Director’s fees is not entirely new in the business industry. Directors are the minds of the Corporation for it is the corporate governing body. Normally, they are not entitled to compensation, other than reasonable per diems, in the absence of an express provision in the By-laws. This is because directors are stockholders holding majority shares in most cases, and as such, more share of income goes to them through dividends. In other words, even without compensation, they will receive more through their considerable stock holdings and any mismanagement adversely affects them. In case the By-laws would provide compensation, the same shall not exceed 10% of the net income during the preceding year.
What is more interesting to discuss is how such compensation, or per diems for attendance in Board meetings, is being taxed. This was actually highlighted sometime in 2008 when the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular No. 34-2008 dated April 15, 2008 (RMC No. 34-08). Under said RMC 34-08, director’s fees are taxed as follows:
a. Directors who are employees at the same time (e.g. President, V-Pres., etc.) are withheld withholding taxes on compensation;
b. Directors who are not employees at the same time:(1)Expanded withholding tax of 10% if gross income does not exceed P720,000, or 15% if the same exceeds; and,(2)12% value added tax (VAT), if VAT registered or in non-VAT with gross receipts not exceeding P1.5M; or 3% other percentage tax (OPT).
Such RMC 34-08 gained much protests and became controversial on the VAT/OPT aspect and as such, BIR revisited the same and finally came up with RMC No. 77-08 dated November 24 deleting the imposition of the VAT or OPT based on the following arguments:
a. That director’s does not freely offer his services as a director because under the Corporation Code, it must own at least one share;
b. That his term is limited to one (1) year only so the going-concern aspect of VAT or OPT is not present;
c. That the remuneration is limited to not more than 10% of the net income during the preceding year; and,
d. That a director is generally precluded to enter into a contract with the corporation of which he is a director.
From such RR 77-08, directors fees are not subject to VAT or OPT, but subject to income tax. The withholding tax imposed therein is an advance collection of an income and is a creditable withholding tax. The director recipient is still required to file an income tax return to include the director's fees and the tax credits.
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