THE business and legal communities were dismayed by an order from the Bureau of Internal Revenue imposing a value added tax (VAT) of 12 percent on the gross receipts (like “per diems, allowances or any other income payment”) of directors of corporation, who are not at the same time officers thereof. If the gross receipts do not exceed P1.5 million a year, the 3-percent percentage tax is charged. This VAT is imposed on top of the usual income taxes.
Administrative imposition. So they (in particular, the Institute of Corporate Directors headed by former Finance Secretary Jesus P. Estanislao) asked: Is this new BIR imposition valid and legal?
To start with, may I stress that this new charge was not expressly imposed by the National Internal Revenue Code (Code) but only by Revenue Memorandum Circular (RMC) No. 34-2008 issued on April 15, 2008 by then BIR Commissioner Lilian B. Hefti. RMC 34-2008 did not state its legal basis. It merely said—rather summarily and imperiously—that directors “fall under the category of sellers of services under Title IV of the Code.”
On the other hand, “Title IV of the Code,” specifically Sec. 105 thereof, says that “any person who, in the course of trade or business […] renders services […] shall be subject to the value added tax […]” Sec. 105 clarifies that “(t)he phrase ‘in the course of trade or business’ means the regular conduct of a commercial or an economic activity […]” (bold types supplied). The big question is: Does the work of a director (who is not at the same time the president, treasurer or other officer of the corporation) fall under this category and therefore subject to VAT? My short answer is an emphatic “No.”
Directors do not sell services. First, the service rendered by directors is not made “in the course of business or trade.” Directors are elected by the stockholders of a corporation to represent them in the policy formulation of the company. Their rights, duties and obligations are mandated by the Corporation Law. They do not “sell their services” to the company for which they are compensated on the basis of their business or professional acumen.
Persons subject to VAT are required to issue invoices for their services for which they also issue official receipt once paid. Directors do not do that because they have no compensation contracts with the company. Their per diems are given to them by reason of their election and merely for their attendance during meetings, not on a quantum merit basis like those rendering “VATable” services. In short, their fees are not measured according to the merit of their services but are given on the fact alone of their election to office.
Second, there is no “regularity” in the conduct or pursuit of a director’s activity. Directors remain in office only for the term—usually one year—they are elected. Their compensation is not subject to negotiation or based on individual merit. It is determined by the board of directors and is equal to everyone else similarly situated.
Third, the VAT—per the Supreme Court in “Commissioner of Internal Revenue vs American Express” (June 29, 2005)—is a “tax on consumption expressed as a percentage of the value added to the goods or services purchased by the producer or taxpayer.” Directors do not add a corporate value that is economically quantifiable. Hence, it is difficult if not impossible to ascertain the additional value created by individual directors by reason of their office.
“Commissioner of Internal Revenue vs Seagate Technology” (Feb. 11, 2005) held that under the VAT system, a “taxpayer can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports.” A director has no input taxes against which the output tax can be offset. There is no supply chain in the director-corporation relationship.
Since the VAT cannot be shifted or passed on, the director will be both the producer and end-user or customer. There can be no occasion to claim any refund or credit. Why? Because by its nature, VAT is simply inapplicable to the fees and other compensation received by corporate directors. Subjecting them to the tax is simply incongruous to the very nature of the VAT.
Under RMC 34-2008, directors will never have the option given them by jurisprudence “to either (1) carry over any excess input VAT to the succeeding quarters for application against […] future output VAT liabilities, or (2) file an application for refund or issuance of a tax credit certificate covering the amount of such input VAT.”
Resolving doubts. Finally, taxes are odious exactions on the populace. Thus, their language and rationale should be clear. Any ambiguity or doubt in their coverage should be interpreted in favor of the taxpayers. Here, there is not merely ambiguity or doubt. There is certainty that the VAT was never intended to cover directors who do not have input or output capacities. Neither do they participate in an economic chain of activity in which the value added by the players is clearly identifiable and taxable.
Happily for the corporate world, the BIR official who issued this arbitrary order has resigned. New Commissioner Sixto S. Esquivias IV should immediately withdraw that portion of RMC 34-2008 imposing VAT on directors, instead of waiting for the Court of Tax Appeals and the Supreme Court to embarrass his office with an adverse decision. I am confident his boss, the sensible Finance Sec. Gary Teves, will support him.
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