STRATEGIC TAX MANAGEMENT

Module 3: Revenue Cycle – Case Study

Assessment Title: Case Study: Tax Management Issues Associated with Revenue Cycle
Outcome Assessed: Identification of tax risks associated with the revenue cycle and formulation of
recommendations on mitigating such risks

You just recently clinched a job as a tax accountant in Shopee Consultancy, Inc. (“Shopee”).
Shopee, a non-GPP business consulting firm, was registered with the Securities and Exchange Commission
(SEC) on February 4, 2019 and with the Bureau of Internal Revenue (BIR) on February 8, 2019. Moreover,
it is a VAT taxpayer per BIR Certificate of Registration (COR) and is an EFPS filer.
The accounting manager instructed you on your first day at work to assess Shopee’s tax reporting as of
September 30, 2020 by reviewing certain documents. Specifically, she requested guidance on the
following:
1. Amount of income tax and VAT due as of September 30, 2020, if any
2. Unapplied creditable withholding taxes, input VAT and other tax assets as of September 30, 2020
3. Deferred output VAT as of September 30, 2020
4. Unremitted taxes, if any, (basic tax only or excluding penalties for late filing and/or remittance)
5. Possible tax exposures (basic tax only) or opportunities for tax savings, if any.
6. Recommendations in order to mitigate the risk of incurring deficiency taxes or possible tax
exposures

You were given access to the following documents:

a. Comparative financial statements for the period ending September 30, 2020 – unaudited and
for the year ending December 31, 2020 – audited (excerpt)
Unaudited Audited
Account Title
September 30, 2020 December 31, 2019
Accounts receivable, net ₱ 2,217,420 ₱ 3,024,945
Creditable withholding taxes 1,920,000 1,336,540
Prepaid local business tax 38,875 -
Input VAT 248,400 -
Land - 892,500
Advances from clients (1,500,000.00) -
VAT payable - (91,800)
Output VAT (414,000) -
Deferred output VAT - (415,800)
Rental deposit (50,000) -
Business consulting revenues (12,800,000) (17,700,000)
Cost of services 10,750,000 11,050,000
General and administrative expenses 1,785,423 2,591,237
Other income (842,925) (109,600)

1|Page
STRATEGIC TAX MANAGEMENT
Module 3: Revenue Cycle – Case Study

b. Accounts receivables aging (excerpt)

Unaudited Audited
Account Title
September 30, 2020 December 31, 2019
Accounts receivable ₱ 2,463,800 ₱ 3,361,050
Allowance for doubtful accounts 246,380 336,105

c. Collection schedule (excerpt)

Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2019 ₱ 3,055,500 ₱ 2,837,250 ₱ 3,462,900 ₱ 4,452,300
2020 5,398,050 6,241,950 3,128,250 -
 As a matter of practice, Shopee records its collections inclusive of VAT but net of the
creditable withholding tax.
 All of Shopee’s clients withhold and remit tax based on billings and furnish on time the
supporting withholding tax certificates or BIR Form No. 2307. Moreover, the use the
maximum withholding tax rate applicable to income payments to management and technical
consultants.
 Based on the billing details, collections in the 1st quarter amounting to ₱3,361,050 pertains to
2018 billings which remained unpaid as of December 31, 2019.
 On September 18, one of Shopee’s top-tier clients paid ₱1,455,000.00 in advance, which
pertains to 4th quarter billings.

d. Other income schedule

Unaudited Audited
Account Title
September 30, 2020 December 31, 2019
Gain on sale of office equipment ₱ (55,000) ₱ -
Gain on sale of land (82,500) -
Rentals from subleasing office
(450,000) -
premises
Realized foreign exchange gain (38,800) -
Unrealized foreign exchange gain (14,900) (25,600)
Interest income from bank deposits
(112,000) (84,000)
denominated in Philippine peso
Reversal of allowance for doubtful
(89,725) -
accounts
 Last year, Shopee purchased a 150 sqm. parcel of land where it plans to construct its own
office building. However, the top management decided not to proceed with the said plan. The
parcel of land was sold to a young entrepreneur on January 14.
 Shopee sold an off-balance sheet office equipment on September 15.
 On January 1, Shopee started subleasing a portion of its office premises to a start-up IT
company.
 All foreign exchange gains recorded in the unaudited books pertain to 2020 transactions.

2|Page
STRATEGIC TAX MANAGEMENT
Module 3: Revenue Cycle – Case Study
 As a matter of practice, Shopee records interest income from bank deposits net of the tax
withheld and remitted by the concerned banks. However, the banks have yet to issue the
supporting withholding tax certificates or BIR Form No. 2306.

e. General and administrative expenses (excerpt)

Unaudited Audited
Account Title
September 30, 2020 December 31, 2019
Doubtful accounts expense ₱ - ₱ 336,105
Local business tax 38,875 -
Documentary stamp tax on sale of
825 10,000
office equipment

 In January 2020, Shopee paid local business tax as assessed by the concerned local
government unit and initially recorded as a prepaid tax, which will be amortized every
quarter.
 There were no other DST payments made by Shopee aside from the amount paid related to
the sale of office equipment, which is supported by a timely-filed BIR Form No. 2000.

f. Filed VAT returns

2019 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
VATable sales ₱ 3,150,000 ₱ 2,925,000 ₱ 3,570,000 ₱ 4,590,000
Output VAT 378,000 351,000 428,400 550,800
Available input
297,000 304,200 226,800 459,000
VAT claimed
VAT remitted ₱ 81,000 ₱ 46,800 ₱ 201,600 ₱ 91,800

2020 1st Quarter 2nd Quarter

VATable sales ₱ 3,500,000 ₱ 5,850,000
Output VAT 420,000 702,000
Available input
315,000 386,100
VAT claimed
VAT remitted ₱ 105,000 ₱ 315,900

 According to the accounting manager, the VATable sales indicated in the filed VAT returns for
the 1st and 2nd quarters of 2020 pertain to the amounts billed to clients. The collection
schedule was only updated a week ago when the new billing and collection officer reported
for work.
 The input VAT claimed in the 1st and 2nd quarters of 2020 were properly offset against the
output VAT account.
 Based on your review of the e-filing and e-payment details in the filed VAT returns, Shopee
timely filed the said returns and timely paid the VAT due.

3|Page
STRATEGIC TAX MANAGEMENT
Module 3: Revenue Cycle – Case Study

g. Filed 2019 annual income tax return (excerpt)

Net income per books ₱ 4,168,363
Add:
Doubtful accounts expense 336,105
4,504,468
Less:
Unrealized foreign exchange gain 25,600
Interest income from bank deposits denominated in Philippine peso 84,000
Taxable net income ₱ 4,394,868

Regular corporate income tax due ₱ 1,318,460

Less: Creditable withholding tax certificates 2,655,000
Income tax due (excess income tax payments) ₱ (1,336,540)

h. Filed 2020 quarterly income tax returns

Shopee timely filed no-payment income tax returns for the 1st and 2nd quarters of 2020. The said
returns already reflect the withholding tax certificates received by Shopee from its clients based
on billings.
i. Deed of Absolute Sale (DOAS) of Land between Shopee and young entrepreneur
The DOAS dated January 14, 2020, which was notarized on the same date, for the 150 sqm. parcel
of land provides for a selling price amounting to ₱975,000 and that all taxes due on the said sale
shall be paid by the seller.
Moreover, attached to the said deed is the latest tax declaration for the subject parcel of land.
The market value indicated in the said declaration is ₱937,500.
However, the previous left a note dated September 16 that the Register of Deeds requires the
payment of the applicable taxes on the said sale before the title can be transferred to the young
entrepreneur.
j. City Revenue Code (excerpt)
The revenue code of the city where Shopee operates provides for a ₱11,500 business tax on gross
receipts for the preceding year amounting to ₱1,000,000.00 or more but less than ₱2,000,000.00,
and 50% of 1% business tax rate on gross receipts for the preceding year amounting to
₱2,000,000.00 or more.
Moreover, it provides for a 50% of 1% tax on transfer of real property ownership.
k. Sublease agreement between Shopee and start-up IT company

 Sublease period is from January 1, 2020 to December 31, 2022

 Monthly rental amounting to ₱50,000
 Rental deposit amounting to ₱50,000 to applied against the last month’s rental
 No rent-free period and advance payment of rentals
 No provision regarding the taxes due on the agreement and the rental payments

4|Page
STRATEGIC TAX MANAGEMENT
Module 3: Revenue Cycle – Case Study

l. Zonal value of land

Per applicable Department of Finance (DOF) order, the zonal value of the 150 sqm. parcel of land
is ₱7,000 per sqm.

5|Page