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04
July

Accounting for Withholding Taxes in the Philippines

By: Floyd C. Paguio

We had been browsing some search terms leading to our pages, blog posts and articles when we noticed the search phrase “accounting for withholding tax entries“, and this invites our attention to make a simple article on the accounting entries related to withholding taxes.  To start with, please note that under the tax rules,

“obligation to withhold arise upon your payment, accrual, or recording in the books of an expense subject to withholding taxes, whichever comes earlier”

 As such, we show you the sample related accounting entries in the books of the payor-withholding agent and that of the payee. To illustrate:

Let us assume that Company A secured the professional services of Mr. Juan de la Cruz amounting to P100,000, exclusive of 12% VAT, or a total of P112,000.00. What are the related accounting entries, assuming Mr. Juan de la Cruz’ income does not exceed P720,000.00 and the withholding tax rate is 10%?

I. Payment of expense subject to withholding

Upon payment, you may take the sample journal entry on the books of Company A as payor:

  • Debit: Professional fees (expense) – P100,000.00
  • Debit: Input VAT – P12,000.00
  • Credit: Cash – P102,000.00
  • Credit: Withholding tax payable – P10,000

As payee, it is at this point that you will recognize the expense and decrease cash by the amount paid, net of withholding tax. Withholding tax is bound to be remitted within the next month, so you record it as a liability in the meantime. You please note also that withholding tax is based on amount excluding VAT so computation is 10% of P100,000.00 or P10,000.00.

Upon remittance of Company A to BIR using BIR Form No. 1601E with Monthly Alphalist of Payee, the sample entry would be:

  • Debit: Withholding tax payable – P10,000
  • Credit: Cash – P10,000.00

On the books of payee Mr. A, you may take the sample journal entry below:

  • Debit: Cash – P102,000.00
  • Debit: Creditable Withholding Tax – P10,000
  • Credit: Professional fees (revenue)- P100,000.00
  • Credit: Output VAT – P12,000.00
In support of the above entry, Mr. A will issue a VAT official receipt for the cash of P102,000, and will receive a creditable withholding tax certificate (CWT or BIR Form No. 2307) either every payment of on a quarterly basis.  Upon application of Mr. A of the CWT against his quarterly or annual income tax liability based on BIR Form No. 2307 from Company A, you may have the sample journal entry as follows:
  • Debit: Income tax due and payable – P10,000
  • Credit: Creditable Withholding Tax – P10,000
II. Accrual of expense subject to withholding

If Company A did not pay at the end of the period, and simply recognize the expense, you may take the sample entry as follows :

  • Debit: Professional fees (expense) – P100,000.00
  • Debit: Deferred Input VAT – P12,000.00
  • Credit: Accrued expenses payable – P102,000.00
  • Credit: Withholding tax payable – P10,000
On the above, you recognize liability on accounts payable and withholding taxes. Input VAT is deferred and you cannot use against output VAT of Company A because you do not have a VAT official receipt in support. BIR will disallow the same and will penalize you if you claim input VAT on purchase of services without VAT official receipt.
Same entry with the above will be made upon remittance of the withholding taxes to the Bureau of Internal Revenue (BIR)
On the books of Mr. A, you may record the income accrual based on the following sample entry:
  • Debit: Accounts receivable – P102,000.00
  • Debit: Deferred Creditable Withholding Tax – P10,000
  • Credit: Professional fees (revenue)- P100,000.00
  • Credit: Deferred Output VAT – P12,000.00

You could not use deferred creditable withholding tax against quarterly or annual income tax liability of Mr. A without the BIR Form No. 2307 from Company A, and you cannot make Mr. A liable for VAT on the deferred output VAT because as service provider, his tax liability is based on gross receipts or collections.

III. Payment of accrued expense subject to withholding

Upon payment of accrued expenses subject to withholding taxes, you may adopt the sample entries on the books of Company A:

  • Debit: Accounts Payable – P102,000.00
  • Credit: Cash
  • Debit: Input VAT – P12,000.00
  • Credit: Deferred Input VAT – P12,000.00

You may likewise adopt the following sample entry upon collection of Mr. A of the recorded accrued revenue:

  • Debit: Cash – P102,000.00
  • Credit: Accounts receivable – P102,000.00
  • Debit: Creditable Withholding Tax – P10,000
  • Credit: Deferred Creditable Withholding Tax – P10,000
  • Debit: Deferred Output VAT – P12,000.00
  • Credit: Output VAT – P12,000.00

You please note that the deferred accounts are simply reversed to neutralize their temporary effect on the books.

The above are sample illustrative entries only, and you are free to make enhancements. Account titles may vary depending on the chart of accounts adopted by your company.


(Mr. Floyd C. Paguio is a Resource Speaker with Tax and Accounting Center, Inc. He is a Certified Public Accountant and the Managing Partner of GPP & Co., CPAs, an accounting firm engaged in the practice of accountancy catering clients from various industries. He is a professor of accounting at Polytechnic University of the Philippines – Taguig Campus and at the MAPUA I.T. Yuchechengco School of Business and Management. For comments, you may please send mail at floyd.paguio@gppcocpas.com)

Disclaimer: This article is for general conceptual guidance only and is neither an expert opinion, nor a substitute for an expert opinion in itself. Please consult your preferred accountant or accounting consultant for the specific details applicable to your circumstances.


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25
May

Tax Savings on SME education

With much due respect, we disagree with the notion that education is costly, and instead, we submit that ignorance is more costly! Let me share hereunder our views.

As Article 3 of the Civil Code of the Philippines puts it, and hereunder quoted:

“Ignorance of the law excuses no one from compliance therewith.”

This is a sad truth for the entrepreneurs. For an entrepreneur, large or small, everyday is a great competition that if one could not stand ground, it may loss the battle. One entrepreneur might have great business ideas for operations and marketing, but if it does not possess the required knowledge in complying applicable rules and government requirements, its hard earnings may simply go to government coffers in the form of unexpected dues such as penalties for simple lapses, or worst to private pockets.

 As the saying of Martin Luther King, Jr. says:

“Nothing in the world is more dangerous than a sincere ignorance and conscientious stupidity”

Ignorance of applicable existing laws, rules and regulations is not a good excuse not to comply. While honest mistake or unintentional lapses makes one’s conscience clear, our government authorities does not easily accept them. Bureau of Internal Revenue (BIR) for instance imposes a 25% surcharge based on the basic amount of tax on tax returns not filed on time, regardless of whether or not the delay covers a day, or weeks, or months, or years. What is 25% may mean a lot because any peso amount paid to penalties are actually peso net income after deducting all the related expenses and taxes. It could have been used to other operational investments and multiplied more profits.

Likewise, BIR imposes interest of 20% per annum for incomplete payments, and compromise penalties ranging from P200 to P25,000 or even as much as P50,000 in some instances. Worst, one could even go to jail without knowing it ahead because before he knew it, a simple lapses resulting to an under-declaration of income or overstatement of expense by more than 30% is presumed fraudulent and is subject to criminal sanctions after due proceedings.

Securities and Exchange Commission (SEC) likewise imposes a penalty for simple errors on the filed reports such a corporate stockholder being made a director when the same is even impossible to be true because directorship is only for natural persons. Late filing of General Information Sheet (GIS) and Audited Financial Statements (AFS) entails penalties. SEC is now even penalizing corporations for erroneous or incomplete notes to audited financial statements. Or worst, too much of these would even cost the Company’s Certificate of Registration in such a way that it will really have headaches on how to transfer properties.

Why risk your earnings with your ignorance. Educate to compete and succeed in your business undertaking. Invest on good education to protect your hard earned business income.

 

Related Services:

Bookkeeping and Tax Compliance Education. We offer range of quality seminars, trainings, and workshop geared towards developing the required knowledge in tax and accounting compliance.(Post viewed 1709 times)

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