THE practice of offsetting due to/due from and payable/receivable of taxpayers including the accounting and recording of the same and its related transactions in the books of the parties is strictly prohibited for taxation purposes.
Accrued receivables or payables arising from the sale or lease of goods or properties or the performance of service will at all times be recognized at gross for tax purposes, regardless of whether the transactions are actually settled through offsetting or through net settlement of cash flows.
Relative to this, the BIR issued Revenue Memorandum Circular (RMC) No. 61-2016 to standardize the procedure on the practice of “netting” or “offsetting” arrangements.
Income tax, creditable or final withholding taxes and value-added tax/percentage tax will be determined based on the gross amounts. Any amount offset against the income payments by the payor which was not subjected to creditable of final withholding tax must be disallowed as deductible expense of the payor pursuant to the provisions of Revenue Regulations (RR) No. 12-2013.
The RMC provides an illustrative example of transactions involving netting arrangements:
1. Between a manufacturer supplier of goods and a supermarket. A manufacturer supplies goods to the supermarket and is at the same time liable to pay service fee to the supermarket for the display of its products in the supermarket. Although the manufacturer issues a sales invoice for the full amount, the supermarket pays only the amount net of service fee. The amount payable to the manufacturer for the purchase of goods cannot be recorded in the books of the supermarket net of service fee. This may appear to be a discount but in substance is a service fee.
2. Between telecommunication companies. Telecommunication companies have interconnection charges/access fees chargeable to each other. These charges pertain to the revenue-sharing or fixed rate charge arrangement for charges on voice and data transmissions passing through their respective networks. The receivables/payables are settled based on the net payable computed for either company. In this case, automatic setoff of payments due to the other company against the gross revenue of the collecting company is not allowed. The companies must record the gross amounts of receivable from the revenue earned and the payable incurred from the interconnection charges. The applicable taxes relative to the transactions must also be recorded separately.
3. Between a lender bank and a depositor. The bank incurs interest expense on the deposit and, at the same time, has interest income on a loan to the same depositor. In this case, the bank should record at gross amounts the interest income from loan and interest expense from the deposit.
For the prescribed accounting entries, please refer to the RMC.