Tax Implications and Recording of Deposits/Advances as Part of Gross Receipts (Outright Income) or Claim for Deduction of Expenses (Outright Expense) Received or Paid by Taxpayers Other Than General Professional Partnerships (GPP)

Last February 8, 2013, the Bureau has issued the Revenue Memorandum Circular No. 16-2013 to provide guidelines to observed in accounting and recording of deposits/advances for the payment of the pertinent expenses received by the taxpayers other than General Professional Partnerships (GPP) covered by Revenue memorandum Circular (RMC) No. 89-2012 dated December 28, 2012.

The Policies and Guidelines is with details as follows:

1. Deposits/Advances Part of Gross Receipts

When cash deposits or advances are received by taxpayers other than GPP covered by RMC 89-2012 from the Client/Customer, a corresponding Official Receipt shall be issued. the amount received shall be booked as Income and shall form part of the Gross Receipts and subject to Valued-added Tax (VAT) or Percentage Tax (Gross Receipt Tax), if applicable, and shall in turn be deductible as expense by the Client/Customer provided that it is duly substantiated by Official Receipts pursuant to section 34 (A) (1) of the Tax Code.

2. Claim for Deduction of Expenses

Receipts incurred, paid for and issued in the name of the taxpayer shall be recorded as its own expenses for income tax purposes. These expenses shall be claimed as deductions from gross income provided these are duly substantiated by Official Receipts/Invoices issued by third-party establishments.

3. Income Payment are Subject to Appropriate Withholding Taxes

All Client/Customer shall, upon payment of deposits/advances, withhold tax at the rate prescribed in Revenue Regulations No. (RR) 2-98, as amended, which shall be remitted/paid on or before the 10th day of the following month using the Monthly Remittance Return of Creditable Income Taxes Withheld (Expanded) (BIR Form No. 1601E) except for taxes withheld for the month of December of each year, which shall be filed on or before January 15 of the following year pursuant to RR 2-98, as amended. For those filing using the Electronic Filing and Payment System (EFPS), the regulations pertaining to EFPS filers shall apply.

4. Issuing Official Receipts for the Deposit and Advances

An Official Receipt shall be issued for every deposit and advances pursuant to Section 113 of the Tax Code. The Official Receipt shall cover the entire amount which the client/Customer pays.

For VAT Taxpayers, the VAT Official Receipt will constitute the Output Tax for taxpayers other than GPP and in turn, the input tax of its client/customer.

Please refer ftp://ftp.bir.gov.ph/webadmin1/pdf/68486RMC%20No%2016-2013.pdf of the PRO-FORMA ENTRIES and full text of the Revenue Memorandum Circular No. 16-2013.