4Payables Tax and Withholding

This chapter contains the following:

The reporting limit is the minimum amount used to determine whether to report on payments to a supplier. If you're doing business within the United States (US), refer to federal or state tax publications for information on US 1099 reporting requirements.

Select from one the following methods to compare payments to the reporting limit amount:

  • Same as federal

  • Compare individually

  • Compare sum

Note: If you don't specify a reporting limit, the limit is assumed to be zero.

Same as Federal

This setting uses the federal reporting limit, which is predefined in the application as 600 USD.

Compare Individually

This setting compares the reporting limit to the sum of the payments for each US 1099 miscellaneous income tax type.

For example, the reporting limit for region X is 600 USD. You make two 400 USD payments to a supplier in region X and classify each payment with a different US 1099 miscellaneous type. The supplier isn't reported to the region tax authority because the total for each tax type is less than the reporting limit of 600 USD. In this case, the supplier is reported only to the federal tax authorities.

Compare Sum

This setting compares the reporting limit to the sum of the payments for all US 1099 miscellaneous income tax types.

For example, the reporting limit for region X is 600 USD. You make two 400 USD payments to a supplier and classify each payment with a different 1099 miscellaneous income tax type. The supplier is reported to the region tax authority because the sum of the payments, which is 800 USD, exceeds the reporting limit. In this case, the supplier is reported to both federal and region tax authorities.

A reporting entity is any person or organization with a unique tax identification number. Oracle Fusion Payables uses reporting entities for United States (US) 1099 reporting.

Primary Balancing Segment Values

For each reporting entity of an invoice business unit, assign one or more primary balancing segment values. Typically primary balancing segment values represent different legal entities.

For example, you define a reporting entity called Headquarters, which comprises companies 1, 2, and 3. Each company is represented by a primary balancing segment value. When you submit a US 1099 report, you specify Headquarters for the reporting entity parameter. The report accumulates payments for companies 1, 2, and 3, and sums up the paid invoice distributions that have the companies balancing segment values.

Note: Primary balancing segment values must be unique across reporting entities.

Reports

You can submit the following US 1099 reports for a specific reporting entity:

  • US 1096 Report

  • US 1099 Report

  • US 1099 Invoice Exceptions Report

  • US 1099 Supplier Exceptions Report

  • US 1099 Payments Report

  • US 1099 Electronic Media Report

You may be required to withhold tax from your supplier invoices and pay it to a tax authority on behalf of the supplier. Set withholding tax options on the Manage Tax Reporting and Withholding Tax Options page and on the supplier setup.

The withheld amount is calculated according to how you set the Calculation Point option. If you apply withholding tax at invoice validation, then the withheld amount is based on the invoice amount. However, if you apply withholding tax at payment, then the withheld amount is based on the payment amount.

Review withheld amounts online or run the standard reports.

Setting Up Automatic Withholding Tax

To automatically withhold tax, perform the following steps:

  1. Enable the Apply Withholding option and set the other withholding tax options in the Withholding Tax Options section on the Manage Tax Reporting and Withholding Tax Options page.

  2. Create each tax authority as a supplier with a supplier type of Tax Authority.

  3. Create withholding tax codes.

  4. Create withholding tax classifications.

  5. Specify withholding tax details for suppliers.

  6. Define withholding tax certificates to handle rate exceptions.

Withholding Tax Automatically

To perform automatic withholding, you assign a withholding tax classification to an invoice line. You can accept the default withholding tax classification or select another classification. When applying withholding tax, Oracle Fusion Tax creates one or more withholding tax type invoice lines, updates the withheld amount on the invoice, and updates the unpaid amount on the installment.

For example, if an invoice for 100 USD has withholding tax of 20 USD, Oracle Fusion Tax creates a withholding tax type invoice line for -20 USD. The withheld amount is -20 USD, and the unpaid amount on the installment is 80 USD.

Caution:
  • Automatic withholding tax is calculated only once.

  • Automatic withholding tax isn't calculated:

    • For a specific tax after you enter a manual withholding line for that tax.

    • If you pay an invoice with a manual payment or a refund, and the option to apply withholding is at payment time.

Creating Withholding Invoices

After you deduct withholding tax from an invoice, you can optionally create invoices to remit the withheld tax to a tax authority. Oracle Fusion Tax can automatically create withholding tax invoices, or you can perform this task manually. To create withholding tax invoices automatically, set the Tax Invoice Creation Point option to specify whether to create withholding invoices at invoice validation or payment.

Reporting on Withheld Tax

You can run the following reports to satisfy tax authority, supplier, and management reporting requirements:

  • Withholding Tax Reports by Invoice, Payment, and Supplier

  • Payables Withholding Tax by Tax Authority Report

  • Payables Withholding Tax Letter

A withholding tax code is the name for a withholding tax rate. Withholding tax codes use Oracle Fusion Tax's regime to rate setup structure.

Regime to rates include:

  • Tax regime: The set of tax rules that determines the treatment of one or more taxes administered by a tax authority. The common tax regime setup is one tax regime per country per tax type. The tax requirements are administered by a government tax authority for the entire country.

  • Tax: The details for the taxes of a tax regime. Each separate tax in a tax regime includes records for the tax statuses and tax rates that are used to calculate and report on the tax.

  • Tax status: The taxable nature of a product or service in the context of a transaction and specific tax on the transaction. For example, one tax can have separate tax statuses for standard, zero, exemptions, penalty, and reduced rates. You define all applicable tax rates and their effective periods for the tax status.

  • Tax rate: The rate specified for a tax status and is effective for a period of time. Set up a tax rate record with applicable tax rate detail information per rate period. Rate periods account for changes in tax rates over time.

Creating Withholding Tax Codes

Each tax code is defined within the context of a business unit, country, tax regime code, tax, and tax status code.

For a tax regime and tax, you can select an existing record or create a new record by clicking Create in the list of values. The following table describes the regime to rate options:

Option Description

Tax Regime

Select an existing tax regime code for the country or create one from within the list of values options.

To create a new tax regime record, enter the tax regime code, name, and start date.

Tax

Select an existing tax for the tax regime code or create one from within the list of values options.

To create a new tax record, enter the tax, start date, tax currency, tax liability account, tax authority, and tax authority site. For tax authority details, you must associate a supplier with a type of Tax Authority to a withholding tax. You can then create withholding invoices to pay taxes you withheld from your suppliers.

Tax Status

Select a tax status code from the list of:

  • Exempt from tax

  • Tax penalty

  • Reduced tax rate

  • Standard tax rate

  • Zero tax rate

Tax Rate

Enter a unique tax rate code and select a tax rate type of:

  • Percentage

  • Gross amount rate schedule

  • Withheld amount rate schedule

Using Withholding Tax Codes

To use withholding tax codes, assign them to one or more withholding tax classifications. When you define a withholding tax code, you can enable the Create withholding tax classification option to automatically create a classification for that tax code. To handle rate exceptions, define withholding tax certificates for a withholding tax.

When you define a withholding tax code, specify the tax rate type to base the withholding tax calculation on a percentage or rate schedule.

The tax rate type values are:

  • Percentage

  • Gross amount rate schedule

  • Withheld amount rate schedule

For each rate type, the same withholding tax code can have different rate period details based on effective periods. For example, the withholding tax rate is 10 percent one year and 11 percent the following year.

Percentage

Select Percentage if a flat rate percentage is required rather than different rates for different amount ranges. For example, if withholding tax is deducted at a specified rate of 10 percent, create a percentage tax rate code with a tax rate of 10 percent.

You can use percentage rates in conjunction with tax threshold controls that are defined at the tax level. For example, withholding for a specific tax is restricted to no more than 10,000 USD for a withholding tax period.

Gross Amount Rate Schedule

Select Gross amount rate schedule to apply different tax rate percentages for different invoice amount ranges. You can define the rate schedule at the document level or period level to include all invoice amounts from a supplier for a specified period. For example, define a tax code that for each year withholds at a rate of 10 percent for the first 10,000 USD in invoice amounts from a supplier. Then, define a rate of 15 percent after the first 10,000 USD.

You can build document or period limits into the rate schedule if necessary, by defining a To amount for the highest amount range.

Withheld Amount Rate Schedule

Select Withheld amount rate schedule to apply different tax rate percentages for different withheld amount ranges. You can define the rate schedule at the document level or period level to include all invoice amounts from a supplier for a specified period. For example, define a tax code that for each year withholds at a rate of 10 percent for the first 1,000 USD in withheld amounts from a supplier. Then, define a rate of 15 percent after the first 1,000 USD.

You can build document or period limits into the rate schedule if necessary, by defining a To amount for the highest amount range.

Withholding tax classifications include one or more withholding tax codes. Define withholding tax classifications to associate one or more withholding tax codes to a single transaction. For example, assign a withholding tax classification to an invoice line to withhold two taxes, each tax withheld at different rates and remitted to different tax authorities.

You can edit a withholding tax classification to add more tax codes if needed.

Compounding Withholding Tax Codes

Optionally, tax codes can be compounded in order of precedence within a withholding tax classification. When you enter an invoice with a withholding tax classification that consists of multiple compounded tax codes, taxes are calculated in order of precedence.

Lower precedence taxes are applied to the amount of the invoice less the previous withholding tax amounts. The highest precedence is 1. For example, define a withholding tax classification with two tax codes. Tax A for 10 percent has a precedence of 1, and tax B for 5 percent has a precedence of 2. Oracle Fusion Tax calculates the withholding tax for a 100 USD invoice as follows: tax A is 10 USD, tax B is 4.50 USD (.05(100 - (100 * .10))).

If compounding details aren't entered for a withholding tax classification, the gross invoice amount is used to calculate withholding amounts for each tax code. For example, define a tax classification with two codes that each have a rate of 10 percent, and don't define compounding details. On an invoice for 100 USD, two automatic withholding tax lines, each for 10 USD are generated. Two lines are generated because both automatic withholding tax codes of 10 percent are applied to 100 USD.

Applying Withholding Tax Classifications to an Invoice

For supplier sites that use withholding tax, the withholding tax classification that you define at the supplier site assignment level is used to populate the default tax classification on the invoice. You can override any default withholding tax classification.

Withholding tax certificates specify withholding tax rate exceptions that are granted by a tax authority. You can define withholding tax rate exceptions for all invoices of a supplier site or for specific invoices of that site. A tax can have one or more certificates.

Before defining withholding tax certificates and exceptions, you must:

  • Enable the Apply Withholding option.

  • Create withholding tax codes.

  • Enter withholding details for suppliers.

Certificates

To define a withholding certificate, you must specify a certificate number, type, priority, and rate for a tax regime and tax.

A certificate number can be user-defined or it can be a number assigned to a certificate issued to a supplier by the tax authority.

Oracle Fusion Payables predefines a certificate type of Standard. You can define additional certificate types on the Manage Tax Lookup Codes page.

Only one certificate can be enforced at a time. If you have one or more certificates for the same tax regime and tax and the date ranges overlap, Oracle Fusion Tax applies the certificate with the highest priority, where 1 is the highest priority. If a certificate specifies that the supplier site is exempt from the tax regime and tax, then enter 0 as the tax rate.

Note: The tax rate for a withholding certificate overrides all rates for the withholding tax.

Exceptions

To define an exception for an invoice, specify the invoice number and rate for a tax regime and tax.

Note: The tax rate for an exception overrides all rates for the withholding tax.

FAQs for Payables Tax and Withholding

Use the Create or Edit Withholding Tax Code pages to define withholding tax thresholds at the tax level for percentage tax rate types. You can define thresholds based on the taxable amount or the tax amount. Apply these thresholds on each specific document or for a defined period. In each case, you can specify a minimum or maximum value. Thresholds can have different details based on the effective periods.

Consider that you don't want to deduct withholding tax if it's less than 10 USD. In that case, create a document-based tax amount threshold with a minimum value of 10 USD.