Taxability of Director's Fees for VAT Purposes

Revenue Memorandum Circular No. 77-2008 resolves the VAT and business tax treatment of director’s fees/per diems/allowances received by a director who is not an employee of the corporation.
The Circular’s analysis is anchored on the Value-Added Tax (VAT) rules under Title IV of the Tax Code, particularly Section 105, Section 108, Section 109, and Section 116.
The Circular repealed the penultimate paragraph of Revenue Memorandum Circular No. 34-2008.
The repealed paragraph had asserted that such directors are sellers of services subject to 12% VAT under Section 108 or 3% percentage tax under Section 116 if they do not meet the VAT threshold.

Directors who are not employees receive remuneration as part of the management role of corporate ownership, not as the regular pursuit of a trade or business.
Director’s fees, per diems, honoraria, or allowances received in the capacity as director are treated as remunerations paid in the exercise of an owner’s right in the management of a corporation.
Such remuneration is not derived from an economic or commercial activity pursued in the course of trade or business as contemplated in Section 105.
The Circular therefore establishes that director’s fees/per diems/allowances are exempt from the 12% VAT or the 3% percentage tax, even if the payments are not among those enumerated as exempt under Section 109.

Section 105 of the Tax Code makes VAT provisions applicable to any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and to persons who import goods, subject to the VAT rules in Sections 106 and 108.
The phrase “in the course of trade or business” means the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, by any person.
VAT applies to persons whose undertakings reflect a going-concern commercial/economic activity undertaken to realize pecuniary gains/profits.
The Circular applies these concepts to directors and concludes that the directorship functions do not fit the pattern of a regular commercial service enterprise.

Section 23 of the Corporation Code requires an individual to own at least one (1) share of the capital stock of the corporation to be elected as a director.
Section 23 of the Corporation Code limits the director’s term to one (1) year until a successor is elected.
The Circular treats these constraints as showing that the director’s service is limited in time and not undertaken as a going-concern commercial service activity.
Section 30 of the Corporation Code provides that, absent by-law provisions fixing compensation, directors receive no compensation as such directors except for reasonable per diems.
Section 30 of the Corporation Code allows compensation other than per diems only if granted by the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders’ meeting.
Section 30 of the Corporation Code further limits the total yearly compensation of directors to ten (10%) percent of the net income of the corporation during the preceding year.
Section 32 of the Corporation Code generally precludes a director from entering into a contract with the corporation of which the director is a director, subject to the conditions provided by law.
The Circular uses these corporate-law rules to reinforce that the remuneration to a director as such is tied to corporate ownership and management, not to independently transacted business dealings.

Director’s fees, per diems, honoraria, and allowances received as a director who is not an employee of the corporation are treated as remunerations paid in the exercise of a right of an owner in the management of a corporation.
Such remuneration is not “in the course of trade or business” under Section 105.
The remuneration is therefore exempt from the imposition of the 12% VAT under Section 108.
The remuneration is also exempt from the imposition of the 3% percentage tax under Section 116, including situations where a VAT threshold issue would otherwise be relevant.

The Circular repeals the penultimate paragraph of Revenue Memorandum Circular No. 34-2008.
The repealed rule had treated directors who are not employees as sellers of services liable to pay 12% VAT under Section 108 or 3% percentage tax under Section 116 if they do not meet the VAT threshold.
After November 24, 2008, the controlling position is that director’s fees/per diems/allowances received by a non-employee director are not subject to 12% VAT or 3% percentage tax.

The Circular takes effect immediately.
The Circular’s operative implementation consists of the formal repeal of the specific portion of Revenue Memorandum Circular No. 34-2008 dealing with VAT/percentage tax liability for director’s fees, per diems, allowances, and similar remuneration received by directors who are not employees.