What does the Revenue Dept's latest VAT notification on services mean for directors?

For value-added tax purposes, a service is defined as “any activity performed with a view to benefits of value other than the sale of goods”.

This new notification was issued to stipulate that the activities performed in the capacity of a director of a limited company or of a public company, a titular director, a director emeritus and a government-appointed director shall not be regarded as a service under the definition of Section 77/1(10) of the TRC.

But does this notification truly silence the debate about whether directors are liable for VAT if they receive more than Bt1.8 million in directors’ fees?

For personal income-tax purposes, any payment received by a director is income under Section 40(2) of the TRC, which covers income earned from a “post or from performance of work whether such post or performance of work is permanent or temporary”.

Generally, income under Section 40(2) shall be regarded as services for VAT purposes and a taxpayer who earns more than Bt1.8 million in income under this section shall be required to register and pay VAT.

There has long been a debate about whether this applies to a director who receives a director’s fee. In the past, the RD has issued tax rulings on the VAT liability of directors’ fees which provide some indication of the approach the RD could take regarding this issue.

For example, in tax ruling No 0811/7741, the RD ruled that the fees received by a managing director who was obliged to perform duties in accordance with the rules and the company’s regulations and the resolutions of the board of directors were not subject to VAT, as the fees paid to the managing director should be regarded as an employment salary under Section 40(1) of the TRC, and were therefore VAT-exempt under Section 81(1)(m) of the TRC.

In this ruling, the RD exempted fees earned by a managing director from VAT even though the managing director did not have an employment contract, which the Section 81(1)(m) exemption specifically requires. Section 81(1)(m) of the TRC provides a specific VAT exemption for transactions for services provided under an employment contract.

In another tax ruling, No 0706/7829, the RD ruled that the fees received by a director were derived by virtue of post or of service rendered under Section 40(2) of the TRC, and thus subject to VAT. The reason was that the director in this case was responsible for management activities as well as collaborating with clients, which meant that his duties went beyond that of the typical director.

The above-mentioned tax rulings provide some indication of the approach the RD could take regarding this issue. You may notice that in each case the RD was responding to a specific taxpayer based on a specific set of facts.

Learning from the above sample tax rulings, VAT would be exempted if fees could be classified as employment income under Section 40(1) of the TRC, whereas VAT would be imposed if the director also performed other activities besides acting in the capacity of a director.

It seems that the RD’s interpretation depends on whether the activities of directors fall under the definition of employment income which is exempt from VAT. However, these past tax rulings did not provide a clear answer about whether the fees received by a director solely in his/her capacity as director are subject to VAT.

There is no doubt that the fees received in the capacity as a director are income under Section 40(2) of the TRC, but the RD never addressed this issue from a VAT perspective. This left the issue of VAT on directors’ fees in a state of uncertainty.

In this regard, the issuance of this new notification makes it clear that the fees earned by a director in his/her capacity as a director are not subject to VAT, as the activities of a director are not regarded as a service under the VAT definition.

Benjamas Kullakattimas is

Tax partner in charge, KPMG Phoomchai |Tax Ltd.