Law Summary
Definition of Compensation under Revenue Regulations No. 2-98
- "Compensation" includes all remuneration for services performed by an employee under an employer-employee relationship.
- Director's fees paid to directors who are also employees qualify as compensation income according to Section 2.78.1 of RR No. 2-98.
- Such fees are exempt from Value-Added Tax (VAT) under Section 109 of the NIRC when received by employee directors.
Tax Treatment When No Employer-Employee Relationship Exists
- If the director is not an employee (duties limited to attendance and participation in board meetings), director's fees are not considered compensation income.
- These fees fall under gross income from trade or business under Section 32(A)(2) of the NIRC.
Income Tax Withholding for Non-Employee Directors
- Fees paid to non-employee directors are subject to creditable withholding tax:
- 10% if gross income for the year does not exceed PHP 720,000.
- 15% if gross income exceeds PHP 720,000.
- This is pursuant to Revenue Regulations No. 30-2003.
- Such payments are classified as "Professional Fees, talent fees, etc. for services rendered by individuals," per Section 2.57.2 (A)(9), RR No. 2-98.
- The withholding tax base includes fees, per diems, allowances, and any income payments to the director.
Business Tax Obligations of Non-Employee Directors
- Non-employee directors receiving fees must also pay business tax under Title IV of the NIRC.
- They are considered sellers of services liable for:
- 12% VAT on gross receipts if VAT threshold is met (Section 108).
- 3% percentage tax if they fail to meet the VAT threshold (Section 116).
Enforcement and Dissemination
- Internal Revenue Officers are instructed to widely publicize this circular to ensure proper compliance.
- The circular is effective as of April 15, 2008, signed by the Commissioner of Internal Revenue, Lilian B. Hefti.