Accounting for Withholding Taxes in the Philippines

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

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

• 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