For calculation of tax, we need to have tax base amount and tax rate.
Tax rate is the tax percentage which is to be applied on tax base amount to arrive at tax amount. Tax base amount is the amount on which tax rate is to be applied.
As directed by tax authority in a country:
- Every country has a list of different taxes which may be applicable on a business transaction in the country.
- Different business transaction might invite different types of taxes with different tax rates.
- Tax base amount can be inclusive or exclusive of cash discount.
Once tax base amount and tax rate is known for a transaction, tax amount can be calculated.
Calculated tax amount along with business transaction details need to be recorded.
Let’s see how sap handles the above requirements for tax calculation
Every country has a list of different taxes which may be applicable on a business transaction in the country.
In sap, country specific tax procedure is created and assigned to country. Tax procedure is a list of tax condition types. Each condition type represents a type of tax applicable in the country.
Hence tax procedure represents the list of different types of taxes which are valid in the country.
TAX CODE, TAX JURISDICTION CODE
Different business transaction might invite different types of taxes with different tax rates.
In sap, tax code is created to store the value of tax percentage.
A business transaction might invite different type of taxes with different tax rates. Hence in sap, tax condition types are assigned to tax percentage. This combination of tax condition types and corresponding tax percentage is stored in tax code.
A tax code in sap is a two digit alphanumeric code which stores different tax conditions (defined in tax procedure) and corresponding tax percentage.
Normally tax code is created at national level but in few countries like USA, different areas have different tax authority and each tax authority decides its own tax percentage. Hence applicable tax percentage depends upon which tax authority the business transaction belongs to.
In sap, each tax authority is created as tax jurisdiction code.
Hence in USA, tax percentages are assigned to tax condition types for the combination of tax code and tax jurisdiction code.
When a business transaction happens, tax code is supplied and system derives tax jurisdiction code information. Corresponding tax percentage maintained against tax condition type is applied for tax amount calculation. Tax amount is posted to GL account assigned to condition type.
With huge number of tax jurisdiction code (tax authority) and each are regulating its own tax percentage, it becomes very challenging for companies to keep track to up to date tax percentage. Instead of committing resources on keeping track of tax percentage, companies take help from other companies who maintain up to date tax percentage for each tax jurisdiction code.
Companies like vertex, taxware, sabrix maintain tax percentage on their server. When transaction is entered in sap, software determines the jurisdiction code and fetches tax percentage from vertex/ taxware/ sabrix server.
Hence companies free themselves from the load of maintaining tax percentages by using the services provided by other companies. Hence tax percentage is fetched from external sources like vertex, sabrix and taxware.
TAX BASE AMOUNT
Tax base amount can be inclusive or exclusive of cash discount.
In sap, for each company code we can define if tax base amount is inclusive of cash discount or exclusive of tax discount.
POSTING OF TAX AMOUNT
When a business transaction is recorded, tax code is supplied. System calculates the tax amount for each condition type. Condition types are mapped to account key and account key is linked to GL account.
When document is posted, system automatically picks the mapped GL account for posting tax amount.
Let’s put the entire concept together to understand calculation and posting of tax amount in sap
From entered document, system knows the company code. Company code leads to country and country leads to tax procedure.
From tax code which is entered while posting document, system fetches the percentage against each tax condition type and applies the percentage on determined tax base amount.
— Tax condition types are assigned tax percentage in tax code.
— Tax condition types are assigned tax percentage in (tax code and tax jurisdiction code) combination.
— Tax percentage is fetched from external sources like vertex/ taxware/ sabrix etc on the basis of tax jurisdiction code.
Calculated tax is posted in GL account assigned to tax condition type.
To read more on tax configuration: