Thursday, February 10, 2011

Using Personal Credit Cards for Company Expenses

Good and bad news.  

1.  Using personal credit card for company expenses can be allowed for deduction for income tax purposes provided the requirements of deductibility are met.


2.  However, for companies required to withhold, RMC 72-2004 provides reprieve on exemption of withholding only to those corporate credit cards.


See full text of RMC 72-2004 here: ftp://ftp.bir.gov.ph/webadmin1/pdf/14572rmc04_72.pdf



http://www.punongbayan-araullo.com/pnawebsite/pnahome.nsf/section_docs/YM581L_30-1-07

Using personal credit cards for company expenses

by Shirley S. Go

Representation and entertainment (R&E) expenses or other reimbursable costs incurred by officers and employees on behalf of their companies  cause a lot of tax problems.  Because of this, most companies apply for company credit cards to be issued to its authorized officers and agents.    In some cases, companies would rather ask their officers or marketing agents to advance the cost of these business meetings, and subsequently have these costs reimbursed by the company.   These employees would usually use their own personal credit cards.

For taxation, is there is difference between a reimbursement scheme through the use of a personal credit card, as compared with the use of a company issued credit card?

In both cases, the reimbursement would be considered as a valid deductible expense of the company as long as 1) the entertainment expenses will not exceed the ceiling of 0.50% of net sales for those engaged in sale of goods or properties; or 1% of net revenue for those engaged in sale of services, including the exercise of profession and use or lease of properties; and 2) that the requisites for deductibility are complied with.
One of the requisites for deductibility is that the reimbursement be substantiated by official receipts, or invoices, or bills or statements of accounts issued in the name of the taxpayer claiming the deduction.  For a holder of a company issued credit card, the official receipts issued by the seller will automatically be under the company’s name, thus making it more convenient to meet this requisite.     In contrast, for holders of personal credit cards, the receipts will generally be issued in the name of the cardholder unless a specific request is made by the holder that it be issued in the name of the company.
How about the withholding tax?

A reprieve is provided to a company that has provided its employee with a company-issued credit card.    Under Revenue Memorandum Circular (RMC) 72-2004, a top ten thousand corporation (TTC)  or a government agency is exempted from the 1% or 2% withholding tax requirement on purchases of goods and services if payment is made through the use of a company-issued credit card.   It can be inferred from the wordings of the RMC that the rationale of this exemption is that the credit card company is required to withhold 1% of 50% of the gross amount when it pays the merchants for the purchases of the cardholders.   Thus, without this exemption, the business entity will be subjected to withholding tax twice - the first coming from the customer (i.e., 1% or 2%) and the second from the credit card company (i.e., 1% of 50%).
This exemption, however, has not been extended to employee reimbursement where payment is made using the employee’s personal credit card.  Would you not say that the same rationale could be applied?    Thus, if the Company presented the charge slip as proof that the purchase was paid using the personal credit card of the employee, shouldn’t that be sufficient to claim an exemption from withholding?

Hence, in the absence of such exemption, employers continue to be bothered on how to efficiently implement this withholding on reimbursable expenses.

Under the RMC, it is required that the employee issue a Certificate of Taxes Withheld at Source (BIR Form No. 2307) as proof that a tax has been withheld.  Such certificate will be used by the seller to claim a tax credit against income taxes due from it.   It is also provided that the said certificate should be issued only by the duly authorized representative of the employer-withholding agent.
This would give rise to problems in implementation, both on the part of the buyer and the seller.  For instance, would the signatory of the certificate agree to issue a signed certificate but without an amount indicated therein? & ;nbs p; On the other hand, would a seller be willing to accept a withholding certificate from just anyone?  How could it ensure that the withholding agent is legitimate?

It appears that the requirement to withhold on all valid and legitimate reimbursable business expenses initially paid through personal credit card of employees would be quite difficult or even impractical to implement. Couldn’t the exemption granted on purchases using company-issued credit cards be liberally applied?

(The author is a tax manager at Punongbayan & Araullo, member of Grant Thornton International.  For comments and inquiries, please e-mail the author or call 886-5511.)
 

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