Tax on Deposits and Advances to Firms in Philippines

By: Tax and Accounting Center Philippines

According to the BIR, it has been a common practice for general professional partnerships (GPP or Firms (e.g. accounting firms in the Philippines and law firms in the Philippines) to require client – taxpayers the following:

1. Deposit a sum of money to them to be used to cover necessary expenses and liquidate the same later, or
2. Firms to pay in advance the necessary expenses in behalf of client and secure re-imbursement from clients as “out-of-pocket” expenses.

In most cases however, official receipts and invoices for the necessary expenses incurred by the Firm in behalf of the client are issued under the name of the Firm. Upon seeking re-imbursement of the advances to clients or upon liquidation of the deposits of clients, clients would claim said expenses as deductible expense while at the same time being claimed by the Firms as their very own deductible expense. In effect, the same expense is claimed both by the Firm and the client.

Under Revenue Memorandum Circular No. 89-2012 dated 27 December 27, 2012 (RMC No. 89-2012) entitled “Clarifying the Tax Implications and Recording of Deposits / Advances Made by Clients of General Professional Partnerships for Expenses”, the Bureau of Internal Revenue (BIR) made new guidelines below along with our views.

Deposits or advances are service income of Firms

Upon receipt of deposits from clients or upon receipt of client’s reimbursements for out-of-pocket expenses, the Firms shall issue a BIR-registered Official Receipt (O.R.) in the Philippines. This would meant that the deposit or advances are income of the Firm that is subject to 12%  value added tax in the Philippines. As such, Firms would be required to bill advances and deposits with 12% VAT in the Philippines.

Necessary expenses for clients are Firm’s deductible expenses

The Firm shall record the expenses it incurred and paid in behalf of the Client as its own expense for tax purposes based on official receipts and sales invoices issued by third-party establishments under the name of the Firm. As such, Firms will likewise be required to deduct applicable withholding taxes in the Philippines, and claim input VAT from such expenses, if any. 

Deposits or advances are professional fees expense of clients

Upon payment of the client of advances and deposits with the Firm, the client shall record the same as professional fees expense based on the official receipt that the Firm will issue. As such, the client is not required to apply withholding tax on professional fees to general professional partnerships in the Philippines. If the Firm is a VAT-registered, then, the VAT-registered client will be passed on VAT on such advances.

Comments

The present regulation is an attempt to change the old ways causing alleged loss of revenue from taxes. The scenario the BIR is trying to avoid may have had happened in the past but may not be conclusive as to all other professional firms in the Philippines. Nevertheless, we could not blame BIR at all.

The new regulation – RMC No. 89-2012 in the Philippines appears to be simple but would raise more questions in its implications and applications. Nevertheless, compliance seems to be the best option.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may please send mail at in**@ta************.org.