Expanded Withholding Tax Prescribed by Sec. 50(b) of the Tax Code

November 29, 1988 BIR RULING NO. 564-88 50 (b) 39 000-00 564-88 Gentlemen : This refers to your letter dated August 25, 1988 requesting in effect a ruling on the following: cdtech "1. Expanded Withholding Tax What basis is to be used for computing the expanded withholding tax (per Revenue Regulations No. 6-85) for services rendered by VAT registered individuals or corporations: (a) The gross receipts defined as the "total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged for materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for service performed for another person, excluding the VAT," or (b) The gross receipts as defined above and the amount of the value-added tax computed at the rate of 10%. "2. Contribution to the Retirement Fund A company uses the calendar year as its accounting period. It accrues contributions to its retirement fund every month and pays the monthly accrual in the following month. Can the company claim as deduction the outstanding accrual it has recorded in its books as of 31 December in the current year even though actual payment for said accrual is made in January, the next year?" In reply, please be informed as follows: 1. The expanded withholding tax prescribed by Section 50(b) of the Tax Code, as implemented by Revenue Regulations No. 6-85, as amended, is a creditable income tax based on gross payments, which includes indirect taxes, e.g., value-added tax directly payable by the payee but billed against the payor. Consequently, the basis of computing the expanded withholding tax for services rendered by VAT-registered individuals or corporation is the gross payments to such VAT-registered individuals or corporation including the Value-Added Tax. 2. Under Section 39 of the Tax Code, as amended, the deductions provided for in Title II of the same Code, shall be taken for the taxable year in which "paid or accrued" or "paid or incurred", dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions should be taken as of a different period. Moreover, under Section 37 of the Tax Code, as amended, the net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year of calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer. Accordingly, if a company uses the calendar year as its accounting period and accrues contributions to its retirement fund every month and pays the monthly accrual in the following month, the said company can claim as deduction the outstanding accrual it has recorded in its books as of December 31, of the current year even though payment for said accrual is made in January of the next succeeding year since it is consistent with the accrual method of accounting being employed. In other words, deductions should be taken consistently with the method of accounting regularly employed in keeping the books, of said company. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner