Witholding taxes (Retenciónes)

Witholding taxes (Retenciónes)

A withholding tax (WHT), or a retention tax, is an income tax to be paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the income due to the recipient. Depending on the jurisdiction, withholding tax can apply to employment income, payments of interest or dividends, royalties, rent or even the sale of real estate.

Cin7 Core does not have a native feature which allows for the recording of withholding tax or retenciónes, however this article shows a workaround that can be used.

Prerequisites

 

Retention Requirements

In this example, we will use the requirements of our client that led to the workaround:

  • VAT of 16% is added to the purchase amount.

  • 10% of the supplier revenue is withheld. The buyer (us) will pay this to the tax authorities on the supplier's behalf.

  • 10.6667% of the VAT is withheld. The buyer will pay this to the tax authorities on the supplier's behalf.

  • The rest of the total is paid to the supplier.

 

Purchase total (without taxes):

$1000

Sales tax VAT 16%:

$160

Revenue retention 10%:

-$100

VAT retention 10.6667%:

-$106.67

Total paid to the supplier:

$953.33

 

It is not possible in Cin7 Core to create a tax rule for a negative percentage, as would be required by a WHT. As a workaround, a positive tax rule is applied to a negative additional cost added to the purchase.

Set up Accounts and Tax Rules

The next step is to create accounts in the chart of accounts and configure the withholding tax rules. The following accounts are required in the Chart of Accounts:

  • VAT/Sales Tax account - this account already exists as a mandatory account.

  • A current liability account for VAT/Sales Tax withholding.
         

  • A current liability account for revenue withholding.

 

Note: Multiple revenue withholding liability accounts can be created if this is required by the tax authorities. For example, our client required one account for revenue tax withholding on rented spaces and another account for revenue tax withholding on independent workers.

Then, we will need the following tax rules:

  1. Sales Tax on Purchases - this tax rule will already exist in Cin7 Core. In our example, it is 16%. It is linked to the Sales Tax liability account.
         

  2. Sales Tax withholding rule - In our case, it is 10.6667%, and is linked to the Sales Tax Withholding liability account.
         

  3. Revenue withholding rule - In our case, it is 10%, and is linked to the Income Withholding liability account.
         

  4. A 0% tax rule - we will need to apply a non-taxed reimbursement cost to cancel out the negative withholding cots.

Applying withholding tax to a purchase

Let us see how this applies to a real purchase. We add 5 lines to the purchase:

  • The actual charge for the supplier service, with the sales tax rule (16%).

  • A negative charge/reimbursement for the value of the supplier service, with the sales tax WHT (10.6667%).

  • A positive charge for the value of the supplier service, with zero taxes. This cancels out the negative amount in the purchase.

  • A negative charge/reimbursement for the value of the supplier service, with the revenue tax WHT (10%).

  • A positive charge for the value of the supplier service, with zero taxes. This cancels out the negative amount in the purchase.

         

 

As you can see, the total paid to the supplier is 1000 before tax (the negative and positive costs have canceled each other out), and 953.33 after tax, as calculated in our requirements.

Our accounts show like this - a positive sales tax on purchases has been counted as well as two negative withholding taxes.

  

On the closure of the month, the balances are moved from the withholding accounts to the "sales tax payable” account or "income tax payable". The withholding accounts get reset to zero for the opening balance of the next month.

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