RMC No. 61-2016 — Prescribes the policies and guidelines for accounting and recording transactions involving "netting" or "offsetting"

BUREAU OF INTERNAL REVENUE RECORDS MGT. DIVISION JUN 1 4 2016/ 8: 3A M a Republic of the Philippines RECEIVED

Department of Finance BUREAU OF INTERNAL REVENUE

Quezon City

June 13, 2016

REVENUE MEMORANDUM CIRCULAR NO._ (01- M0/%

SUBJECT Prescribing Policies and Guidelines for Accounting and Recording Transactions Involving "Netting" or "Offsetting

TO All Revenue Officials, Employees and Others Concerned

For information and guidance of all concerned, this Circular is being issued to standardize the procedure on the arrangements/practices of offsetting the amounts recognized as accrued/trade receivables against amounts recognized as accrued/trade payables pursuant to Section 6 (H), in relation to Sections 57 (B), 113 and 237, all of the National Internal Revenue Code (NIRC) of the 1997, as amended, and to the definition of gross income and gross receipts under Section 32 (A) and 108, of the same Code, respectively.

BACKGROUND:

It is a general principle of accounting that the offsetting of assets and liabilities in the balance sheet is improper. Hence, under no circumstance is offsetting to be considered appropriate in recording transactions that are subject to a wide range of "netting arrangements or similar practices, including those with standard commercial provisions that allow parties to "net settle", such as trade receivables and payables.

Questions have been raised about offsetting amounts recognized for transactions for which the net amount of those transactions, rather than the gross amount is reported for accounting/tax purposes. In the absence of definitive policies for reporting assets and liabilities arising from those transactions, various financial reporting practices have developed giving rise to accounting treatments that result in offsetting which adversely affect the complete measurement of an asset or a liability.

TAX CONSEQUENCE:

The practice of offsetting due to/due from and/or payable/receivable transactions of taxpayers and consequently the accounting and recording of the same and its related transactions in the books of the parties is strictly prohibited for taxation purposes. Thus, at all times, the accrued receivables or payables arising from sale or lease of goods or properties or the performance of service, shall be recognized at gross for income and value- added tax or percentage tax purposes.

provisions of Revenue Regulations (RR) No. 2-98, as amended, shall be recorded at gross, Income payments subject to creditable or final withholding taxes pursuant to the

regardless of whether the transactions are actually offset or the same provide for net settlement of cash flows. Any amount offset against the income payments by the payor not subjected to creditable or final withholding tax shall not be allowed as deductible expense of the payor pursuant to the provisions of RR No. 12-2013 which disallows claims for deduction of expenses for which the corresponding withholding tax was not remitted.

ILLUSTRATIONS AND ACCOUNTING ENTRIES:

For clarification and to guide the concerned taxpayers in their invoicing and recording of income payments and receipts, hereunder are example of transactions with "netting arrangement" or those providing for net settlement of cash flows, together with the prescribed accounting entries.

ILLUSTRATION NO. 1

Company S is a VAT-registered entity engaged in grocery and supermarket business. Company F also a VAT-registered entity is a manufacturer of food products. F supplies its manufactured food products to S for sale to end-users. Based on an agreement, F is under obligation to pay S service fees for the display of F's food products in S's store premises.

the same amount. On settlement date, S paid F P8,000.00 only (net of P3,200.00 service Assuming F sold to S food products worth P11,200.00 and issued sales invoice for

fees pursuant to the said agreement).

BUREAU OF INTERNAL REVENUE RECORDS MGT. DIVISION JUN 1 4 2016 8. ? AM Ua RECEIVED

2

Based on the foregoing, S and F should have the following entries in its respective books:

ToRe rd Purchase of Goods from F and Recognition of Ser e Fees/Revenue A. To Record Sale of Goods to S and Recognition of Service Fees/Expense

Purchases RETAILER/BUYER (S) 00 Credt MANUFACTURER/SELLER (F) 11,100.00 Debit

[nputVAT VP Tr3c VT Payable(10,000 x 1% 000 11,100.00 100.00 Creditable IT Wi Sale N+VA 00.00 10,000.Co 1,200.00

reditable IT Withheld (2.857.14x2%) AIRT Deferred VAT Payab ie (3.200/112% x 12% Service Fee Income 3,142.85 57.15 2,857.14 342.86 Service Expens Deferred input VAT CWT (3,200/112% x 2% A/PTrad 130%x120% 2.857.14 342.86 3.142.85 57.15

BToRecord Settlement of the ab APTra Q5 Deferred VAT Payable 420 A/P Trade 142.8

A/R Trade ifnr as 7,957.15 Input VAT Deferred Inp A/RTrad 342.86 100.00 342.86

G.Torecordk of Taxes to the BIR CWT Pa Output VAT Payable tput VAT (for other vatable transactions) Cash 100.00 342.86 XXX [Output VAT CWT Payable Input VAT a 1,200.00 57.15 342.86 914.29

nput VA 200.00

Accordingly, S shall record the purchases at gross amount of P10,000.00 instead of 28,000.00, that is net of service fee. At the same time, S shall declare the service fee as revenue and shall issue an Official Receipts (0.R.) in the amount of P3,200.00 representing the service fee.

Based on the above illustration, F and S may, for example, simulate a transaction to resemble, in form, a discount, when the transaction actually achieves a sale of service. The tax consequences of discount and sale of service differ, in which case, the application of the principle of "substance over form" will ensure that the parties are taxed according to the legal consequences of the sale the transaction effects in substance, instead of the discount that the transaction purports to have in its form. Accordingly, service fees disguised as discount in an agreement that does not express what the parties truly intend, where substance contradicts form, the agreement will be disregarded such that the purported discount shall be considered as income by S subject to creditable withholding tax and VAT

Furthermore, if the agreement provides for F to give discount to s but in reality the discount is disguised service fee, such discount shall not be allowed as deduction from the gross selling price for VAT purposes since such discount is not the discount as contemplated under the provisions of RR No. 16-2005, as amended.

BUREAU OF INTERNAL REVENUE RECORDS MGT DIVISION

JUN'4 2016 X:43A.M. UM.A.aA {

RECEIVEDM

In all cases, the principle of "substance over form" shall apply in delineating a transaction, hence, service fee disguised as discounts shall be considered as revenue on the part of payor of the income payment notwithstanding the "netting" arrangement or agreement between the payor and the payee

ILLUSTRATION NO. 2

Companies G and S are both authorized Telecommunications (TELCO) carriers and are therefore mandated by the National Telecommunications Commission (NTC) to interconnect their telecommunication service networks with one another.

G and s are covered by revenue-sharing or fixed rate charge arrangement for charges on voice and data transmissions passing through their respective network, whereby either company shall have a 50% interconnect share as access charge or interconnection fee in every billing.

and belonging to the Top 20,000 private corporations, for outgoing call made to Mr. K, a postpaid subscriber of S (terminating TELC0) for the amount of #1,000.00. The bill Assuming G (originating or collecting TELCO) billed M, a postpaid subscriber of G

included the 50% intercennect share of S. M paid G the full amount of the bill and G issued the corresponding o.R. to M.

The following are the accounting entries in the books of G

A. To Record the Revenue from Outbound Call CWT (1,000/112% x 2%) A/R from Subscriber Revenue - Voice Call (1,000/112%) Deferred Output VAT(1,000/112% x12%) Debit R 982.14 17.86 Credit P 892.86 107.14

B. To Record the Access Charge/Interconnection Fee of s

Access Charge Expense - S (1,000 x 50%/1.12) Deferred Input VAT (1,000x50%/1.12) x 12% Access Charge Payable -S (500 less 8.93) CWT Payable (500/112% x 2%) P 446.43 53.57 P 491.07 8.93

C. To Record the Collection from subscriber M

Deferred Output VAT Cash A/R from Subscriber Debit P 982.14 107.14 Credit 2982.14

Output VAT 107.14

BUREAU OF INTERNAL REVENUE RECORDS MGT DIVISION IUN 1 4 2016 8:43A.M

RECEIVEW

D. To Record the Settlement Of Access

Charge/Interconnection Fee of S and Receipt of the VAT O.R. from S

Input VAT Access Charge Payable - s Cash Deferred Input VAT Debit P 491.70 53.57 2 491.70 Credit 53.57

The following are the accounting entries in the books of s:

A. Recognition of 50% Interconnect Share

A/R Access Charge G Interconnect Share 500.00 Debit Credit 500.00

B. Settlement of Interconnect Share by G

CWT Cash A/R Access Charge G P 491.70 Debit 8.93 Credit 500.00

Based on the above illustration, the interconnection share of s should form part of reported gross revenue of G. However, simultaneous with the accrual of the gross revenue G shall recognize the corresponding interconnection fee expense and set-up the liability for the same amount due to S. Outright or automatic netting-out or set-off of payments due to other telecommunication companies against the gross revenue of the collecting TELco shall not be allowed.

company shall compute the withholding tax on the gross amount of the interconnect share In addition, TELco paying the access charge to another telecommunication

of the other TELCO, net of VAT.

ILLUSTRATION No.3

However, Company A is at the same time a depositor of Bank x. Bank X extended a loan to Company A, thus earned interest income thereon.

Assuming Bank X earned 21,000,000 interest income from the loan extended to Company A and also in the same period total interest earning of Company A's deposit in Bank X amounted to 2200,000.

BUREAU OF INTERNAL REVENUE RECORDS MGT DIVISION

jUN 1 4 20{e 8:43A. M iADOA

RECEIVEI

The following are the accounting entries in the books of Bank X:

A. Receipt of Interest Income for Loan extended to Company A

Cash Interest Income P1,000,000 Debit 1,000,000 Credit

B. To record Percentage Tax (GRT) liability

Percentage Tax (GRT of 5%) Cash Debit R50,000 Credit 50,000

C. Payment of Interest Income on Deposit to Company A

Interest Expense Cash FWT 2 200,000 Debit Credit 160,000 40,000

Based on the illustration above, Bank X under the principle against offsetting or netting for tax purposes cannot report in their current period's percentage tax return an interest income earning of only -P 800,000. Bank X is under obligation to declare income earning subject to percentage tax in the same reportable period of P1,000,000.

All other issuances inconsistent herewith are hereby repealed and modified accordingly.

All revenue officers and employees are hereby enjoined to give this Circular as wide as publicity as possible.

KIM S JACINTO-HENARES Commissioner of Internal Revenue 042075

BUPRAU OF INTERNAL REVENUE

RECORDS MGT. DIVISION

8:43 A. M.

D jUN 1 4 2016 Ua

RECEIVEM

6