Accounting for netting/offsetting arrangements
(Revenue Memorandum Circular No. 61-2016)
This Tax Alert is issued to circularize the prescribed accounting and recording of transactions involving “netting” or “offsetting” arrangements.
Accrued receivables or payables arising from sale of goods and services shall 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. Hence, income tax, withholding tax and VAT/percentage tax shall be determined based on the gross amounts.
The Circular provides the following examples when netting and offsetting usually happen.
- Manufacturer supplying goods to Supermarket is at the same time liable to pay Supermarket a service fee for the display of its products in Supermarket’s premises. Although Manufacturer issues an invoice for full amount, Supermarket pays only net of the service fee. In this case, the service fee should not be treated as a disguised discount.
- Telecommunication companies, in the normal course of business, have interconnection charges/access fees chargeable to each other. Receivables/payables are settled based on the net payable computed for either company.
- Bank has interest payable to a depositor and, at the same time, has interest receivable from a loan to the same depositor. Upon settlement, bank only charges the depositor/debtor an amount net of the interest payable on the deposit.
In all cases, each company should record the gross amount of purchases/payables or sales/receivables, issue official receipts and invoices for the gross amounts and recognize the same for purposes of computing the income tax, VAT or percentage tax, and withholding tax.
The principle of “substance” over form shall be applied and deficiency taxes may be assessed if uncovered.
See attached Revenue Memorandum Circular 61-2016 for reference.