Understanding VAT

VAT Codes

You use VAT codes to specify the rate at which VAT is calculated.

The VAT rate is frequently the key to reporting VAT because VAT amounts must often be reported separately by VAT rate on a VAT return. Therefore, the VAT code is part of the reporting definition.

To facilitate reconciliation between the general ledger and the VAT return, VAT amounts are usually recorded separately by VAT rate in the general ledger. For this reason, you define VAT accounting information (also referred to as the VAT accounting template) by VAT code.

VAT Accounting Entry Types

In addition to requiring that VAT amounts be reported separately by VAT rate, your VAT return may require that VAT amounts for certain types of transactions be reported separately. For example, you may need to report adjustments made to VAT or VAT recorded on advance payments separately.

Again, to facilitate reconciliation between the general ledger and the VAT return, VAT amounts are usually recorded separately in the general ledger for each of the different types of transactions.

VAT accounting entry types are one of the mechanisms used to enable the correct reporting and accounting of these transactions. These are system-defined values that identify the different types of VAT accounting entries that may be required (for example, input-recoverable, input discount adjustments, output, output on credit memos, or output for purchases).

When you define VAT reports, VAT accounting entry types are used to identify the general types of transactions that should be included on any given line on the VAT return. For example, you might specify that input-recoverable VAT amounts be included on one line of the return while output VAT amounts be included on another line.

For accounting purposes, you define VAT accounting information for each of the VAT accounting entry types defined in the VAT accounting template. The accounting entry types available in this template are determined by the PeopleSoft applications you have installed. Not all of the VAT accounting entry types apply to your organization, so you can define dummy VAT accounts for those that do not apply.

See VAT Environment Setup.

VAT Transaction Types

You use VAT transaction types to classify and categorize transactions at a more detailed level for both VAT reporting and accounting. These are specified for each transaction line when you enter a transaction.

You define the VAT transaction types that you need for your VAT setup. PeopleSoft software also provides a set of VAT transaction types as sample data.

In your VAT reporting definition, you use VAT transaction types to fine-tune the information that you want to include on a given line on the VAT return. You can do this by specifically including, or effectively excluding, certain types of transactions. For example, if you are located within the European Union (EU), you may need to report self-assessed output VAT for intra-EU acquisitions on one line in the return, while reporting self-assessed output VAT for services provided by foreign suppliers on another line. For both lines on the report, you indicate that you want to include transaction lines with a VAT accounting entry type indicating VAT Output on Purchase. For the first line, you also indicate that you want to include only those transactions that are flagged with a VAT transaction type indicating an intra-EU acquisition. For the second line, you indicate that you want to include only lines flagged with a VAT transaction type indicating a service provided by a foreign supplier.

For accounting purposes, VAT accounting information defined for each given VAT accounting entry type is applicable for all VAT transaction types unless it is overridden at the more detailed VAT transaction type level. In the cases in which you need to record VAT amounts in the general ledger at the more detailed level, you can indicate that VAT amounts for a given VAT accounting entry type be posted to different sets of ChartFields defined for each specific VAT transaction type.

VAT Use Type

The VAT use type identifies the end use of a given purchase by defining how much of a given activity or use is taxable, and how much of that activity is exempt, based on the tax status of the goods or services ultimately produced from those procured. In general, you specify the use type for each transaction line, thereby indicating how the purchased good or service on that line is used.

You can specify the ratio of taxable activity to nontaxable activity directly on the use type, or you can specify that mixed apportionment be used to define the ratio of taxable to nontaxable activity at the ChartField level, if you are required to calculate recoverability at a detailed level.

The VAT use type must also be linked to a public service body type for public service type organizations in Canada to retrieve the appropriate rebate percentage for transactions with exempt activity.

VAT Apportionment

VAT apportionment is based on the idea that the usage of a given good or service can be determined based on the business unit or the ChartFields to which the purchase or expense is charged. In other words, usage can be determined based on which business unit, department, or project might be using the purchased item.

You do not need to set up VAT apportionment information unless you are required to calculate your recoverable VAT at a very detailed level. If you elect to use VAT apportionment to calculate recoverability, you first determine a priority 1 ChartField and a priority 2 ChartField to be used in determining recoverability (for example, department or project). You can choose to define the ratio of taxable to nontaxable activity only at the business unit level. VAT apportionment information defined at the business unit level can be overridden by information defined at the more detailed ChartField level. When defining VAT information for either the priority 1 or priority 2 ChartField, you specify the ratio of taxable activity to nontaxable activity for any given ChartField value (or portion of a ChartField value—for example, all department IDs that begin with 10).

When a VAT use type that indicates VAT apportionment is specified for a line, the system looks for a match in the VAT apportionment data for the value specified first in the priority 1 ChartField and, if not found, then second in the priority 2 ChartField. If a match is still not found, the system looks for a match in the business unit. If a match is found, the system uses the ratio of taxable to exempt activity defined for that ChartField or business unit value to calculate the recovery and rebate. However, if no match is found, the system treats the line as 100 percent nonrecoverable. For this reason, it is imperative that you specify enough VAT apportionment data so that a match is always found.

The system uses either the transaction business unit, the transaction's general ledger business unit, or the distribution line general ledger business unit to access VAT apportionment information, based on the type of business unit that you define as the VAT apportionment control for the PeopleSoft Payables, Purchasing, General Ledger, Expenses, and Treasury business unit VAT drivers in the common VAT defaults table.

Calculating Recovery and Rebate

In addition to the rebate rates defined for public service bodies (PSB) and any recovery rate that may have been defined for the individual item or expense, the system uses the percentages defined for taxable and exempt activity to calculate the recovery and rebate percentages that are then used to calculate the recoverable and rebate VAT in the following way:

• VAT recovery percent is calculated as [(item recovery percent/100) × (taxable activity/100)] × 100

• VAT recovery amount is then calculated as gross VAT amount × (VAT recovery percent ÷ 100)

• VAT rebate percent is calculated as [(item recovery percent/100) × (exempt activity percent/100)] × PSB type rebate rate

• VAT rebate amount is then calculated as gross VAT amount × (VAT rebate percent ÷ 100)

For example, for a school in Ontario, Canada, the rebate rate is 68 percent. If the school incurred input VAT in the amount of 250.00 CAD for an item defined as recoverable at 50 percent and it was associated with a VAT use type with a taxable activity percent of 75 percent, then the result would be:

VAT recovery percent = 
((50/100) x (75/100)) x 100 = (.5 x .75) x100 = 37.5 = 37.5%
VAT recovery amount = 250.00 x (37.5/100) = 250.00 x .375 = 93.75
VAT rebate percent = ((50/100) x (25/100)) x 68 = (.5 x .25) x 68 = 8.5 = 8.5%
VAT rebate amount = 250.00 x (8.5/100) = 250.00 x .085 = 21.25

(When you calculate the VAT rebate amount, the rebate percentage is applied against the gross VAT amount, rather than the nonrecoverable VAT amount, because the exempt activity percentage was taken into account when you originally calculated the rebate percentage.)

This example involves calculating the PSB type rebate rate with a VAT code that is made up of multiple VAT authorities, each with its own individual rebate rate. In this example, the rebate rate is calculated as the sum of (VAT authority rebate rate × VAT authority tax rate) for each VAT authority within the VAT Code divided by the sum of (VAT authority tax rate) for each VAT authority within the VAT Code. (VAT authority rebate rate × VAT authority tax rate) for each VAT authority within the VAT Code) ÷ (sum (VAT authority tax rate) for each VAT authority within the VAT Code).

For a school in New Brunswick, Canada, the PSB rebate rate would be calculated as:

 ((68 x 7) + (0 x 8)) / (7 + 8) = 476 / 15 = 31.73 

VAT Defaults and the Organizational Structure

VAT drivers and the organizational structure affect VAT transactions.

VAT Reporting and Registration Countries

Before the system can determine the VAT treatment, it must first determine the VAT reporting country and, if applicable, the VAT registration country for the trading partner.

For sales and procurement transactions for which the physical nature is goods, this determination is made based on whether each trading partner is registered in the ship to country, the ship from country, or both, taking into account the rules that apply both within and outside of the EU.

For sales and procurement transactions for which the physical nature is services, the process is more complex. For freight transport services within the EU, the system determines whether each trading partner is registered in the ship to country, the ship from country, or both. For other types of services, the system looks at where each trading partner's business is established, where the service is physically performed, and where the VAT is most often liable for the type of service being provided.

If the system is unable to determine the VAT reporting country based on the applicable rules, it uses the VAT registration country designated as the home country for the VAT entity. If no country is defined as the home country, the system displays an error message. A valid VAT reporting country must be specified for processing to continue.

The VAT reporting country is also important because it is the main driver for retrieval of VAT defaults from the VAT defaults table.

Services Place of Supply Country

The place of the supply country is another factor in determining the VAT treatment for sales and procurement transactions with a physical nature of services. This is the country in which the VAT is liable for the service. The system determines the place of supply country by looking at the countries in which both trading partners are registered for VAT, the countries in which both trading partners have established their businesses, the type of service being provided (freight transport or other), and where the VAT is most often liable for the type of service being provided.

VAT Exceptions

You also need to consider whether the purchasing organization has been granted some type of exemption from paying VAT. These exemptions, referred to within PeopleSoft applications as VAT exceptions, take the form of either an exoneration or suspension from paying VAT. An organization may be exonerated from paying VAT because of the nature of its business. For example, a government agency may be granted exoneration from paying VAT. In certain countries, such as France, an organization may be granted a temporary suspension from paying VAT because it regularly has a much higher level of recoverable input VAT (as opposed to output VAT) and would always receive a large VAT refund. By granting suspension from paying the input VAT, the refund is either reduced or eliminated.

You can specify whether a VAT exception is applicable to a customer or VAT entity, as the purchasing organization, and, if so, if that exception is an exoneration or suspension from paying VAT. If a valid exception is applicable to a transaction, the transaction uses this information to apply the appropriate default zero-rate VAT code and VAT transaction type.

VAT Treatment

Once the VAT reporting country is known, the main driver for processing VAT on sales and procurement transactions is the VAT treatment. This determines which default values to apply and also controls, to some extent, the availability of some VAT-related fields.

In addition, many countries are required to report the sale and purchase of goods separately from services. To support this requirement, PeopleSoft enables you to distinguish between transactions involving goods and transactions involving services.

For a sale of goods, for example, when the system determines the VAT treatment, it looks first at the combination of the ship-from and ship-to countries. The system then looks at the countries in which the buyer and seller are registered for VAT. If the ship-from and ship-to countries are the same and, in procurement, if the supplier is registered for VAT in that country, then the transaction is treated as domestic. If the supplier is not registered for VAT, the transaction is treated as outside the scope of VAT. If the ship-from and ship-to countries are different, the system determines whether both countries are located within the EU. If they are, the system looks at the VAT registration for each trading partner to determine whether the transaction should be treated as an intra-EU sale or purchase, distance sale, domestic, or outside the scope of VAT. If either or both of the countries are located outside of the EU and, in procurement, if the supplier is not registered in the ship-to country, then the transaction is treated as an export or import. If the supplier is registered in the ship-to country, the transaction is treated as domestic.

The determination of the treatment of services for the purposes of VAT varies a great deal more than for the treatment for goods. For services, when both the supplier and the customer are located in the same country and the services are physically performed in that country, the treatment is the same as the domestic VAT treatment for goods. However, the VAT treatment for services differs from the VAT treatment for goods when the services are performed by a foreign supplier (a supplier not registered in the customer's country).

In the case of services that are performed by a foreign supplier, no tangible goods can be stopped at the border. To deal with this, the requirement in many countries is for the customer to self-assess the VAT due on the supply of services. While this procedure is similar to that for intra-EU acquisition, differences exist. Intra-EU acquisition applies only when goods are moving between countries within the EU and when both trading partners are registered for VAT in the EU. The requirement to self-assess VAT on services performed by foreign suppliers exists for both EU and non-EU countries. Additionally, for customers in EU countries, VAT may be self-assessed on services performed by any supplier that is not located and not registered in the customer's country—regardless of whether that supplier is located in the EU.

Part of the process of determining whether the customer must self-assess the VAT is determining the place of supply of the service, as described previously. For service purchases, if the VAT reporting country is the same as the place of supply country, the purchasing organization records VAT on the purchase transaction. Whether this is self-assessed or not depends on whether the supplier is also registered in the place of supply country. If the place of supply country is different from the VAT reporting country, the transaction is recorded as outside of scope. For the sales of services, if the VAT reporting country is the same as the place of supply country, VAT is charged to the customer, as applicable. However, if the place of supply country is different from the VAT reporting country, the sale transaction is treated as either outside of scope or zero-rated, based on how the VAT reporting country is defined in the VAT country table.

Within PeopleSoft software, detail VAT treatment values on the transaction lines are used for applying the precise defaults applicable to the transaction lines. Each of these detail VAT treatment values is associated with a VAT treatment group. The system tracks the VAT treatment group on the header for PeopleSoft Billing, Receivables, and Payables transactions. The VAT treatment group allows individual transaction lines to be grouped together into invoices during batch processes and validates the detail line VAT treatment values on the transaction lines.

Domestic Reverse Charge

Some countries, such as the United Kingdom, require that a reverse charge be applied to domestic transactions between VAT registered traders involving the sale of certain goods such as mobile phones or computer chips. In these cases, if the goods that are specified on a given transaction line are subject to this reverse charge, the VAT treatment for the line will reflect domestic reverse charge. You can specify by country whether reverse VAT charges apply and whether specific VAT drivers (such as, products, inventory items, suppliers, and customers) are subject to the reverse charges.

PeopleSoft provides a VAT report, Reverse Charge Sales List, that shows the domestic business sales that are subject to reverse charges and the VAT that is due from the purchasers on these sales.

See Understanding VAT Reports.

How VAT Defaults Work

Once the VAT reporting country, VAT exception type, and VAT treatment for a transaction are known, the system can retrieve the defaults from the defaults table based on the VAT drivers on the transaction. In general, most of the fields contained within the VAT Controls group boxes on the transaction entry VAT pages are populated based on values retrieved for the VAT reporting country from the defaults table.

To supply the values within the VAT Details group box on the transaction line entry VAT pages, the system retrieves the VAT-applicable value from the defaults table and uses this along with VAT exception type and VAT treatment to determine the VAT applicability for the transaction line.

Once the VAT applicability for a line is derived, that value, along with the VAT treatment, is used in combination with the transaction-specific default hierarchy to retrieve the default VAT code and VAT transaction type values respectively from the common VAT defaults table.

PeopleSoft software VAT default structure is specifically designed to hold the most frequently used value on the driver at the top of the hierarchy and exceptions to this on drivers at lower levels. Default processing on transactions looks through the hierarchy starting at the bottom and stops once a value is found.

The system also makes some initial, basic assumptions about VAT suspension and VAT recoverability that would be applicable to each line:

• Within procurement, before usage is taken into account, all items are assumed to be 100 percent recoverable.

• When recording foreign VAT in expenses, all expense types are assumed to be 100 percent reclaimable.

• For transactions for which the purchasing organization has been granted suspension from paying VAT, all lines are assumed to be subject to VAT suspension.

However, you can define exceptions to these assumptions:

• You can define any item or expense type that, due to the nature of the item or expense, is not 100 percent recoverable.

• You can define any expense type that, due to the nature of the expense when recording foreign VAT, is not 100 percent reclaimable.

• You can define any sales line identifiers (products, charge codes, discounts, surcharges, inventory item, labor type, or generic identifiers), sales line identifier groups (VAT product groups, charge code VAT groups, CRM service type or inventory item group), asset classes, Treasury accounting templates, items or item categories that are not subject to VAT suspension.

  In other words, you can define certain VAT driver values that may still be taxable, regardless of whether the buyer has been granted suspension.

Overriding VAT Defaults and Settings

In rare and specific cases, the system might not be able to provide all default VAT values as desired. Therefore, to enable the correct recording of a transaction, you can always override any default value on the transaction entry VAT pages. This topic is discussed in greater detail later in this topic and in the application-specific documentation.

See Applicable Transaction Entry VAT Page.