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 follow:

 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.