QuestionsQuestions (BIR REVENUE MEMORANDUM CIRCULAR NO. 77-2008)
It held that such directors are liable not only to income tax but also to VAT (12%) under Section 108 or percentage tax (3%) under Section 116, as they supposedly fall under “sellers of services” for services rendered.
Section 105 of the Tax Code, which subjects to VAT any person “in the course of trade or business” who sells, barters, exchanges, leases goods or properties, renders services, or imports goods.
It means the regular conduct or pursuit of a commercial or economic activity (including incidental transactions), by any person, regardless of type of entity.
Because the director’s functions are not pursued on a going-concern/commercial basis; they are exercised only within a limited term after meeting statutory qualification requirements (e.g., owning at least one share) and are not comparable to regular selling of services for profit.
Section 23 of the Corporation Code: to be elected as a director, the person must own at least one (1) share of the corporation’s capital stock.
The text notes that the director’s term is limited to one (1) year until a successor is elected, meaning the director’s service is limited and cannot be treated as regular, ongoing commercial activity.
It states director remuneration is fixed and subject to statutory ceilings, generally limited to reasonable per diems absent by-law provisions, and any other compensation must be approved by stockholders and cannot exceed 10% of the prior year’s net income as directors.
Section 30: directors shall not receive compensation as such except reasonable per diems unless by-laws fix compensation or stockholders approve additional compensation.
To show directors are generally restricted from entering into business dealings directly with the corporation they direct, limiting the idea that their relationship resembles ordinary commercial service rendering.
They are remunerations paid in the exercise of an owner’s right in the management of the corporation, not derived from an economic/commercial activity pursued in the course of trade or business.
They are exempt from 12% VAT or 3% percentage tax, even if the payments are not enumerated as exempt under Section 109 of the Tax Code.
The penultimate paragraph stating that directors receiving fees/per diems/allowances from corporations where they are directors but not employees fall under sellers of services liable to VAT under Section 108 or percentage tax under Section 116.
It takes effect immediately, as stated in the text.
It holds the exemption is based on the nature of the transaction not being “in the course of trade or business” under Section 105; therefore, VAT/percentage tax does not apply regardless of whether the income is listed under Section 109.