Writing off Withholding Tax

Hi,

Can someone tell me how to write off withholding tax receivable?

The account is created automatically when you add withholding tax to a sales invoice.

My withholding tax is in other countries and not in my home country.
So the balance sheet shows this in my base currency.

I can’t seem to find a way to remove it from that account.

Please help.

Can you expand upon what actually is occurring ?

Are you collecting then paying this withholding tax to a tax authority, either in yours or another country - if yes, then the payment to the tax authority will clear (remove) it from that account. If no, (you are not paying it to a tax authority) then don’t charge it as it is not applicable.

However, if your customer is deducting the withholding tax and paying their tax authority, then when your customer pays you, the Receive Money would have two lines, the first paying the Accounts Receivable + Customer + Invoice for the full amount of the Invoice, then a second line using the Withholding Tax account for the amount deducted which will be a negative figure.

Hi,

Thanks for your reply.

I’ll explain it a little bit clearer.

The companies I deal with deduct withholding tax in their countries before making a payment to me.

So my invoice to them has the gross amount due to me, and then there is the option to deduct withholding tax (this is a function on Manager). So the invoice then shows:
1 - Gross
2 - Less withholding tax
3 - Net due.

When I receive cash this settles the net amount on the invoice.
Manager creates a separate asset account for withholding tax receivable.

I will not be receiving the withholding tax back so I want to write it off from the accounts.

I cannot seem to find a way to do this.

I even tried to post a manual journal and there is no way to use the ‘Withholding Tax Receivable’ line.

I would have:
CR 'Withholding Tax Receivable’
DR ‘Bad Debt Expense’

I’m unable to.

How can I remove this from the accounts on Manager?

If you are not receiving the withholding tax, then why charge it on your invoice?
You can account them by applying a discount on the product value.

This might be the best solution but it’s not really a discount.

Also, for tax purposes, it should be used to reduce my tax liability.

What you are showing in your accounts is intentional loss. Value of a product = cost price + profit.
In your case the withholding tax deducted by your customer should be considered as included in the cost price of the product. There is no necessity in showing the tax that you do not charge simply because your customer or supplier charges you.

One more thing to consider. If your customers are deducting the withhold tax based on your invoice value then you cannot use the discount method.

The best practice would be to make the invoice for full value (without deducting withholding tax) and later issue credit note to your customer for the withholding tax value not paid to you.

You shouldn’t be using the option of withholding tax on the sales invoice, as the legal requirement is upon the Customer in their country to deduct the withholding tax. There is no requirement for you to show (deduct) on your sales invoice another country tax payers legal requirement.

If the gross is 100, send the sales invoice for 100, when the customer pays 90 the Receive Money is Accounts Receivable + Customer + Invoice for 100, then a second line using the Withholding Tax account for 10 which will be a negative figure.

Then when it comes to tax time, that withholding tax account balance is used to offset your local tax payable. Lets say the tax on your profit is 1000, but because of the withholding tax of 10, you only owe 990, at this point the withholding tax account balance is cleared.

Alternatively, you could keep doing the sales invoices as you are (showing the withholding tax) but this doesn’t change the tax time situation as far as clearing that account balance, it is an offset at that time.

Thanks for your reply.

Can you clarify this for me.

are you saying this:

DR accounts receivable 90
CR withholding tax (Minus) 10

Yes, but the full entry would be:
Dr Bank (deposit) 90
Cr Accts Receivable + Customer 100 (Paying the invoice which debited Accts Receivable)
Dr Withholding Tax 10

Hi thanks,

It makes sense, but how could I do this if the invoice currency is different from the base currency? Apportion the amount of withholding tax in GBP?

Putting a lower amount here will make the FX rate completely wrong, there would be a big foreign exchange loss, and then ruin the accounts receivables balances on the balance sheet.

And in the future how will I clear the withholding tax account?

OK so I found a way to do it, but the withholding balance is a Debit.

How can I have it as an asset on the balance sheet if I don’t have it - it’s deducted at source?

OK the invoice date is not the same date as when the money is received. Now the withholding tax is recognised in the wrong period.

Your unpaid Sales Invoice for 100 is stored as an Accounts Receivable Asset - money not received
Usually if you are paid 90 of the 100, then the unpaid 10 remains as an Accounts Receivable Asset
But in this case the 10 is paid via the customers Withholding Tax (WHT) deduction so the 10 gets transferred from the Accounts Receivable Asset account to the WHT Asset account as it is no longer owing to you by the Customer, but it is now owing to you by your tax authorities as an offset - tax paid by you but indirectly.

No, the WHT is now recognised in the period it was created / deducted by the Customer. Until the Customer actually pays you the WHT itself doesn’t exist, it’s just a future obligation which will occur when the Customer payment is made. If they never pay you - there would be no WHT as it is their obligation to create it upon payment, it is not yours to create upon invoicing.

Whenever you declare / claim that WHT as “paid” on a tax authority form.

a) If its on a quarterly return where you have collect 450 VAT, paid 325 VAT and 10 WHT
Your payment would be 115 made up of 125 to the VAT account and -10 to the WHT account

b) If its on an annual income return and the tax on your profit is 1000, but because of the withholding tax of 10, you only owe 990, at this point the withholding tax account balance is cleared to an Equity account.

Can you use the tax withheld in another jurisdiction to offset the taxes owed to your government?

Yes, if the country’s rules / laws permit it, otherwise the taxpayer could be doubled taxed on the same income

Sure, but can @JPTrades offset in his jurisdiction?

I am asking, because if he in not permitted to offset, then I don’t think he should be putting those amounts into the “Withholding Tax” account on the Balance Sheet. They should go into an Expense account.

If he is permitted to offset, then what you have suggested seems right-on.

Well they did write in post #6 “Also, for tax purposes, it should be used to reduce my tax liability”

You’re right. I took that to mean general income tax liability, but your interpretation makes more sense. Thx.

It doesn’t matter on the type of tax liability, if its a permitted offset under a set of rules then it is claimable at that point. Have updated the last part of post #15 to be clearer on the differing options.