BIR Ruling No. 064-12

February 9, 2012 BIR RULING NO. 064-12 RMC No. 34-2008; Section 36, Revenue Regulations No. 2; BIR Ruling 422-2011 National Wages and Productivity Commission 2nd Flr., DY International Bldg. 1011 Gen. Malvar, San Marcelino Sts. Malate, Manila Attention: Dir. Ciriaco A. Lagunzad III Executive Director Gentlemen : This refers to the letter dated February 16, 2011 of Dir. Joffrey M. Suyao, Chairman of the Regional Tripartite Wages and Productivity Board-XI (RTWPB-XI) and OIC-Regional Director of Department of Labor (DOLE)-Region XI, requesting the National Wages and Productivity Commission (NWPC) to issue a memorandum to clarify the nature of the "per diem" granted to members of RTWPB-XI for their attendance in board meetings, per NWPC Office Order No. 12, series of 2005. THEDCA In reply, please be informed that it is a well settled principle of taxation that income, in the broad sense, means all wealth which flows into the taxpayer other than mere return of capital (Section 36, Revenue Regulations No. 2, "The Income Tax Regulations"). Guided by the above principle, it is without argument that "per diem", no matter how negligible the amount, is wealth that flows into the hands of a Director, hence, subject to income tax. This was confirmed in BIR Ruling No. 422-2011 dated November 11, 2011, where this Office held that "the name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, bonuses, allowances (such as transportation, representation, entertainment and the like), fringe benefits (monetary and non-monetary), fees, including director's fees , taxable pensions and retirement pay and other income of a similar nature constitute compensation income." (underscoring supplied) Further thereto, Revenue Memorandum Circular (RMC) No. 034-2008, dated April 15, 2008, clarifies the taxability of the Director's Fees for income tax and business tax purposes as follows: "It is a well-settled rule that director's fees are taxable, for income tax purposes, as compensation income when the recipient/director is an employee of the corporation which pays the same. Being embraced within the term "compensation income", the director's fees are subject to the withholding tax on wages imposed under Section 79, in relation to Section 24 (A), both of the National Internal Revenue Code (Code). The above tax treatment applies whenever it is established that the director and the corporation has an employer-employee relationship, i.e. , President of a corporation sitting as a member of the Board of Directors. Revenue Regulations No. 2-98 provides that "the term "compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code". Thus, fees including director's fees, if the director is, at the same time, an employee of the employer/corporation constitute compensation income (Section 2.78.1, RR No. 2-98). Accordingly, the director's fees received by employees are exempt from the value-added tax under Section 109 of the Code. However, if these fees are paid to a director who is not an employee of the corporation paying such fees ( i.e. , whose duties are confined to the attendance of and participation in the meetings of the board of directors), such fees are not treated as compensation income because of the absence of employer-employee relationship, but rather, the same should squarely fall under Section 32 (A) (2) of the Code under the caption "Gross income derived from the conduct of trade or business or exercise of a profession." The fees received by the director who is not an employee of the payor/corporation are subject to ten percent (10%) creditable withholding tax if his gross income for the current year do not exceed P720,000.00 or fifteen percent (15%) if his gross income exceeds P720,000.00 pursuant to Revenue Regulations No. 30-2003. These payments fall under "Professional Fees, talent fees, etc., for services rendered by individuals" which include under its purview "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." (Section 2.57.2 (A) (9), RR No. 2-98). It is also emphasized that the amount subject to the 10% or 15% creditable withholding tax is not only confined to fees, but also per diems, allowances and any other form of income payment made to the director. Aside from being liable to the payment of the income tax imposed under Title II of the Code, these directors who are not employees, having received fees which had been subsequently reported in their annual income tax returns as part of their gross income should likewise be liable to pay business tax on account of such receipt of income. They fall under the category of sellers of services under Title IV of the Code who are liable to pay the 12% VAT on their gross receipts pursuant to Section 108 thereof, or to the 3% percentage tax imposed under Section 116, should they fail to meet the VAT threshold." Based on the foregoing, the "per diem" received by the Board of Directors is subject to withholding tax on wages, if the director is also an employee of the company. However, if the director is not an employee of the company paying such fees, and whose duties are confined to attendance at and participation in the meetings of the board of directors, the "per diem" received is subject to a 10% or 15% creditable withholding tax, as the case may be. Please be guided accordingly. TIaCcD Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue