VAT Defaults

Based on the VAT rules that apply in different business scenarios, the system is designed to automatically provide as much VAT information as possible about a transaction. For the system to determine which scenario and VAT rules are applicable to a given transaction, you must set up various VAT defaults and other VAT-related pieces of information.

This PeopleSoft application delivers a VAT structure for defaults that:

Defines most of the setup structure as predefined system data, including the fields relevant to VAT; the VAT drivers, such as items, products, customers, suppliers, and business units for which certain VAT defaults can be specified; and the transaction-specific hierarchies for defaults.
Stores as user data the individual factors that make up much of the VAT rules, for example, how VAT must be calculated, when VAT must be declared, how VAT must be recorded, and whether purchase VAT can be recovered. Data considered to be an attribute of VAT drivers, for example, customer VAT registration information, is stored in the application VAT table of defaults, while all VAT data is stored in a common VAT table of defaults.
Contains the logic dictated by the various VAT authorities to determine the VAT information that is conditionally based on a combination of factors. For example, once all the country, VAT registration, and VAT exception data is retrieved, the system can determine the VAT treatment. The system automatically supplies as much VAT information about a transaction as possible, either retrieved from the stored defaults or derived from the logic, based on the VAT values already associated with the transaction.

Note:

This topic contains a table listing the VAT drivers for which you can define defaults and the associated VAT controls and defaults.

VAT Defaults and the Organizational Structure

VAT drivers and the organizational structure affect VAT transactions.

Term	Definition
VAT country	The VAT country is the highest level in the VAT structure. You identify all countries that have a VAT system, and in which you have a presence or a trading partner. The system uses these VAT country definitions to determine whether VAT is applicable to a given transaction and, if so, which rules should apply.
VAT entity	VAT entities represent the level within your organization at which the VAT return is filed. Each VAT entity includes one or more PeopleSoft General Ledger business units. For each VAT entity, VAT registration and other country-specific information can be defined for each country in which the VAT entity is registered. You can also indicate whether your organization has been granted any VAT exceptions (exoneration or suspension) from paying VAT.
Business units	PeopleSoft General Ledger business units provide the link between the application business units and the VAT entity. One or more PeopleSoft General Ledger business units constitute a VAT entity. All PeopleSoft Asset Management, Order Management, Billing, Receivables, Purchasing, Payables, Treasury, and Expenses application business units mapped to the PeopleSoft General Ledger business unit or units in the entity are VAT-enabled. Transactions entered for PeopleSoft General Ledger, Asset Management, Billing, Receivables, Payables, Treasury, and Expenses are available for reporting by that VAT entity.
Suppliers, customers, and banks	These entities represent your trading partners. You enter VAT registration information for the customers, suppliers, and banks that are registered for VAT. You can also specify whether your customers have been granted any VAT exceptions (exoneration or suspension) from paying VAT, or whether VAT suspension is recognized and supported by your suppliers or banks.
Application-specific VAT drivers	These values make up the levels in the hierarchy that are specific to each application that processes VAT transactions. Examples include voucher origin and voucher control group for PeopleSoft Payables, bill source and bill type for PeopleSoft Billing, and journal source for PeopleSoft General Ledger.
Transaction line identifiers and groups	These values represent the goods and services being procured, incurred, received, sold, and reported. Examples include inventory items, item categories, expense types, products, product groups, charge codes, charge code groups, and general ledger accounts.

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.

Note:

Run the VAT 3000 report after setting up defaults to validate VAT default setup data and to expose any inconsistencies and missing default values.

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.