Money down! Tax treatment and reporting of cash deposits and advances

A notable businessman once said that in the business world everyone is paid in two coins:  cash and experience. Take the experience first; the cash will come later.  Idealistic it truly is, but oftentimes reality sets one on a different path. Requiring clients to give a deposit to cover necessary expenses for a service or engagement is common practice nowadays.

The Bureau of Internal Revenue (BIR) recently issued Revenue Memorandum Circular (RMC) No. 16-2013 to clarify the tax implication and recording of deposits/advances for expenses received by taxpayers other than General Professional Partnerships (GPPs).

RMC No. 89-2012 prescribes the accounting and recording of cash deposit/advances received by GPPs.  The tax authorities felt the need to issue the subject RMC because of reports that the expenses are being claimed twice as a deduction for income tax purposes, both by the GPP and its client.

Just like GPPs, there are some companies that require clients to make a cash advance/deposit to answer for certain expenses that will be incurred in the course of rendering the service. Thus, RMC No. 16-2013 was issued last February 8, 2013 targeting companies other than GPP that recognize cash deposits/advances from its customers/clients.

Similar to RMC 89-2012, the new RMC No. 16-2013 highlights the proper treatment of cash advances/deposits.  It likewise stresses the importance of issuing official receipts to document the said advances/deposits.

Under RMC No. 16-2013, the Company shall recognize the cash deposits/advances received as income in its financial books and issue the corresponding official receipt to the client/customer. As income, the cash deposits/advances are thus subject to value added tax (VAT) or percentage tax (PT), whichever is applicable. The official receipt issued shall cover the whole amount which the client/customer advanced and it should conform to the proper invoicing requirement for VAT registered person under Section 113 of the National Internal Revenue Code of the Philippines, as amended (NIRC).

When expenses are incurred or paid in behalf of the client/customer and the expenses are properly substantiated by receipts issued by the third party establishments in the name of the company, the latter shall record the expenses as its own for income tax purposes. The necessary withholding tax from the income payment should also be paid and remitted to the BIR in order for it to be considered as legitimate expense for deduction against gross income. We are reminded by the BIR that expenses are deductible only to the party in whose name the official receipt is issued and other parties are excluded in claiming the same expense.

The client/customer making the cash advance/deposit for the necessary expenses shall treat the same as an outright expense in their books of account. It may claim such cash advance/deposit paid to the company as a deductible expense provided that the withholding tax due thereon has been withheld and remitted to the BIR.

Companies that are able to utilize their tax credits need not worry. The income from the receipt of cash advance/deposit will be offset by the expenses incurred; hence, no additional income tax will be due to the company. The clients/customers should neither worry for the advances are deductible in full to them, and they can also claim as VAT credit, the VAT that will be levied on the cash advance/deposit.

RMC No. 16-2013 is effective immediately and parties affected (i.e. the company and the customer/client) should conform to it to minimize risk of assessment of tax or penalties.

Jose Bernard V. Basallaje is an associate from the tax group of Manabat Sanagustin & Co. (MS&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email [email protected] or [email protected].