Tax rules on director's fees

Director’s fees are taxable for income tax purposes as compensation income when the recipient/director is an employee of the corporation that pays the fees.
Director’s fees are treated differently when the director is not an employee of the paying corporation, where no employer-employee relationship exists.
The tax treatment depends on whether an employer-employee relationship exists between the corporation and the director.

The Circular ties withholding tax on wages to Section 79, in relation to Section 24(A) of the National Internal Revenue Code (Code), when director’s fees are compensation income.
The Circular applies Revenue Regulations No. 2-98 for the definition of compensation income and for determining when remuneration constitutes compensation.
The Circular applies Section 32(A)(2) of the Code to director’s fees paid to directors who are not employees of the paying corporation.
The Circular applies Revenue Regulations No. 30-2003 and its thresholds for creditable withholding tax based on the director’s gross income.
The Circular applies Revenue Regulations No. 2-98 provisions on what forms part of professional fees and related categories under Section 2.57.2(A)(9) for directors who are not employees.

Compensation income means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code (Revenue Regulations No. 2-98, Section 2.78.1).
Director’s fees constitute compensation income when the director is an employee of the corporation that pays the director’s fees.
The Circular treats as an employee-director situation the example where the President of a corporation sits as a member of the Board of Directors.
Director’s fees do not constitute compensation income when the director’s duties are confined to attendance at and participation in meetings of the board, because the employer-employee relationship is absent.

When director’s fees are paid to a director who is an employee of the paying corporation, the fees are taxable as compensation income.
The Circular provides that director’s fees in this situation are subject to withholding tax on wages under Section 79, in relation to Section 24(A) of the Code.
Fees characterized as compensation income under the employer-employee relationship are exempt from VAT under Section 109 of the Code.
The Circular applies this employee-based treatment whenever an employer-employee relationship exists between the corporation and the director.

When director’s fees are paid to a director who is not an employee of the corporation paying such fees, the fees are not treated as compensation income due to the absence of an employer-employee relationship.
In the non-employee scenario, director’s fees fall under Section 32(A)(2) of the Code as gross income derived from the conduct of trade or business or exercise of a profession.
The Circular imposes a creditable withholding tax on the director’s fees paid to directors who are not employees.
The creditable withholding tax is 10% if the director’s gross income for the current year do not exceed P720,000.00 and is 15% if the director’s gross income exceeds P720,000.00 (Revenue Regulations No. 30-2003).
The Circular classifies these payments as falling under “Professional Fees, talent fees, etc., for services rendered by individuals,” including “Fees of directors who are not employees of the company paying such fees, whose duties are confined to attendance at and participation in meetings of the board of directors” (Revenue Regulations No. 2-98, Section 2.57.2(A)(9)).
The Circular states that the amount subject to the 10% or 15% creditable withholding tax is not limited to director’s fees; it also covers perdiems, allowances, and any other form of income payment made to the director.

Directors who are not employees and who have received director’s fees that are subsequently reported in their annual income tax returns as part of their gross income are liable to pay business tax on account of such receipt.
Such directors are treated as sellers of services under Title IV of the Code.
Sellers of services are liable to pay 12% VAT on gross receipts pursuant to Section 108 of the Code.
Sellers of services are liable to pay the 3% percentage tax under Section 116 if they fail to meet the VAT threshold.
The business tax liability arises from the director’s receipt of income that is considered gross income under the income tax framework applied to non-employee directors.

All internal revenue officers must give BIR Revenue Memorandum Circular No. 34-2008 as wide a publicity as possible.