Why is the Supplier Debited for Withholding Tax in Purchases?


I’ve noticed an issue when enabling withholding tax on a purchased service. The system records the withholding tax as a debit to the supplier (accounts payable). However, withholding tax is non-refundable and directly impacts the business as an expense.

Shouldn’t the debit entry instead go to an expense account (profit and loss) since it represents a cost incurred by the business? This treatment aligns better with the nature of withholding tax as a non-recoverable expense, ensuring the financial statements accurately reflect the true cost of the service.

Would love to hear your thoughts or insights on this!

I do not see any issue, Manager is treating Withholding tax correctly. Manager deducts the Withholding tax at the source, meaning that your business withholds a portion of the payment (in your case 5%) and remits it to the tax authorities on behalf of the supplier through a separate payment from the Accounts payable which is a liability account in the balance sheet. The supplier later offsets this amount against their tax liability.

In this scenario, the main issue lies in how withholding tax is recorded, as it affects the supplier’s account, reducing its balance below the actual invoice amount. Based on your explanation, withholding tax should be recorded as a separate liability, not as a deduction from the supplier’s account. Below is the correct process:


Expected Scenario:

  1. Invoice Creation:

    • Supplier Account (Credit): 10,000
    • Expenses/Purchases (Debit): 10,000
  2. Withholding Tax Recording:

    • Withholding Tax Liability (Credit): 500
    • Withholding Tax Expense (P&L - Debit): 500
  3. Payment Settlement:

    • Bank Payment (Credit): 10,000 (full amount paid to the supplier)
    • Withholding Tax Liability is settled later when the tax declaration is submitted.

Correct Accounting Entries:

Upon Invoice Creation:

  • Accounting Entry:
    • Debit:
      • Expenses/Purchases = 10,000
    • Credit:
      • Supplier Account = 10,000

For Withholding Tax Deduction:

  • Accounting Entry:
    • Debit:
      • Withholding Tax Expense = 500
    • Credit:
      • Withholding Tax Liability = 500

During Payment Settlement:

  • Accounting Entry:
    • Debit:
      • Supplier Account = 10,000
    • Credit:
      • Bank = 10,000

Current Problem:

  • The software records withholding tax as a direct deduction from the supplier’s account, resulting in the supplier’s balance showing less than the invoice amount (9,500 instead of 10,000). This is incorrect because the supplier should reflect the full invoice value (10,000).

Proposed Solution:

  1. Record withholding tax as a separate liability (Liability account) rather than deducting it directly from the supplier’s account.
  2. The supplier’s account should display the full invoice amount (10,000), unaffected by the withholding tax.
  3. Withholding tax in the liability account and settle it later when remitting the tax to the authorities.

Sorry, but please read my answer again. Witholding tax requires your business to pay the 5% to the tax authorities and hence you create a separate payment from the Accounts payable to the tax authorities and not the supplier, hence you screenshot (first post) correctly distributing the debits and credits to your accounts payable. A view screen of similar in a test business correctly shows:

When you click New Payment you notice from the below screen that only $95 is paid to the Supplier. You still need to make a Separate payment of $5 to the tax authorities for the Withholding tax in the Withholding Accounts payable.

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Withholding tax is still being deducted from the supplier’s account, which is incorrect.

It isn’t!

  1. You pay only $95 to you Supplier when you pay the invoice see my screenshot.
  2. The remaining $5 gets paid from the Withholding tax payable account to the Payee (Other: Tax . Look carefully at my screenshot where I select the Payee not as the Supplier but “Other” and named it Tax authorities Yes the Withholding payable is linked to the Supplier but not paid from the suppliers accounts, as audits need to be able to trace it both ways.

I believe I understand your point.

If the value of the service I received from the supplier, which I will transfer to them, is $100, and the withholding tax system in my country imposes a 5% tax on any foreign transfers, then does this mean I should record the invoice value as the base amount + the withholding tax amount?

If the first part of my understanding is correct, then there’s another issue. The program calculates the percentage based on the total amount ($105), resulting in a tax of $5.25 instead of $5.


Withholding tax on a purchase invoice affects the supplier’s account. It is essentially paying the withheld amount to the supplier through the tax office. The tax office issues a certificate, which is forwarded to the supplier as proof of payment by the withholding agent. If the withholding agent fails to provide this certificate, the supplier will continue to record the withheld amount as a receivable in their books. Upon receiving the certificate, the withheld amount becomes a tax credit.

False. The amount is withheld from the total payable to the supplier, directly impacting the supplier’s account.

Yes, but the journal entry involves debiting the supplier’s account through the related invoice, as done in Manager, with the corresponding credit recorded in the withholding tax payable account under liabilities.

The problem is not the Manager. There are 2 methods for using Withholding Tax. You can choose it by rate or amount. If you want to deduct $5 from $105, you can’t use a 5% rate. Because the calculation of 5% x $105 = $5.25, and your screenshot has shown it correctly.

Do you realize that $5 is not 5% from $105? It’s 4.761904761904762% from $105. So if you want to deduct just $5 from $105, use the amount method and manually type the $5 in the Withholding Tax field. The rate method always calculates from the total amount of the invoice, whether it’s a Sales Invoice or a Purchase Invoice.

I will give you an example of how the rate method always calculates the total invoice, even after adding VAT.

So, let’s say the Invoice has VAT 10%, and the unit price is $100.

image
(PPN is the same as VAT in my country)

When you use the rate method and you put 5% in the field, the calculation will be:

  • Total Price: $100
  • VAT 10%: $10
  • Subtotal Price: $110
  • Withholding Tax: 5% x $110 = $5.5
  • Total Invoice:
    (Total Price + VAT) — Withholding Tax = ($100 + $10) — $5.5 = $110 — $5.5 = $104.5

Conditions:

  1. If the tax regulation of your country is to deduct 5% from the invoice total even after VAT, use the rate method and the Manager has calculated it correctly in my example above.
    image

  2. However, if the regulation requires deducting 5% from the other “Taxable Base,” which is not the Total Invoice after adding VAT but the total price itself, which is $100, use the amount method for Withholding Tax, and the calculation is shown below here:

  • Total Price: $100
  • VAT 10%: $10
  • Withholding Tax of 5% from the Total Price: 5% x $100 = $5
    (Put the $5 in the Withholding Tax field and choose the amount method.)*
    image *
  • Total Invoice:
    (Total Price + VAT) — Withholding Tax = ($100 + $10) — $5 = $110 — $5 = $105

The calculation formula is always the same: “(Total Price + VAT) — Withholding Tax”. However, it calculates the numbers differently by choosing different methods of Withholding Tax. So, what’s your condition about the tax regulation on how to deduct the Withholding Tax in your country? Number 1 or Number 2?

Then, all the Withholding Tax value from the purchase invoices will be put into the Withholding Tax Payable in the liability to be settled later by making a payment to the tax authorities. The Withholding Tax value from the Sales Invoice will be put into the Withholding Tax Receivable account and will be settled after you fill the Withholding Tax Receipts in the Withholding Tax Receipts menu.

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It seems that in Saudi Arabia as in most jurisdictions that Withholding tax is always a rate see

@Abeiku and I already explained that it is a tax that you pay to your tax authorities “on behalf of” the Supplier. So in your very first example you buy something for $100 and the Withholding tax rate is 5%. Rather than paying the full $100 you deduct the 5% ($5) so it becomes $95.

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@eko It’s the same in Indonesia too, it’s always a rate percentage. In Indonesia, every Tax Article always states a rate and the taxable base (in Indonesia we call it DPP or Dasar Pengenaan Pajak) for WHT calculation is not from the invoice total after VAT is added, but the gross price total of the goods or services. So, to calculate any tax rate we have to know what is the taxable base to be calculated with the tax rate. Indonesia always has different conditions for this taxable base or “DPP”. Some tax article says for example the new rate of VAT 12% that effectively applied from January 1st, 2025 for some goods or services, the taxable base is from the gross price total but must be calculated by 11/12 before calculating it with the 12% rate.

From what I understand from the guide you gave about WHT in KSA, I think it’s the same in KSA too. It says the base is from the gross payment amount, which I think is the same as the gross price total of the goods or services before adding VAT. However, I’m not really sure if the term “gross payment amount” in the number 2 is what I understand, that’s why I asked @Esllam_Rashwan how the condition applied in his country before.

The thing is, whether you choose the rate or amount method for WHT calculation in Manager, it ends up showing the result of the calculation in the invoice, which is the Withholding Tax amount and not its percentage rate number, right? However, the rate method in Manager calculates the variable of the final Invoice Total even after VAT is added. But, if we want to achieve the result of a 5% rate of WHT, but the base for tax calculation is not the final invoice total after VAT is added but the gross price total of goods or services, then we have to use the amount method in Manager, not the rate method. So, the screenshot you gave before is the same as mine @eko but I added VAT into the example.

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If you set the VAT rate as “inclusive” then the results are as you wish. See below:

Yes, for WHT, the result is the same. However, sometimes VAT is not always inclusive. If VAT is inclusive, we can check “Amounts are tax inclusive” so that WHT will be calculated based on the percentage rate and the result will be the same as if we chose the amount method and entered $5 manually. However, all taxes including VAT will be fully inclusive. If VAT is exclusive, “Amounts are tax inclusive” should not be checked. Because inclusive and exclusive VAT have different amounts. And also, the label is become “Includes VAT” for the VAT. It means, that VAT amount is included in the Total of $95 and the payment will be still $95. If the VAT is exclusive, the VAT amount is added to the Total of $95, and the payment should be $95 + VAT Amount.

I delved deeper into this and you are correct then when applying a rate rather than amount Manager does calculate that rate over the total + any taxes while you need it on the gross amount.

As such you should indeed change rate to amount and the easiest to for example add this Withholding tax amount is to enter the amount as 0.05*100 in the example which after submitting make it $5, See screenshots below:

This will give you the result that you are looking for:

That’s right @eko Manager allows users to enter the amount like your example when we chose “Amount” method for WHT.

Thank you for the clarification. I completely understand all of this. I would have preferred if there was a way to input the tax rate mandated by regulatory authorities directly through the designated percentage field, along with the invoice amount (the payment value to the supplier). However, it’s a simple matter—I will calculate it externally in Excel and manually enter it as a fixed amount.

Thank you for your response. The situation in Saudi Arabia is completely different, as there is no direct relationship between regulatory authorities and suppliers, and no such certificates are issued. The only requirement is that, as a company operating in Saudi Arabia, when I receive a service from outside the country, I must pay a 5% tax on the amount transferred to foreign suppliers.

or enter the rate including the adjustment for pre/post tax and any other taxes which apply.

(In theory this could all be automated if Manager used a multi-tax code consisting of a collection of single tax codes & calculation order, as described here USA Sales Tax Setup Issues - #14 by Patch but that has not been popular)

I have a clearer understanding of this now. This transaction is not related to withholding tax at all. In my country as well, a tax must be applied and paid to the tax authorities as import VAT on all imports, except for VAT-exempt items. The suppliers are not involved in the process, just like in your case.

You can also accomplish this by using report transformation and reporting categories. I use this method to create a report that closely matches the tax return form I need to complete each month.

The process involves creating two tax codes—one to capture the cost of the imported item for your business.
This allows me to capture and represent the tax base or cost of the item or service to my business on the report transformation form, which is why the tax rate is zero.

.

The other (below) captures the tax applied to the imported item or service, which is to be paid to the tax authorities.

.

The tax rate is set to “Pass-through 100%,” allowing me to record the tax without increasing the tax base or the cost of the imported item (crediting the tax payable liability account and debiting the expense or related inventory item account). This approach offers flexibility in entering the desired tax amount, especially when the tax authority’s exchange rate differs from the actual exchange rate used to calculate the tax payable on the import in local currency (5% tax in your case).

A report transformation will then present these two entries in a report.

This may seem complicated, and I apologize, but it is a simple and effective way to make the most of report transformations, providing a report for anyone who needs to audit or track these transactions.

Illustration with 15% tax on import

Cost

Tax

Result in report transformation

Thank you for your attempt to help, but I believe this matter is entirely different from VAT. VAT-related codes cannot be used in this case, as withholding tax is non-refundable, whereas VAT is a refundable tax.