Some tax authorities require withholding tax (also called tax withheld at the source) to increase tax law compliance and secure earlier receipt of tax revenues. In simple terms, customers are required to withhold a portion of the balance due on sales invoices they receive from suppliers and pay that portion directly to the tax authority instead of to their suppliers. Then, either the customer or the tax authority provides certification of payment of withheld amounts to the supplier. The supplier reduces subsequent payments of its tax liabilities by amounts already paid on its behalf by its customers.
Withholding tax may be a form of advance payment of income taxes, value added taxes, goods and service taxes, or some combination of these and other types of tax. Because the entire process involves both customers and suppliers, Manager supports withholding tax accounting through both its sales invoice and purchase invoice processes, though procedures are somewhat different.
Notes
As implemented in Manager, withholding tax does not refer to deductions on payslips of taxes due from employees. These are referred to as Payslip Deduction Items and are explained in another Guide.
Withholding tax cannot be applied on cash receipts or payments, because the full amount of the transaction must be recorded. Further, cash receipts cannot be associated with individual suppliers’ subaccounts as withholding tax must.
As a buyer or customer who receives sales invoices indicating the need to withhold tax, you must do four things:
- Activate the Withholding tax payable liability account.
- Record tax amounts withheld from payments to suppliers.
- Remit withheld amounts to the tax authority.
- Provide notifications about your remittances (if required by local law) to the suppliers and tax authority.
Activate the Withholding tax payable account
Withholding tax functionality for purchase invoices does not require activation of any new tabs. Nor do you need to create any new accounts. The necessary account, named Withholding tax payable, is added automatically to your chart of accounts the first time you check the Withholding tax box on a purchase invoice:
The account is created in the Liabilities group, because the money it represents technically belongs to your suppliers until it is eventually used to pay taxes owed on their behalf.
Record withheld tax
When entering a purchase invoice to which tax withholding applies, you have two concerns:
- Posting the full amount of purchases to the appropriate asset or expense accounts. This ensures fixed assets, inventory, and operating expenses are reflected at their actual costs. (Remember, withholding tax is not an expense of your company, so it should not affect other financial results. You are only acting as collection agent for the tax authority of amounts that would otherwise be due from the supplier.)
- Recording tax withheld for later remittance.
To satisfy the first concern, record purchased goods or services at their full costs, using as many lines as necessary, just as though no withholding tax was involved. Post these line items to the same accounts you normally would. Apply appropriate discounts, tax codes, and options as usual.
To satisfy the second concern, check the Withholding tax box and complete the additional fields that appear. This will reduce the balance due on the purchase invoice and post the withheld tax to Withholding tax payable, the liability account mentioned above.
Example
Sample Consulting purchases stationery worth 500 from Summit Supplies. Summit’s sales invoice shows a 10% deduction for withholding tax is necessary. Sample enters the following information in its purchase invoice:
The resulting purchase invoice looks like this:
450 is posted to Accounts payable and 50 to the Withholding tax payable liability account:
The full 500 cost of stationery is posted to an expense account:
Remit withheld tax
When withheld tax is remitted to the tax authority, a payment is posted to the Withholding tax payable account.
Example
Sample Consulting remits the 50 withheld from its payment to Summit Supplies via a bank payment:
The liability is cleared, but the Accounts payable balance will remain unchanged until Sample pays Summit Supplies the reduced balance due. The expense account where the purchase was originally posted is also not affected:
Provide notifications
Comply with local procedures after remitting withheld tax:
- File necessary information with the tax authority to indicate which suppliers’ withheld tax you are remitting.
- Notify suppliers of your remittance if required by law.
For assistance preparing notifications, drill down on the balance (or dash, if the balance is zero) of Withholding tax payable. All relevant transactions will be listed. A General Ledger Transactions report for the Withholding tax payable account could also be prepared.
Example
Sample Consulting drills down on its Withholding tax payable account balance and obtains the following list for Summit Supplies:
and this report:
