Tax treatment of deposits, cash advances

by: Jen Reyes

THE BUREAU of Internal Revenue’s (BIR) new issuance, Revenue Memorandum Circular No. 16-2013 (RMC 16-2013) clarified the tax treatment of deposits/advances given by clients/customers to their suppliers/providers. This new issuance is an offshoot of RMC 89-2012, which involves cash advances given to General Professional Partnerships (GPPs). Unlike RMC 89-2012, RMC 16-2013 covers all taxpayers, other than GPPs, doing business in the Philippines. The latter details all the tax implications to and obligations of the taxpayer and the client for purposes of recording and documentation of the deposits/cash advance made.
 
Under RMC 16-2013, all deposits/cash advance received by a taxpayer shall be considered and recorded as income in his books of account and it shall form part of the taxpayer’s gross income for the taxable year. Similarly, Value-Added Tax (VAT) will be imposed on the deposits/cash advances received by each taxpayer. Moreover, the RMC makes it the obligation of the taxpayer to issue official receipts for the cash advances received from its clients. The RMC, in turn, directs the taxpayer to claim the expenses incurred for its client as deductions from its gross income provided there are official receipts in the name of the taxpayer claiming for deductions. On the part of the clients or customers, the deposits/advances given to suppliers/providers should be treated as expense which is deductible from their gross income provided official receipts support such expense. Furthermore, clients/customers are required to withhold the appropriate withholding tax on income on the deposits/cash advance made to their suppliers/providers at the applicable rate pursuant to the provisions of Revenue Regulation No. 02-98 (RR 2-98). Consequently, the client has the obligation to report and remit the tax withheld to the BIR. Rules on reporting and remittance of withholding tax for filers using electronic filing and payment system (eFPS) shall apply to their transaction.

Since the deposits/cash advance is subject to VAT, the client may claim it as input VAT while the recipient taxpayer must pay output VAT.

After a careful perusal of RMC 16-2013, it is not clear what type of cash advance or deposits will be covered by the new requirements. Depending on the nature of the business and the business arrangements agreed upon with the customers, advances or deposits may take several forms. A deposit may be required to commence performance of a contract which is therefore considered as advance payment for the services or goods. This forms part of the fee paid by the client for the services rendered. In certain industries, this is called acceptance fee. In the case of leasing arrangements, a deposit may be required to cover the cost of any damages that the lessee may cause on the property or equipment in the duration of the lease. Hence, this is usually refunded at the end of the lease term if no damages need to be settled.

Under certain arrangements, the service provider requires cash advances to pay on behalf of client, certain fee or charges which are receipted in the name of the client, such as notarial fees, government filing fees and other regulatory fees. Such funds are generally held in trust for the client utilized to defray client expenses and subject to liquidation. If the issuance covers these types of advances, there may be unforeseen repercussion on the part of the taxpayer which may expose it to possible higher tax payment.

The BIR issuance allows the service provider to claim deduction for the expense incurred using the cash advance. However, this is possible only if the supporting official receipts are in the name of the service provider claiming the expense. Otherwise, the supplier/service provider cannot claim for deductions for business expense. This situation exposes the taxpayer to the risk of having a higher taxable income resulting to higher tax due because of the recorded income sans any deduction of expense to offset. Besides, while the ai m of the issuance is to prevent double claim of deduction, the same may still happen when the client claims for deductions with receipts in its name to substantiate the claim for deductible business expense.

You will also note that the provisions of RMC 16-2013 seems inconsistent with the existing rules and regulations on what forms part of income to be subject to Creditable Withholding Tax (CWT) and VAT.

In Commissioner of Internal Revenue vs. Tours Specialists, Inc. (G.R. No. L-66416 March 21, 1990) the Supreme Court (SC) has the occasion to pronounce that gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer’s benefit. This being so, said money received should not be treated as income.

In requiring the withholding of CWT, the RMC presupposes that there is income redounding to the benefit of the payee. As provided under RR 02-98, CWT is imposed on payment for services rendered by or goods bought from the payee. In this case, there is no sale of goods or services by the payee.

Similarly, under Section 105 of the National Internal Revenue Code (NIRC), VAT is imposed on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines. Thus, the imposition of VAT presupposes an exchange between the payee and payor, i.e. goods or services in exchange for the payment. This element is clearly not present for the payment of cash advance especially if the cash advance is used to pay to third party establishment since the money is utilized for client expenses and is separate and distinct from the fee paid for the services of the recipient taxpayer. Thus, relating to the above-mentioned SC decision that monies held in trust should not be treated as income, the cash advance received by taxpayer from client should not be subject to CWT and VAT as it is inconsistent with the purpose for which the two taxes are imposed because the cash advance are paid not for the services or goods received from the taxpayer.

In sum, while the intention of the new BIR issuance to prevent double claiming for deduction of certain expense is reasonable, it will be accomplished at the expense of other taxpayers. Hence, it may be prudent to reconsider the requirement of RMC 16-2013 or provide clarifications on the types of advances that will be covered.

Nonetheless, taxpayers must be ready to comply and be prepared for the possible consequences of the new BIR issuance.