About Setting Up Tax

Tax is a transaction tax that is paid by the end user, which can be a consumer or a business. You set up Tax to specify the Tax percentage to calculate for the following scenarios:

Who you sell to.
Who you buy from.
What you sell.
What you buy.

When you set up Tax, you have to perform the following general steps:

Set up Tax business posting groups.
Enter Tax posting setup combinations.
Set up Tax product posting groups.
Assign Tax posting groups.
Use reverse charge Tax for trade between EU countries/regions.
Understand Tax rounding for documents.

Note
The principles for setting up both business and product Tax posting groups are like the principles for setting up general posting groups. For more information, see Set Up Posting Groups.

Setting up Tax Business Posting Groups

You create Tax business posting group codes to represent customers and vendors.

Tax business posting group codes define how Tax is calculated and posted according to the type of customer or vendor that is involved in the transaction. For example, the Tax business posting group can describe where the customer or vendor is located.

Use codes that are easy to remember and that describe the business group, such as EU, Non-EU, or Domestic. The code must be unique. You cannot have the same code more than once in a table. You can set up as many codes as you need.

For more information, see How to: Set Up Tax Business Posting Groups.

Setting up Tax Product Posting Groups

You create Tax product posting group codes for items and resources.

Tax product posting group codes determine how to calculate and post Tax according to the type of item that is being purchased or the type of item or resource that is being sold.

Use codes that are easy to remember and describe the product posting group, such as No-Tax for miscellaneous without Tax, Tax10 for miscellaneous with 10 percent Tax, and Tax25 for miscellaneous with 25 percent Tax.

For more information, see How to: Create a Tax Combination Setup and How to: Set Up Tax Product Posting Groups.

Entering Tax Posting Setup Combinations

You set up the combinations of Tax business posting groups and Tax product posting groups in the Tax Posting Setup window.

For each combination, you can specify the VAT percent, VAT calculation type, and general ledger account numbers for posting VAT that is related to sales and purchases and reverse charge VAT. You can also specify whether VAT is recalculated when a payment discount is applied or received.

You can enter as many combinations as you need. If you want to group Tax posting setup combinations with similar attributes, then you can define a Tax Identifier value for each group and then assign the identifier to the group members.

For more information, see How to: Set Up Combinations of Tax Business Posting Groups and Tax Product Posting Groups, How to: Create a Tax Combination Setup, and Tax Calculation Type.

Assigning Tax Posting Groups

Once you have set up Tax posting groups, you assign them to general ledger accounts, customers and vendors, and items and resources.

Instead of manually assigning these groups to accounts, you can set up default Tax business posting groups on general business posting groups and default Tax product posting groups on general product posting groups. The relevant code is then automatically inserted as the Tax business or product posting group when you assign the relevant business or product posting group to a customer, vendor, item, or resource.

For more information, see the following topics:

Using Reverse Charge Tax for Trade Between EU Countries/Regions

Companies in the EU must use reverse charge Tax when trading with other companies in the EU. The rule applies to purchases from EU countries/regions and sales to EU countries/regions.

Note
This rule applies when trading with companies that are registered as Tax liable in another EU country/region. If you do business directly with consumers in other EU countries/regions, then you should contact your tax authority for applicable Tax rules.

Purchases from EU Countries/Regions

When you post a purchase from a vendor in another EU country/region, Tax must be calculated using the rate that is applicable in your own country/region. On the VAT statement, the VAT amount is added to the domestic sales VAT and to the domestic purchase VAT. This means the calculated VAT does not affect the payable VAT.

You must report the value of purchases, which is the base amount that was used to calculate purchase Tax, from EU countries/regions separately on your Tax statement.

To correctly calculate Tax on purchases from EU countries/regions, you should:

Set up Tax Bus. Posting Group and Tax Prod. Posting Group combinations with Reverse Charge Tax in the Tax Calculation Type field. You must also enter the general ledger account to which reverse charge Tax is posted in the Reverse Chrg. Tax Account field.
Assign the Tax business posting groups in the Tax Bus. Posting Group field on the vendor card of each EU vendor. You should also enter the vendor's Tax registration number in the Tax Registration No. field on the Foreign Trade FastTab.

When you post a purchase from a vendor in another EU country/region, the Tax amount is calculated, the purchase Tax account is debited, and the reverse charge Tax account is credited. A Tax entry that contains the Tax base amount, which is the purchase price before Tax, is created, and the amount is specified as a reverse charge Tax amount.

Sales to EU Countries/Regions

Tax is not calculated on sales to Tax-liable companies in other EU countries/regions. You must report the value of these sales to EU countries/regions separately on your Tax statement.

To correctly calculate Tax on sales to EU countries/regions, you should:

Set up a line for sales with the same information for purchases. If you have already set up lines in the Tax Posting Setup window for purchases from EU countries/regions, then you can also use these lines for sales.
Assign the Tax business posting groups in the Tax Bus. Posting Group field on the Invoicing FastTab of the customer card of each EU customer. You should also enter the customer's Tax registration number in the Tax Registration No. field on the Foreign Trade FastTab.

When you post a sale to a customer in another EU country/region, the Tax amount is calculated, and a Tax entry is created by using the information about the reverse charge Tax and the Tax base, which is the amount that is used to calculate the Tax amount. No entries are posted to the Tax accounts in the general ledger.

Understanding Tax Rounding for Documents

Amounts in documents that are not yet posted are rounded and displayed to correspond with the final rounding of amounts that are actually posted. Tax is calculated for a complete document, which means that Tax that is calculated in the document is based on the sum of all lines with the same Tax identifier in the document.