Taxation of directors

Many tax professionals grapple with the issue of taxation of directors. A director can either be an employee of a company or a non-executive member. In both cases, the tax laws have provisions to deal with how payments which have a source in the country should be taxed in the hands of a director. The blatant failure of companies to declare all remunerations paid to their directors makes assessing them for tax payable a challenge.

Section 116 of the Income Tax Act, 2015 (Act 896) as amended states payments or emoluments made to directors or board members as service fees shall be taxed in accordance with the first schedule. A service fee as defined by the Act means a payment to the extent to which, based on market values, is reasonably attributable to services rendered by a person but excludes interest, rent or royalty.

It is worth noting that the Act treats how such amounts should be withheld for both resident and non-resident persons. A resident person is defined in section 101 of the Act therefore it is imperative for companies to apportion such payments accordingly. Service fees paid to both resident and non-resident directors by reason of their association with the company shall be taxed at a withholding rate of 20 per cent.

These amounts withheld are not final tax hence persons who received such emoluments are to account for it when filing their annual returns at the end of the basis period as enshrined in section 124 of the Act. A non-resident director will only file returns on income accrued in the country or have a source in the country.

During tax audits, the commissioner general will assess the directors of the company to ascertain their compliance with this provision. Most unstructured companies fail to file returns of their directors hence tax auditors use their discretion and best judgment to assess their tax liability.

The dilemma after tax audit- who is liable to pay the assessment raised? The company or the director in question? In practice, as promulgated in section 117 of the Act, the liability is added to the company’s tax debts. The Commissioner General shall surcharge any company for the director’s liability when it fails to withhold the tax payable. Regulation 3 of LI 2244 requires employers to withhold appropriate tax from qualifying cash payments made during the year. The company may recover the equal amount surcharged from the director.

In conclusion, assessing the directors of a company is vital in revenue generation purposely to prevent income shifting and to maximize the tax net. It is therefore our civic responsibility to ensure we pay our taxes for national development.

>>>the writer is a member of CITG and a staff of GRA