Taxability of Director's Fees for VAT Purposes

Section 105 of the Tax Code defines persons liable for VAT as those engaged in the regular conduct or pursuit of a commercial or economic activity.
This includes persons selling goods, rendering services, or importing goods in the course of trade or business.
The phrase "in the course of trade or business" refers to regular, going-concern activities aimed at pecuniary gain.

Directors are elected members of the corporation's board and must own at least one share of the capital stock (Section 23, Corporation Code).
The term of office is limited to one year or until successors are elected.
Director's services are not offered freely to any corporation but are tied to ownership and election.
Director’s compensation is limited and regulated; it cannot exceed 10% of the corporation's net income unless voted otherwise by stockholders (Section 30, Corporation Code).

Director’s fees and allowances do not constitute an economic or commercial activity pursued on a going-concern basis.
Such income derives from the exercise of ownership rights in managing a corporation, not from selling goods or services regularly.
Directors are generally prohibited from contracting with their corporation (Section 32, Corporation Code), restricting business dealings that could constitute taxable trade.

Fees, per diems, honoraria, and allowances paid to directors as such are exempt from 12% VAT and 3% percentage tax despite not being enumerated among exempted items in Section 109 of the Tax Code.
These payments are not considered income from a trade or business transaction but as remuneration for corporate management rights.

The statement in Revenue Memorandum Circular No. 34-2008 imposing VAT or percentage tax on director's fees received by non-employee directors is hereby repealed.
This Order takes effect immediately upon adoption on November 24, 2008.
Officially issued and signed by Commissioner Sixto S. Esquivias, IV.