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Receivables provides two methods for deriving the appropriate tax code and rate for your transactions.
Controlling Tax from Item & Destination - Item Method
Normally, the tax code (and therefore Tax Regime) for a transaction (line) is derived using rules associated with the line item and destination (Point of Supply). The Item Method defaults tax codes based on a search hierarchy that you define in the System Options window. Typically within the Item Method, the system searches for a tax code at the item, customer site, customer, and system option levels (in that order) and ignores any tax codes associated with the Revenue Account of the line item.
In some countries and implementations, your chart of accounts may be constructed around VAT compliance. When using this method, you assign one or more revenue accounts to a tax code. Then, when recording a transaction to one of your revenue accounts, Receivables will record the tax on that transaction to the VAT account assigned to this revenue account.
Receivables lets you optionally set up defaults and rules using the GL Tax Options window in Oracle General Ledger. Using this window, you can assign tax codes to Natural Accounts, which lets the Receivables Transactions Workbench and AutoInvoice program automatically default tax codes when you enter or import transactions. You can also choose to validate the tax code against the Natural Account of the Revenue account when you complete transactions in the Transactions Workbench. See: Set Up Account Method VAT.
Note: By validating the tax code for your invoice lines against the tax code assigned to your Revenue account, you can ensure that the VAT amounts in your tax returns reconcile to the tax liability accounts and that the taxable amounts in your tax returns reconcile to the Profit and Loss accounts.
Suggestion: If you enforce validation on tax codes from the natural account, you should not derive tax codes from customers, customer sites, or inventory items.
Use the Tax Codes and Rates window to define your tax codes and rates. See: Tax Codes and Rates.
For example, the following company needs to define tax codes and rates for use in the European Union (EU):
| Home Country - | UK, one VAT registration number | |
| Does Business with - | Customers in the UK | |
| Customers outside the UK but inside the EU - Tax Registration Number Known Tax Registration Number Unknown | ||
| Customers outside the EU | ||
| Product Line Includes - | Taxable Items | |
| Exempt Items | ||
| Miscellaneous Cash - | Positive Receipts | |
| Negative Receipts | ||
| Customer Home Country | Tax Codes | Tax Rates |
|---|---|---|
| United Kingdom | UKSTD | Standard UK Rate |
| UKZERO | 0% | |
| UKRED | Reduced Standard Rate | |
| EU Transactions | IntraEU-Zero | 0% |
| IntraEU-Taxed | (see Step 4) | |
| Export Transactions | Export | 0% |
| United Kingdom | Positive Cash | Miscellaneous Cash Receipts |
| United Kingdom | Negative Cash | Miscellaneous Cash Payments |
| Table 1 - 48. (Table 1 of 1) | ||
Suggestion: You can use the VAT Reconciliation Report to assist with preparing your VAT return. To simplify your VAT return process, you should assign a different tax liability account to each tax code, enabling the VAT Reconciliation Report to distinctly display the tax and taxable amounts for each tax code.
These tax codes and rates would then be assigned (using the Customers window) to each of the four classes of customer, or customer sites, as follows:
| Customer Class | Tax Code |
|---|---|
| Intra-EU, Zero Rated | IntraEU-Zero |
| Intra-EU, Taxed (see note) | IntraEU-Taxed |
| External | Export |
| Domestic | null |
| Table 1 - 49. (Table 1 of 1) | |
Receivables searches for tax codes according to the tax hierarchy that you define in the System Options window, stopping when one is found. Using the approach outlined above, you will be able to automatically tax your transactions correctly when you create:
Note: If you assign a tax code with a rate of zero to an invoice, or if the invoice is exempt, it will still have tax lines and account distributions posted to the General Ledger for the zero tax amount.
To apply time limits to tax code rates, simply add an end date to the existing tax code, then redefine the code using the same tax code name. This lets you keep an audit of changes to rates, while ensuring that the correct rate will always be used on a transaction.
Note: If a customer's Tax Registration Number is not known, or if you are required to collect VAT in multiple countries, perform step 4, Set Up Tax Groups for Distance Selling Rules. This will let Receivables automatically apply different VAT rates on domestic and Intra-EU taxed transactions.
You should also assign a tax code to your miscellaneous cash receipts within the Transactions window. You should use a different tax code for negative cash receipts and positive cash receipts, though they may have the same rate. The VAT Reconciliation Report will use the general ledger account assigned to the tax code for each receipt for reporting VAT on miscellaneous transactions. See: Entering Miscellaneous Transactions.
| Miscellaneous Cash Receipt | Tax Code |
|---|---|
| Positive Receipt (an investment dividend) | Positive Cash |
| Negative Receipt (a bank service charge) | Negative Cash |
| Table 1 - 50. (Table 1 of 1) | |
Navigate to the General Ledger Tax Options window and assign a tax code to the natural account segment of your Revenue account. For each natural account, decide if the system should allow an override of tax codes posted to this account. The Receivables Transactions Workbench will validate tax codes against revenue accounts if the Revenue account has Allow Override set to No and the system option Enforce Tax from Revenue Account is set to Yes. If you set up Receivables to enforce tax from your Revenue account, the Transaction Workbench will not let you complete an invoice if any of its lines have a tax code that is different from the tax code assigned to the Natural account. AutoInvoice will also reject transactions that fail this validation.
To set up your system to enforce that a tax code is derived from your Revenue account, perform the following:
Attention: If you update your Revenue account or any of its attributes such that the tax code for an invoice line is no longer the same as the tax code assigned to your Revenue account, Receivables will display a message when you attempt to complete an invoice. This lets you choose to re-default the tax code for the offending invoice line, and then complete the invoice. If you choose to not update the tax code, Receivables will not let you complete the invoice.
For more information, see: Controlling Tax from your Revenue Account and Setting Up Automatic Tax Calculation.
If you are using the Account Method VAT compliance or do not require Receivables to calculate VAT rates using a combination of both inventory item and ship-to country, you can skip this step.
The implementation outlined in step 2, Define Tax Codes and Rates, assumes that all inventory items have been assigned a Tax Code and that Intra EU and export shipments override the default. The examples in step 2 are most appropriate if your inventory items are local to your home country. If you ship within your home country, you will typically be required to collect taxes only in that country.
An alternative implementation is appropriate if you ship to many countries and your legal entity is required to collect tax in multiple countries. Instead of a tax code, you can assign a tax group to each inventory item; this lets Receivables automatically create a schedule of applicable taxes based on a combination of both the inventory item and ship-to country.
The following table illustrates how tax groups can be used to provide Item Method VAT with Distance Sales.
| Tax Group Name: EUSTD Tax Group Description: 'European Standard Rates' Tax Code | Tax Rate | Ship To Country |
|---|---|---|
| UKSTD | 17.5% | United Kingdom |
| ITSTD | 19% | Italy |
| DESTD | 15% | Germany |
| FRSTD | 25% | France |
| Table 1 - 51. (Table 2 of 2) | ||
Suggestion: As the Standard (or Reduced) rate of VAT changes in each country, use effectivity dates within the group to control when Receivables applies the new tax rate.
European Standard rates are the set of tax rates for each member country that are classified as 'Standard'. Typically, but not always, goods classified in one EU country as 'Standard' will share the same classification in another EU country. An example of an exception to this rule is the category of goods called 'Documentation'. In Germany, Documentation may be classified as 'Reduced', whereas in the UK it may be classified as 'Zero-Rated'. If required, you can construct a tax group that will automatically assign the correct tax code and rate for each shipment. For example:
| Tax Group Name: EUDOC Tax Group Description: 'Intra-EU Taxed, Documentation' Tax Code | Tax Rate | Ship To Country |
|---|---|---|
| UKZERO | 0 | United Kingdom |
| DERED | 7.5% | Germany |
Caution: You can define a single VAT Registration number at the Organization level in the System Options window. You can override the VAT Registration number when printing your invoices. Your VAT returns must still be compiled using appropriate standard or country-specific VAT reports. The country-specific VAT reports may be incompatible with those from your home country, or with each other.
You can assign the appropriate tax code to each of your inventory items in the Items window. You can assign a tax code or a tax group to each item that you define. If you defined tax groups for Distance Sales, use these groups for your items (see Note in Step 2, Define Tax Codes and Rates).
| VAT Classification | Domestic Supply | Distance Sales Transactions |
|---|---|---|
| Standard Rated Product | UKSTD | EUSTD |
| Reduced Rated Product | UKRED | EURED |
| Documentation | UKZER | EUDOC |
| Zero-Rated Product | UKZERO | EUZERO |
Suggestion: Using inventory item templates, create different templates for each VAT Classification. Then, when you create an inventory item using that template, Receivables will automatically assign the correct tax code or tax group.
Use the list of values to select a Sales Tax Location Flexfield Structure in the System Options window. Receivables uses this structure to determine your tax rates and to control which fields of a customer's address are required when you enter domestic addresses. The following structures are predefined:
For a detailed description of each of these structures, see: Calculating Tax.
Attention: Each segment in the structure will become mandatory when entering customer addresses located in your home country.
Suggestion: You may want to implement Flexible Address Formats for country specific validation of customer address information. See: Flexible Addresses.
The system options listed below affect your tax within Receivables. See: Defining Receivables System Options and Tax Rounding System Options.
| Tax Option Field Name | Suggested Setting |
|---|---|
| Tax Method | VAT |
| Tax Code | Your default tax code. |
| Postal Code Range * | From: ! To: zzzzzzzzzzzzz |
| Address Validation | No Validation |
| Compound Taxes | No |
| Invoice Printing | Itemize and Summarize |
| Tax Cache Size | 1000 |
| Tax Account | The default tax account for your tax codes. |
| Tax Registration Number ** | Your company's Tax Registration Number. |
| Calculation Level | Header |
| Rounding Rule | Nearest |
| Reporting Currency | Your functional currency. |
| Allow Override | No, unless you need to change Tax Rounding rules by Bill-To customer site. |
| Default Country | Enter your home country. |
| Table 1 - 52. (Table 2 of 2) | |
** Receivables prints the number that you enter here on your invoices. You can change this number when printing your invoices.
The Tax Defaults and Rules alternative region of the System Options window lets you control how the system automatically taxes your transactions. Using this window, you can control how your Output VAT is calculated. See: Tax System Options. Use the Tax Defaults and Rules alternative region in the Oracle Payables System Options window to control your Input Taxes. See: Invoice Tax Payables Options.
How you set up your system depends on your implementation and the VAT method you selected in Step 1. If you are using the Item Method, we recommend the following settings for determining a default tax code:
| Default Tax Code Options | Suggested Setting | Hierarchy No. |
|---|---|---|
| Enforce Tax from Revenue Account | No | (NA) |
| Customer Site | Yes | 1 |
| Customer | Yes | 2 |
| Product | Yes | 3 |
| Revenue Account * | No | |
| System Options | Yes | 4 |
| Table 1 - 53. (Table 1 of 1) | ||
| Default Tax Code Options | Suggested Setting | Hierarchy No. |
|---|---|---|
| Enforce Tax from Revenue Account | Yes | (NA) |
| Customer Site | No | |
| Customer | No | |
| Product | No | |
| Revenue Account * | Yes | 1 |
| System Options | No | |
| Table 1 - 54. (Table 1 of 1) | ||
Note: It is possible to use both Item and Account method VAT. If you do this, we recommend that you set Enforce Tax from Revenue Account to No.
We recommend the following settings for your tax exceptions:
| Exception Rate Option | Suggested Setting |
|---|---|
| Use Item Tax Rate Exceptions | No * |
| Use Customer Exemptions | No ** |
| Use Item Exemptions | No *** |
| Table 1 - 55. (Table 1 of 1) |
* Tax exceptions are special tax rates that are assigned to items being shipped to specific addresses. Tax exceptions are only used when you are calculating location-based tax and therefore do not apply in a VAT system.
** Customer exemptions let you fully or partially exempt specific customers from tax. In a VAT system, customers can be assigned a specific tax code that would exempt them from tax.
*** Product exemptions let you fully or partially exempt specific items from tax. In a VAT system, items can be assigned a specific tax code that would exempt them from tax.
Suggestion: Switching off aspects of the tax engine that you do not use may improve performance.
Attention: If you will be using both US Sales Tax and VAT in one set of books, you should set the option Use Tax Code for Product to No. However, this is not an advisable setup. A site will usually implement each legal entity in a different set of books and you should consider the many reporting and security implications of merging multiple countries/organizations into one set of books.
Enter the Application Rule Set 'Prorate All' in the System Options window. An Application Rule Set determines the default payment steps when you apply a receipt to an open debit item and its associated charges (for example, line, tax, freight, and finance charges). The Prorate All rule set applies a proportionate amount of the payment to each open item. See: Miscellaneous System Options and Receivables Application Rule Sets.
Save your system options. Use the Completed Requests window to check that each of the three concurrent programs submitted by the System Options window has completed successfully. If the concurrent programs fail, choose Request Log in the Completed Requests window for more information about the errors. You can also refer to the If Your Concurrent Programs Fail section of the Calculating Tax Essay for more information. See: Calculating Tax.
When implementing VAT, you would generally assign tax codes to customers and items to exempt them from tax, rather than creating specific exemptions.
To do this you must first create a tax code with the new tax rate. Create this tax code in the Tax Codes and Rates window as described in Step 6. Then, for customer exemptions, assign this code to your customer in the Customers window at either the customer or site level, depending on whether you want to exempt the whole customer or only specific sites for that customer. For product exemptions, assign the tax code to your product in the Items window. See: Items.
Use the Receivables Transaction Types window to require the calculation of VAT on all transaction types. You should enter 'Yes' in the Tax Calculation field for each transaction type that you define to ensure that all complete invoices include VAT.
Customers and customer sites that are not subject to VAT should use transaction types that require the calculation of tax, but these customers or sites should be assigned an exempt tax code. This will ensure a zero value tax line will be created for reporting purposes. See: Transaction Types.
If you are implementing Oracle Order Entry, use the Define Order Types window to select a Receivables Transaction Type that has the Tax Calculation flag set to Yes. The Sales Orders window will then ensure that all booked orders have a tax code assigned to each order line. Additionally, the Sales Order Acknowledgement Report will display tax rates, tax amounts and tax summaries based on the transaction type you have selected. Please refer to Defining Order Types in the Oracle Order Entry/Shipping User's Guide.
Use the Automatic Accounting window to specify how you want Receivables to determine the General Ledger account for VAT. See: AutoAccounting.
Enter 'Tax' in the Type field then query all of the segments of your Tax Account Flexfield. For each segment, assign the value you want to use to derive the account. Choose from the tax accounts stored on the following:
Suggestion: You should assign the value 'Taxes' to the natural account segment to ensure the VAT Exceptions report can identify any invoices that post non-tax items to tax accounts.
To enable the calculation of VAT on freight, you should create freight amounts as ordinary invoice lines. This can be done through standard invoice entry or through AutoInvoice.
Using an inventory item to define freight services enables the AutoAccounting program to distinguish freight lines from ordinary line items. AutoAccounting will then use the accounting rules for the freight account rather than the revenue account to derive the general ledger distribution for the freight service.
When an invoice is printed, the freight amounts will be displayed as line items and any VAT calculated on the freight will be displayed as tax. To assist your customers in identifying the freight charges, Receivables provides the Invoice Print option 'European Tax Format'. This option will display the tax rates as the last column of each invoice line, display the freight items last, and provide a summary of tax amounts by tax code at the end of the invoice. You can select the Invoice Print style in the System Options window or assign it to a specific customer profile class.
To convert freight amounts to ordinary invoice lines, navigate to the Inventory Item window and use the Freight Item Template to define an inventory item for freight services. You should ensure that your inventory item has a valid tax code, the appropriate Primary Unit of Measure, and a User Item Type of 'Freight'. Using the Tax Exemptions window you can reduce or zero-rate sales tax rates or freight services as required. See: Defining Items.
You can control the VAT rate on freight services through the tax code assigned to the inventory item. Alternatively, you can override the tax code assigned to inventory item by assigning a different tax code to the customer or customer site, which will allow export freight charges to be taxed differently than domestic freight charges.
If you are implementing Oracle Order Entry, you should set the user profile option 'Tax: Invoice Freight as Revenue' to Yes and 'Tax: Inventory Item as Freight' to the item that you defined for freight services. These profile options are described in more detail in the next step.
To set your tax profile options, navigate to the System Profile Values window using the System Administrator responsibility. The following table outlines the options and recommended settings for VAT.
| Profile Option | Suggested Setting | Reason |
|---|---|---|
| Tax: Allow Manual Tax Lines | Yes | Additional tax lines may be required by a given country. |
| Tax: Allow Adhoc Tax Changes | Yes | VAT usually does not have variable tax rates, but you may need to update tax manually for IntraEU-taxed customers. |
| Tax: Allow Override of Customer Exemptions | No | Prevents unapproved exemptions from being entered. |
| Tax: Allow Override of Tax Code | Yes | Lets you override the default tax code. |
| Tax: Invoice Freight as Revenue * | Yes | Enables freight amounts entered in the Oracle Order Entry Ship Confirm window to be passed to Receivables as taxable line items. |
| Tax: Inventory Item for Freight | Freight | Set this to the inventory item that you defined for freight services (see Attention symbol below). AutoAccounting will use the 'Freight' accounting rule for transaction lines whose inventory item has a user type of Freight. This ensures the line item description of the freight services will be derived from the inventory item that you defined, rather than the default description 'Freight'. Use the Items window to assign a tax code to the inventory item. |
| Table 1 - 56. (Page 1 of 1) * This profile option is used only by Oracle Order Entry | ||
Attention: The inventory item you select should be used to control the tax code, rate, and general ledger tax account for the VAT on freight. Be sure to assign a tax code to the inventory item before you define this profile option.
See: Update System Profile Options and Overview of Delivery-based Ship Confirm.
To assist you in compiling your VAT return, you should navigate to the Request Set window and define a VAT Reconciliation Report Set that includes the following reports:
You should define a report set that provides default values for the following parameters:
| Report Parameter | Suggested Default | Display | Modify | Reason |
|---|---|---|---|---|
| GL Date Low | 01-XXX | Yes | Yes | Date at start of the reporting period |
| GL Date High | 30-XXX | Yes | Yes | Date at end of the reporting period |
| Transaction Date Low | null | No | No | To ensure only transactions for the reporting period are reported. |
| Transaction Date High | null | No | No | To ensure only transactions for the reporting period are reported. |
| VAT Account Low | null | No | No | All VAT Accounts used will be reported |
| VAT Account High | null | No | No | All VAT Accounts used will be reported |
| Include Accruals | Yes | No | No | Report on accrual transactions |
| Include Adjustments | *Yes | No | No | Report on adjustment transactions |
| Include Discounts | *Yes | No | No | Report on all discounts |
| Include Miscellaneous Cash Receipts | *Yes | No | No | Report on all non standard receipts |
| Include Payments | *Yes | No | No | Report on all standard receipts |
| Posting Status | Posted | Yes | Yes | Report on only posted transactions |
| Detail Level | Show Summary and All Detail | Yes | Yes | Provide a high level overview while showing the appropriate detail information. |
| Payment Date | *GL Date | No | No | To match the reporting period. |
| Table 1 - 57. (Table 2 of 2) | ||||
Preventing the user from modifying most of the report parameters at report run time ensures that the report is run consistently each reporting period.
If your company is required to report on VAT under a mix of accrual basis and cash basis tax calculations, you should define a report set that will run two copies of each report; the first for accrual basis calculations and the second for cash basis calculations.
Suggestion: When defining your chart of accounts, group your accrual basis tax accounts together and your cash basis tax accounts together. You can then use the distinct account ranges to define unique report sets for each type of tax basis.
Setup Checklist for Value Added Tax
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