Writing off Withholding Tax

22

Thanks for all the replies and help, I appreciate it.

So just to confirm a few things.

1 - Deducting the withholding tax on receipt of cash. As in the example above, creating a separate line and using a minus figure (credit) it goes to withholding tax as an asset (debit balance).

  • Is the withholding tax really only recognised on payment from the customer and not when the sale was created?

My business model is that which my customers sell my products - so when they sell them, they deduct the withholding tax from my percentage of the sales value. Well that’s the way it’s shown on the sales report. I then receive monthly payment from them (a percentage of the sale value less withholding tax).

  • also how can the withholding tax balance be cleared to an equity account? If it’s a debit balance and equity accounts are on the credit side.

Unless it’s moved to offset the tax liability account?
Is there a way to do this on mamanger without using manual journals?

That being said, another reply above said withholding tax goes to withholding tax recievable, but with this method it doesn’t: it goes to withholding tax as a debit. The method I was using before where I deduct it on the invoice moves it to withholding tax receivable as a credit. So is what I was doing before corrrect?

23

Firstly I don’t have the time right now to answer your extensive questions but I will update this response later so check back, secondly however, what I can say right now is that you are mixing up your debits and credits. Because a number is entered as a minus doesn’t mean it is a credit.

When you have a receipt of cash the Receive Money (cash journal) is:
Debit Bank 100 & Credit Accounts Receivable 100, but that Accounts Receivable figure is not entered as a minus number, even though it is a credit. (see example below)

So when you have Debit Bank 90 & Credit Accounts Receivable 100, to balance the transaction you need another Debit for 10, but this is shown on the Receive Money as a minus as you need to get the 100 down to 90 to match the bank receipt. (see example below)

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24

Thanks,

I know, what I mean is that -10 is a effectively a credit to bank (CR Bank 10, DR withholding tax 10). I know a minus sign doesn’t make it a credit to Withholding tax. Just as the 100 is not a debit to accounts receivable. Because the receive cash function is a debit function and the lines have opposite entries.

My point is that the withholding tax account has a debit balance and it was mentioned above somewhere that it could be moved to an equity account (I can’t see how that is possible). However it could be used to offset the tax liability account.

25

I have not read thoroughly everything in this thread but i have recognised the efforts @Brucanna is making to help you.

In manager you can create any asset, liability, equity, expense or revenue account and use it for any purpose and i will suggest to you how you can use this to easily account for your WHT suffered

I believe you will have to keep record of how much you are losing as WHT to your business partners in other countries, so recording the net amount (receivable amount minus WHT suffered) as the invoiced amount in your books would be inappropriate .

If you are very sure there is no way you can recover what you lose out to your business partners as withholding tax in the form of reduced tax liability or cash refund, go ahead and expense it (Get advice from a local tax officer).

If you are in someway going to reduce your tax liability with what you are losing out as WHT to your business partners then recognise them as tax asset.

You do not need to use the WHT feature in Manager.io when invoicing. You can create an account and call it any name you want under Assets (if you want to hold it as asset and offset your tax liability with it) or under Expense (if you are certain you cant ever claim it in any form i.e. cash refund or reduced tax liability, you may call it Irrecoverable Tax Deducted At Source From Foreign Country Trading account or something better)

Now when you are receiving money, enter the gross receivable amount there.
Add a new line and select the WHT account (Irrecoverable Tax Deducted At Source From Foreign Country Trading account) you created to record the loss.

Enter a negative number for the amount you are losing which will reduce the amount which will finally end up in your bank account.
So if the receivable was 100 and WHT 10, Manager will credit receivable account by 100 and debit WHT asset or Expense account by 10 and debit bank account by 90.

To make it simple, create a non-inventory item for this, which will always fill the description fields with your default narrations e.g. “WHT deducted at source” when you select them to record the amount you are losing as WHT. Just make sure you select the correct account in the non-inventory item creation page which you would have created already for that purpose.

With this, you can always see the account in your journal entries. And if you do it well Manager.io will do the correct double entries displaying all the needed details (description, contact/payer etc) if you click to view the transactions in the WHT account you created.

Am i making sense please?

26

Yes perfect sense.

Thanks for taking the time to reply to me. And I also appreciate the help from everyone who has contributed so far.

The only issue remaining really, is this:

If I decide to use an asset account to offset the future local tax, this account is debited at the time the cash for the invoice is received.

The revenue is recognised at the invoice date.
But the WHT is recognised when the cash is received, which in some cases can be in a different tax year.

eg, Year end 30th March, Invoice March, cash received April.

This means the WHT in some cases is recognised in a different tax year.

Is this correct?

Is the WHT really to be accounted for at the time of payment and not the invoice date?

27

No its not, that -10 has absolutely nothing to do with the bank, but it has everything to do with the Accounts Receivable. If the bank receipt is 90 and that is applied to the Accounts Receivable 100 then its the Accounts Receivable itself that has a remaining balance of 10. Therefore you Credit the Accounts Receivable 10 and Debit the Withholding tax 10 to transfer that balance, which is done via the second line of the Receive Money instead of creating a separate transaction.

Therefore it appears that the WHT relates to their payment to you (their supplier), which is calculated from the sales to their customer. In another words, in lieu of you submitting a Sales (commission) Invoice or a Purchase Invoice in their terms.

Therefore in answer to your question "Is the withholding tax really only recognised on payment from the customer and not when the sale was created? - Yes, because the obligation to withhold the WHT doesn’t occur until they raise that remittance, as they haven’t receive a Purchase Invoice to trigger the WHT earlier then that.

No it didn’t and it can’t. You may have had the WHT account set up under Liabilities but the WHT could never be a credit. For the moment lets assume you raised the invoice without any WHT.

The entry would be - Debit Accounts Receivable 100 and Credit Commission Income 100.
Now if we show the WHT deduction on that invoice then we Debit Accounts Receivable 90 (as that’s the money we are going to receive) Credit Commission Income 100 (as the income value doesn’t change) and Debit WHT 10 to balance the transaction.

Besides when you say “withholding tax receivable” that word “receivable” implies Debit (owed to you), the word “payables” implies Credit (owed by you)

Once again you are mixing up unrelated terminology - debit “balance” and credit “side”

  1. balance is the value within the account, side relates to where a account sits with regards to the “=” sign within the equation: A = L - E.
  2. equity accounts being on the credit side can receive both debit & credit entries and can also have debit balances - the Drawings account is always a debit balanced Equity (credit side) account.

The point is, if the WHT is an allowable offset against other tax liabilities then you don’t have to move it at all, when you process the tax payment (or tax refund) just allocate an entry to the WHT account. Using the figures from earlier the Spend Money would be:

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The WHT -10 will put a credit entry into the WHT account and clear the debit entry (balance) create by the Receive Money. Also, by doing it this way means that you don’t have to use manual journals.

The question is, why create an invoice - if your invoice is based upon “that’s the way it’s shown on the sales report” then just recognise the income based on the cash received date.

If you were invoicing in advance that would be okay but it appears that you are invoicing in arrears, after you have been told what you are going to receive.

That is known as timing differences - no big issues

28

It a very important question but WHT itself per my understanding is a law that comes to life during payments. In other words it becomes an asset only at the time the deduction happens and not when the invoice is issued, neither does it become a period bound liability to the customer upon receipt of your invoice (you can only demand it if the customer deducts it during payment)

It becomes Asset to to the sufferer at time of payment and a liability to the payer at the time of payment. When the payer pays the deducted sum to the government and brings to you the tax credit certificate, they in practice transfer the liability to the government.

It is such that the date of earning that revenue is not really important.

For example if you earned revenue of 100 for the year 2015 but the customer didn’t pay until 2018 you wouldn’t be able to claim WHT asset for 2015 or even 2016 and 2017, you can only claim it if the customer makes some payment, deduct it and sends you a tax credit certificate for the deduction (2018). So you could then use it as a tax asset against 2018 tax liability even though the linked revenue was earned in 2015 ( Asset was born in 2018).

So don’t link it to the invoice that brought the WHT asset. Whenever there is Tax liability, use the WHT asset on hand against it.

In my country, the law explains “The law requires a person effecting payment to another person to deduct the exact tax at source
and pay it to the Commissioner”

29

I don’t think that is your decision to make. Your tax authority makes that decision. You need to ask an accountant what the rules are for your jurisdiction.

30

Thanks for your reply.

No its not, that -10 has absolutely nothing to do with the bank, but it has everything to do with the Accounts Receivable. If the bank receipt is 90 and that is applied to the Accounts Receivable 100 then its the Accounts Receivable itself that has a remaining balance of 10. Therefore you Credit the Accounts Receivable 10 and Debit the Withholding tax 10 to transfer that balance, which is done via the second line of the Receive Money instead of creating a separate transaction.

I agree with this logic, but in terms of the function, (receive cash function) the first line is receivable, in the example we put in receive cash 100, and then how much of the receivable that relates to as 100 as well. So the receivable is totally cleared in the first line alone.
The second line is for Withholding Tax, and as this is a receive cash function. -10 means receive cash -10.

In reality yes agree that the receivable was not fully received so the -10 is against the receivable. I was talking in terms of function.

JPTrades:
My business model is that which my customers sell my products - so when they sell them, they deduct the withholding tax from my percentage of the sales value

Therefore it appears that the WHT relates to their payment to you (their supplier), which is calculated from the sales to their customer. In another words, in lieu of you submitting a Sales (commission) Invoice or a Purchase Invoice in their terms.

Therefore in answer to your question "Is the withholding tax really only recognised on payment from the customer and not when the sale was created? - Yes, because the obligation to withhold the WHT doesn’t occur until they raise that remittance, as they haven’t receive a Purchase Invoice (do you mean sales invoice from me here? or are you saying purchase invoice from their customers?) to trigger the WHT earlier then that.

JPTrades:
The method I was using before where I deduct it on the invoice moves it to withholding tax receivable as a credit.

No it didn’t and it can’t. You may have had the WHT account set up under Liabilities but the WHT could never be a credit. For the moment lets assume you raised the invoice without any WHT.

The entry would be - Debit Accounts Receivable 100 and Credit Commission Income 100.
Now if we show the WHT deduction on that invoice then we Debit Accounts Receivable 90 (as that’s the money we are going to receive) Credit Commission Income 100 (as the income value doesn’t change) and Debit WHT 10 to balance the transaction.

Besides when you say “withholding tax receivable” that word “receivable” implies Debit (owed to you), the word “payables” implies Credit (owed by you)

Very true, my mistake.

JPTrades:
also how can the withholding tax balance be cleared to an equity account? If it’s a debit balance and equity accounts are on the credit side.

Once again you are mixing up unrelated terminology - debit “balance” and credit “side”

  1. balance is the value within the account, side relates to where a account sits with regards to the “=” sign within the equation: A = L - E.
  2. equity accounts being on the credit side can receive both debit & credit entries and can also have debit balances - the Drawings account is always a debit balanced Equity (credit side) account.

Makes sense, again my mistake.

JPTrades:
Unless it’s moved to offset the tax liability account?

The point is, if the WHT is an allowable offset against other tax liabilities then you don’t have to move it at all, when you process the tax payment (or tax refund) just allocate an entry to the WHT account. Using the figures from earlier the Spend Money would be:

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The WHT -10 will put a credit entry into the WHT account and clear the debit entry (balance) create by the Receive Money. Also, by doing it this way means that you don’t have to use manual journals.

Perfect! Makes a lot of sense. Spend money function, the opposite of how the WHT account balance was created reversing it out.

JPTrades:
The revenue is recognised at the invoice date.
But the WHT is recognised when the cash is received, which in some cases can be in a different tax year.

The question is, why create an invoice - if your invoice is based upon “that’s the way it’s shown on the sales report” then just recognise the income based on the cash received date.

If you were invoicing in advance that would be okay but it appears that you are invoicing in arrears, after you have been told what you are going to receive.

I considered this, but wouldn’t that make this more of a cash based business instead of accruals basis?
Also, I raise the sales invoice to create the receivables account so I can keep track of what is due. In some cases I do not receive the full amount and have to chase for payment. If I didn’t have these invoices it would be hard to keep track of what is overdue etc.

JPTrades:
This means the WHT in some cases is recognised in a different tax year.

That is known as timing differences - no big issues
[/quote]

Are timing differences perfectly acceptable? I guess from your explanation that the WHT is not actually deducted from the payment until my customers make payment, so in this case that would make it perfectly accurate.

Thank you for all of your help. I really appreciate it.

31

Thank you for this.

I don’t think my customers will provide me with the certificate of WHT paid, I’ve not recieved one before so I will have to ask.

If I don’t receive it, does that automatically mean I can’t use it to offset and have to expense it to the P&L.

32

Thanks - you’re right. Of course! My mistake not after I decide - I mean after it’s determined if this withholding tax can be used to offset, if not expense to P&L.

33

If you don’t receive it (tax credit Certificate), you cannot enter the WHT suffered as an asset, neither can you expense it. You will need the certificate to back your entries in all cases.
In your case, your tax authority may also accept an authentic looking payment advice from your customer showing clearly the deduction and the amount they paid you.

That is why before you even write off a receivable from a customer, you have to back that entry with a letter of bankruptcy from the customer or a document proving the customer is indeed not in a position to ever pay.

34

I generally agree with @Abeiku, accept that the date of earnings can be important to the extent that that you could be paying double tax until a subsequent catch up period. Using his 2015 model.

If you took up revenue of 10,000 in 2015 with a potential WHT of 1,000 which wasn’t paid until 2018, then your local income tax would be payable on the 10,000 in 2015 even though you are only going to actually receive 9,000. But once again just a timing difference with a negative impact on cash flow.

You could create a second Manager Business which just contains management invoices and use that to keep track of what is overdue, then delete them when paid.

No, it just means that you are recognising the revenue based on the reality of the transaction.
An accrual based Business can be a mix of both, but cash based is only cash based.

Tax certificates are generally issued within the country as proof within the one tax authority.
When you are claiming WHT deductions within your country for WHT paid in another country then the documentation between the parties is the substantiation.

For example in countries like New Zealand & Australia, WHT is deducted from interest and dividends paid to overseas non-resident investors - but there is no tax certificate system used.

35

Gee, those are tough conditions. In this part of the world just the failure to collect after a period is sufficient grounds to write off a receivable, no formal or official justification is required.

36

Well for the listed/public companies. But even if you are not listed, you still have to back your bad debt with some documents. Maybe various letters and emails you sent to collect the debt or something.

37

@Brucanna wow - what an amazing amount of effort you have put in on this topic!

38

JPTrades:
Also, I raise the sales invoice to create the receivables account so I can keep track of what is due.

You could create a second Manager Business which just contains management invoices and use that to keep track of what is overdue, then delete them when paid.

Thank you for this tip, I will use this in the future.

JPTrades:
but wouldn’t that make this more of a cash based business instead of accruals basis?

No, it just means that you are recognising the revenue based on the reality of the transaction.
An accrual based Business can be a mix of both, but cash based is only cash based.

So, even if I know before hand how much is expected to be received you would say just to account for this part as and when the cash is received instead?

I don’t actually issue an invoice at all, so perhaps it does make more sense this way.

JPTrades:
I don’t think my customers will provide me with the certificate of WHT paid

Tax certificates are generally issued within the country as proof within the one tax authority.
When you are claiming WHT deductions within your country for WHT paid in another country then the documentation between the parties is the substantiation.

For example in countries like New Zealand & Australia, WHT is deducted from interest and dividends paid to overseas non-resident investors - but there is no tax certificate system used.

The two regions where the withholding tax is retained are Brazil and India, I doubt I will be receiving any form of certificate.

So in this case, is it not possible to write off, either as an offset or an expense?

I just suffer double tax?

[/quote]

Thanks for your help, and I appreciate your effort.

39

If tax certificates aren’t a requirement locally, not a issue, you just need to confirm the local conditions with regards to taxes paid in other countries.

First, check your local tax documentation (more probably your annual tax return) does it included the provision to claim taxes paid in other countries. Second, search your tax authority web site, contact them direct or discuss with an accountant with knowledge in that area.

If the WHT can’t be claimed as offset, then it could be expensed as a cost of doing business.

Not double but increased.
,
Option 1. WHT is claimable as an offset.
Lets say you have made a profit of 1000 and have paid 100 in WHT. Tax on your local income @ 30% is 300. With the 100 WHT offset you would only be paying tax of 200.

Option 2. WHT is claimable as an expense.
Your profit would now be 900 and with the local income tax @ 30% you would be paying tax of 270.

So its important that you can confirm that the WHT can be claimed as an offset.

40

Hi thanks for your help so far, so basically for the situation described above, you would say not to have accounts receivable, because I don’t actually issue invoices. In reality I view a sales report and await payment (and have no obligation to create sales invoices), I can set up a separate business in manager to keep track of money owed.

However, when the cash is received lets say 30 days, or sometimes 60 days after the sales, the issue I will have is the revenue will be recognised when it was received and not for the month it was related to. I thought revenue through the P&L should be recognised when it is created, which is why it was important to create the accounts receivable.

But you would say I can recognise it on a cash basis in this example, as I don’t actually issue a sales invoice at all?

Thanks for your help.

41

Correct