BUHH-Ail

*F

I}*TEH}{AI HE,\re}fi-}H

M{iT. prv;sr*N
nxc*:rps
"LMrBrv"
tr:{-? fr",fdt

iiiF* i&?fit$lf-

ffi\i'r'k'*
Itepirbilc cf the Phiiippines

D*partrn*nt cf Firta nce

B{-iR}i/!. U i}ii'' } i'.j-itr}Q}"i;{ f. ittr

m:

V iii f'{{,

ffiil$*g{,rh.tffi

}i

QirciI()n Cii1,

]tine i-"i,

RH\,'ilruU E

,.f * w11.,

ilEK-{Jr,AR. zu# . **#!-

Prescribing Poiicies and GLriCelines for Acccunting and I{ecording

Transactions invoivitrg "Nettit'tg" or "Offsetting"

il[iffiSH{:'f;]

'x*

i,'$HHi****EJfC

Z{} tr}

,r\il R*r.rerlue Ci'ficials, Emllloy*es anri

{}
.i..v

fithers Ccllcr:rnect

For informartion anri guidance of all concerned, this Circular is being issued to
standarrlize [he procedure on the arrallgements/practices of offsetting the amcunts
recognizecl as accrued ltrade receivables against amounts recognized as accrued/trade
payables pursuant to Section 6 (H), in relation to Sections 57 [tsJ, L13 and 237, all of the
National Internai Revenrie Code [NIRC) of the L997 , as a,nended, and to the cleiilition of
gross income anci gross receipts under Section 32 [AJ and ],08, of the same Code,
respectively.

E&CI(GROIjNDj
assets and iiabilities in
the balance sheet is irnproper. Hence, under no circumstance is offselling to be considered

It is a. generai principle of accounting that the ofltetting of

appropriate

in recording transactions that are subject to a wide range oi- "netting"

aryangements or sirnilar practices, including those with standard comrnercial provisions

thai ailow parties t0 "net seitle", such as 'lrade receivables and payables.

Questions have beer"i raised about offsetting antLiLints recognized for transactions for
which the let amount of those transacticns, rather than l-he gross amount is reporterl for
accounting/tax purposes. In the atrscnce of definitive policies for reporting aissets and
Iiabilities arising from those transactions, vai"ious financial reporting practices have
clevelopecl giving i:ise to accounting treatmenls that result in offsetting u,hich adversely
affect the complete rneastlrement of an asset or a liabilitl''

L{X.do_NEEQUEN(-Er

The practice of offsetting due to,idLre from and/or payablef receivable transactions
of taxpayers and conseqllently the accounting and recording of the same and its related
transactions in the bocks i:f the parties is strictly prohibited for taxatioll purposes. 'l'hus, at
ail i-jrrtes, the accrued recervabies or payables arising; from saie or lease of goods cr
properties or the perfonnance of service, shall be recognized at gross for income :rnd vi:'liteadded tax or percentage tax purposes.
lncorne payments subject to creditable or final withholding taxes pursuant to the
provisions of Revenue Regrilations IRRJ No. 2-98, as amended, shall be recorded at gross,
regardless of rvhether the transactions are actually off.set or the salne provide for net
settlement of cash flows. Any amount offset against the income payments b), the payor not
suhjecteci to creditable or final withholding tax shall not be allolned as deductibie expense
of the payor pursuant to the provisions o1'RR No. 12-201"3 urhich disallows clainrs fot'
dedr-rction of expenses for iruhich the corresponding withhoiding tax was not remitted.

LI"I,USTBATIQNS 4ND4

CCO

UN TIN G

NT RI ES :

F.or clarification and to guide the concemed taxpayers in their invoicing and
recording of income payments aiici receipts, hereunder are example of transactions rvith
"netting arrangement" or those providing for ne.t settlernent of cash flo\rn's, tcgether v;ith
the prescribed accounting entries.

TLLUSTRATIOT{ T{O. 1

Company $ is a VA'f-registerecl 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 saie to end-users, Based on an agreement, F is under
obligation to pay S service fees for the display of F's foocl products in S's store premises.

Assi:ming F sold to 5 food produc[s worth P11,200.00 and issr-ted sales invoice for
the same amount. Cn settlement date, S paid F P8,000.00 only (net of P3,200.00 set'vice
fees pursuant to the saici agreement).
,

BI]ftAAU OF' {HTERNAL IiE]liHNU},

Rnc#Ft_{_}5i aG?. I}IW"S5{}H

4?rr ,4.fi,t,
"li;lj i iiii$lit r ,.tt
:ij

-ff '*'*'-,

ii;+ ;?*;
.ii'1,.

11

-t

kI=
-Ft-t

,!)'"i'tA*,+J*
",i j'I
g;t. ,i itl
,i
"l* Y .E-l: -il,,l

'rf
'. ;!
'1,

)'
;;'

8*{
,i. :l

.-. :
1!

Baseci on

the foregoing, S and F should have the following entries in its respective

books:
A.']'o Recr:rcl ilurchase of {l*r.rCs from
RE-rA

F
i

and Recogititir:i"t r:f Sr:twice Fees/Revenlte

LER

//

i3

ilYilil,

A.

To Record Sale oi Gooils to S and Rer:r>gniticn of Seruice FeeslErpettse

frrA

S)

NriFAffi

tJ R

ER/ sELr,ER

___*jguq

[]'i

1)ci-rit

iisbiJ

alli'f

9e

rade

l-.1_00.00

Sa

-fue:iil

00,00

i 0il.0i

Ci'eCiiable lT lVrrhheid [10,ilCCx 1']i,i

i

i,I

10,000.00

ies

Out;riri \tA'i'
Seryice E:tpiriise
D e f e i'r q cl i nI u t \r.4T

3,142.85
CreCirable iT \Vitnireld [2,857 .14x?th
Service !-ee Inconte
Deferred VA'l Pat,abie (3,200i 1 iZth x

1,2C0.Llt)

2,857.74
t,3,2

ilAj

34Z.Brc

L?-okxiZat'c'l

Ai P'l-rade
12o,r

(l\ .r'f (3,ZUA /7|Zat'o x

.)

4t

-1, -L.l
'ZO/c

6-

Z,U:

57.15

B. To Recot'ri St:ttietneal tif the al.ove transaction

'1,,1+2.85

3+2,85

i -r,iC0.00

Ai R Tr'acie
De

C.

To record Remiitance of Taxes to the

'34'2.'.J6

,erreci in uirf Vtl'I

tllil
CWT Pavable

3+?,116

I0utnut Vi'i fror other vataDle transaciions)

42.86

91+.)-9
I

rrp

1,2C0.0C

u: \i A"T

Accordingiy, S shall record the purchases at gross amount cJf P10,000"00 instead of
P8,000.00, that is net of service fee. At the same time, 5 shaii deciare the service fee as
revenue and shali issue an Official Receipts [O.R.j in the amount of,P3,200.00 representing
the service fee.
Based on the above iliustration, F and 5 may, for example, simuiate a transaction to
resemble, in form, a discount, when the transaction actuaily 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
iegal consequences of the sale the transaction effects in substance, insiead of the discount

that the transaction purporls to have in its form. Accorclingiy, service fees disguised as
discoun[ in an agreement that does not express what the parties truly intend, rvhere
substance contradic[s form, the agreement wii] be disregarded such that the purported
discount shail i;e considered as income by S subject to creditable withholditrg tax ancl VAT.
Irurthermore, if the agreement provides for F to give discount to S but in reaiity the
discount is disguised service fee, such disccunt shall not be allor,,red as deduction from the

gross selling price for VAT purposes since such discount

is not the

confempiated under the provisions of RR No. t6-20A5, as ameaded.

,ri

,ril

tlrl

{,' il,'1
:

i,"i $r
iT;l
'* /
{l-d tt

it,i.s

'{

5'
..{

'

t-t
1,

,gi .{

l'

./t ,},. ,.}.,.:,.,4',

,/t

-l
,\ ''!*
'.i i,r /i
,f rili
.:i y

discount

as

cases, the principle of "substance gver form" shail apply in delineating a

transactiorl, hence, serviCe fee disguised as ciiscou[ts shai] be considered as revenue on the
part of payor of the income payment notwithstanding lhe "netting" aruangement or
agreement betr,rreen the payor and the payee,

in all

it[.tjiiT'I?.ATIoN NO.

Conipanies G and S are'ooll: authorized Telecommunications ITELCO) carriers and

are rherefore mandated by the National Teiecommunications Commission [NTC) to
inierconnect their telecomrnunication 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 chat'ge or
interconnection fee in every billing,
Assuming G [originating or co]lecting TELCOJ bii]ed M, a postpaid subscriber of G
and belonging to the Top 20,000 private corporations, for outgoing call made to Vir. K, a
postpaid sukrscriber of S [terminating TELCO) for the amount of P1,000.00. The bili
included tlie 50% interconnect share of 5, M paid G the fuli arnount of the bill and G issued
the corresponding O.R. to M.

The iclicwing are ihe accounting entries in the bcol<s oi {i.

A,

'Jlc

Reccrii ti:e ite-;en,-re frcrrt Ouibcund Call

Drir

A/il

Credli

P 9 82,14

fro,rn Sui:scrib er'

CWT Ii,il fra lil?:91 >: zva]

17.85
P 89Z,E6

Revenuc - Voice CaiI li,cOal"LLZaia';

D eferre d C u lput VAT [ 1, 0 0 0 / 1' L'Zaic xlZa,tc]
B

1C7 .1 4

. gq F.eqojglhe Al cesreharye/lnleruqnliq e!-tq use e -aftt

Access Cirarge Expense - 5 [1,000 >r !:{}a/alL,LZ}
D eierl'ed inpr-li \,IAT [1,tt 0 0x5 A]/a I 1.12] x 12ah

* t+4*.43
ra
f--l
l
)J.f,

P 491.47

tl.ccess Charge Pa5r3!i1e -S [5 00 iess 8.93J

C\,1/T

C.

T.ry_Esc

Payal:le

sIC&e-C

[5 fr{}

iLl'Zah x

llqqlislr:[lstLsuh$ rri he r ff

Castr

Deferred OuLpi:t VAT

A/R frorn Subscribcr'
{} r; l p ut 1i'riT

i3{"JEiFlflii

Etj{ {l

tj

*ii

i { j,} l::
,;) ,
ft,q.
l.r

It r):i
.l

X,G

.Jri

t_t..\

;ni t

.i. '{r

E-.J

t,.r

[]{

'l

.l I
"\. .,
rl

8.9 3

Za/a-)

DellL
s 9 82.14
1A7.M

Credit

BZ.1,l
107 .L4

D. l_a--- Ressd---- ihe----le-I!iq:nert --* --pi---Aceess

c ji a reell n!ercc::::ee tlen*ge-e_sf .$_ an d-Ee q erpr
-qflirclAl
---j

'-f-:+-

Ljl. frem.9

lepri
Access Cll:irg* layable - S

+2

53.!;7

Input VA'f

P r!9 i-.',: f;
53.57

si:
D eiel't'etJ I irpllt VAT

tl

T'Iie

A.

_C_feit$

4t) 1 .',/ 0

following are ihe accounting e nlries in the bccks of S:

R.ecosniticll fif

5 0 a/a li':

terccnnect Share

-.L
A

Fsbii

_CreELII

+ S0rl.cc

ff':--:;;?,X'.? : f - . -

50i).0il

B. Sett}emer:t of- Lmerqc,tlleEE-Slai-e-t:f

!eb:l
,P

Cash

eredI

49 1.7 0
8.9 3

CV'IT

Alll

Access Charge

500,l]0

Based on the above illustration, the inlerconnection share cf $ should form part of
reported gross revenue of G. I{owever, sirnuitaneous r,vith the accrual of the gross revenlte,
G shall recognize the corresponding interconnection fee expense and set-up the liabilit), for
the sarne amount due to S. Outright or automatic netting-out or set-off of payments due to
other teiecommunication companies against the gross revenue of the collecting TELCO

shall not be aliowed.

access charge to another teiecommunication
company shall compute the withholding tax on tire gross amount of the interconnect share
ofthe other TELCO, net ofVAT.

In addition, TELCO paying the

ILLUSTRATTClN No.3
Ban]< X extencleC a loan to Company ,4, thus earnecl itrterest income thereon.
Hower,'er, Company A is at the same time a depositor of Bank X.

Assuming Bank X earned P1,000,000 interest income from the ioair extended to
Company A and also in the same period total interest earning of Company A's deposit in
Bank X amounted to P200,000.

'rI
rts1

.lll.;

11,{

',

:1j'I

The follow'ing are the accounting entries in the books of Bank X:

A. ileeelpt of InLe:.qsi Inqcme for Loan exlended

to Car:pa_ry8

i?ehrt

-CredI

,F.i,rJ00,000

Cash

1,ijc0,s.}{}

ir:terest ilic0ine

.I]
L),

T srrre sI d _P e r c qELage--IeL

iGi{ji}-}-i*i:ijly
D-elii

Perceniage Tax IGRT o f Sa/t]

-c--ed:t

p5 0,0 00

Cash

Eay&ryrfs f I n Lercsil

rrg

lll-a-c:l * e-pes i t la-Cqrn paryy$

De

Ir:

rerest

E>rp

ense

0,c0 0

bit

erErli!

?- 200,(i00

Casi:

i60,0il0

FWT

4A,Ct}0

Based on the illustration above, Banl< X under the principle against offset-ting oi:
netting fcr tax purposes cannot report in their cnrrent period's percentage tax return an
interest income earning of onlSr + 80C,000. Bank X is under obligation to declare income
earning subject to percentage tax in the same reportabie period of P1,000,000,

AII other issuances inconsisient herewitir are hereby repealed and

modifieC

accordingly.

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

i
:

..
,l: I i

,ii'

.;:':'''':'"
..I

i,,,.'
'l;;;:'rt-

s. }AtE i-V;?#-ffi HFIlr ffi iIS

{l*rnrnissioner c'f inter'nal Revenue
,4r 7 $
E{Eiv{

,i'

.,\

as i,vide