Each tax jurisdiction deals with withholding tax in slightly different ways, with some not even using this method of in-advance collection of tax. In an article last year we covered the New Zealand system with resident withholding tax and today we are going to be looking at the Philippine system, referred to as creditable withholding tax, and the journal entry required to bring this to account.
If you just want the journal entry lines and none of the background fluff the answer is: debit the creditable withholding tax account, debit bank and credit interest income (revenue).
If you would like some more details and background … then please read on.
What is Creditable Withholding Tax?
Creditable Withholding Tax systems are essentially the same as any other withholding of tax regimen where a set amount (based on a specific percentage of tax) is withheld by a payer in making certain payments to a third party (the payee). The most common implementation of the withholding system around the world is for wages and salaries.
In our case, and looking specifically at the Philippines model as an example, this would be payments for interest, dividends, certain professional fees and contracting work. In the Philippines case it is all set out in the REVENUE REGULATIONS NO. 11-2018 – which can be found at their Department of Finance’s website here.
Creditable Withholding Tax Example Journal Entry
The Philippines is not my jurisdiction of expertise so we’ll keep the example pretty simple. Under SECTION 2.57.1.(A)(1) payers (or withholding agents) are required to withhold 20 per cent of interest payment to account holders. Let’s assume our ABC Ltd has operations in the Philippines and has money held in a local bank account – and let’s say earning 5 per cent per annum.
ABC is holding a daily average balance of 1,000,000 PHP (at the time of writing about $20,000 USD) and as we mentioned above the account is earning 5 per cent in interest. The Philippines tax year ends 31 December. As part of the year-end final accounts work there is a bank reconciliation to be done, which is where ABC’s accounts team would perform the following journal (assuming the interest is credited year end on a simple compounding basis).
1,000,000 PHP x 5% = 50,000 PHP interest
50,000 PHP x 20% tax = 10,000 PHP in creditable withholding tax
|Creditable Withholding Tax||10,000|
The debit to bank increases the balance by the net interest received from the bank. The debit to the creditable withholding tax current asset account increases the prepaid tax ABC has created through the bank withholding that portion of the interest in tax and passing it onto the Bureau of Internal Revenue. And finally the credit to interest income increases the balance for the year.
When ABC determines its tax liability and depending on whether certain taxes are ring fenced in the Philippines, the creditable withholding tax asset account would be credited against the respective tax liability account(s).
That brings us to the end of this short article looking at the journal entry for creditable withholding tax. We hope this has helped in your understanding of how this tax and its associated accounting entries work. We welcome your feedback through a comment below, contacting us or raising a question.