10% Withholding Tax — Employer-Employee Relationship

September 4, 1979 BIR RULING NO. 084-79 10% withholding tax employer-employee relationship This refers to your letter dated March 5, 1979 requesting confirmation of your opinion that amounts paid to a director of a corporation as director's fee and/or allowances are not subject to the withholding tax. In reply, I have the honor to inform you that under Revenue Regulations No. 6-79, supplementing Revenue Regulations No. 13-78 which both implement Presidential Decree No. 1351, beginning July 1, 1979, amounts paid to a director of a corporation as per diems, allowances and other forms of remuneration for services performed as such director shall be subject to 10% withholding tax. Accordingly, payments made before said date are not subject to the expanded withholding tax. However, as to whether or not payments to a director are subject to the provisions of the Withholding on Wages under Chapter XI, Title II of the Tax Code of 1977 as amplified by Revenue Regulations No. V-8, as amended, would depend on the existence of employer-employee relationship between the said director and the corporation. The employer-employee relationship exists only where the person for whom the work is done has the right to control and direct the work not only as to the result to be accomplished by the work, but also as to the details and means by which that result is accomplished. (See Revenue Regulations No. V-8 supra). A director of a corporation is not, by virtue of his office, its employee . (Shriver v. Carlin and F. Co. 155 Md. 51, 141 A. 434, 58 A.L.R. 767). Rather, a director is a part of an elected body of officers constituting the executive representatives of the corporation. (Manson V. Curtis, 223 N.Y. 313, 119 NE 559, Ann Cas. 1918 E. 247). It is clear that no employer-employee relationship exists in the case of such director because the stockholders electing him do not have the right to direct and control the performance of his services, both as to the result to be accomplished as well as to the details and means that are to be utilized in its accomplishment. In the absence, therefore, of employer-employee relationship between the director and the corporation, the fees and/or allowances paid by the latter to the former are not subject to the withholding tax under Chapter XI Title II of the Tax Code of 1977. Nevertheless, a director's occupancy of such office, in a corporation does not disqualify him from becoming its employee where the duties and incidents of his employment are separate and distinct from those pertaining to his Office. Thus, a general sales manager, although he is a director and vice president of the corporation, is an employee within a statute exempting the wages of an employee from attachment. (Shriver v. Carlin supra). In other words, if aside from his having been elected by the stockholders as director of the corporation, an individual also performs the duties of a general sales manager, vice president or secretary of the corporation, the employer-employee relationship exists between said director and the corporation. Only the fees and/or allowances paid to him as an employee of the corporation (like a general sales manager) shall be subject to the withholding tax under Chapter XI, Title II of the Tax Code of 1977 as implemented by Revenue Regulations No. V-8, as amended. However, the fees and/or allowances paid to him as a director of the corporation shall be subject to the 10% withholding tax prescribed by Revenue Regulations No. 6-79, implementing P.D. No. 1351 starting July 1, 1979.