax (VAT or percentage tax).
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. They
would be required to file the 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.
We
foresee that this would necessarily involve additional
compliance requirements on the part of the
directors—issuance of receipts, filing of monthly and
quarterly VAT returns and substantiation of input VAT
that can be credited against their output VAT. Taking
these into consideration will ensure that compliance
with the rules is not compromised.
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The author is an associate of BDB Law. If you have any
comments or questions concerning the article, you can
e-mail the author at alvin.c.go@bdblaw.com.ph or call
856-2952. |
