Under Section 23 of the Corporation Code of the Philippines, and hereunder we quote:
Section 23. The Board of Directors or Trustees. – Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is a no stock, from among the members of the corporation, who shall hold office for one (1) year until their successors are elected and qualified.
They are the brains and the wisdom of the corporation that their maneuvering greatly affects the success or failure of the corporate venture. In exchange their services as a member of the Board of Directors (BOD), directors may be given monetary considerations. They are not normally being compensated for serving as BOD because of the fact that their serving as BOD would inure to their personal benefit, they being major stakeholders who would share the portion of the corporate earnings in dividend declarations. Nevertheless, they may be given per diems for their attendance in board meetings, and conferences. This is normally referred as director’s fees in the corporate world.
This director’s fees constitute an income for the BOD, and as such, subject to income taxes. For tax purposes, the taxability would depend whether or not the BOD is being held out as an employee of the company, concurrently, such as Company President, Treasurer, Corporate Secretary, and other employment capacity. Hereunder are the tax rules applicable:
Director and employee, at the same time
The director’s fee is subject to withholding tax on compensation using the 5-32% withholding tax table based on gross amount. Likewise, its compensation as employee is subject to the same withholding tax rates. At the end of the year, if this is a single employment, then the director is no longer required to file an income tax return under the rules of “substituted filing’ premised on the fact that the BOD had been withheld the correct amount of tax. However, if BOD has other taxable income, like concurrent employment with other companies, business income, income from practice of profession, and other income subject to 5-32%, the director’s fees shall be included in his annual income tax return (BIR Form 1701) and the amount withheld shall be allowed as a deduction from the tax due to determine the net amount payable.
The director’s fee is subject to a creditable withholding tax (CWT) of 10% if gross income of the previous year does not exceed P720,000 as stated in the BIR required affidavit of declaration duly received by the BIR, otherwise, 15%. Said income shall be declared along with the director’s other income like income from concurrent employment with other companies, business income, income from practice of profession, and other income subject to 5-32%, in its annual income tax return (BIR Form 1701) and the amount withheld shall be allowed as a deduction from the tax due to determine the net amount payable.
In sum, if the director is at the same time an employee, then apply the withholding tax table on compensation. If not an employee of the corporation at the same time, then, apply the 15% rate based on gross amount of payment. They could also be provided fringe benefits on top of their salaries and director’s fees, and the same is subject to fringe benefits tax (FBT).
Revenue Regulations No. 2-98, as amended
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October 05, 2017 Thursday – Input VAT Refund