Considerations for Setting Up Tax Rules

The performance of the tax determination process is in inverse proportion to the number of tax rules and conditions that the process needs to evaluate in order to arrive at a specific result.

Creating Tax Rules

Use these guidelines and examples to help plan your tax rules implementation:

If the tax condition results and rule results always equal the default values, then you don't need a tax rule. You only need to define a tax rule for a result that is different from the default value. For example, if more than one tax rate is possible for a given tax and tax status, then you need to create at least one tax rule.

These qualifications apply to tax rules and default values:
- If you require many different results other than the default value for a given tax and rule type, it probably means that the default value itself sometimes applies. In these cases, you should also define a tax rule for the default value. Otherwise the tax determination process must always process and eliminate the tax rules defined for all other values before arriving at the default.
- As an alternative to defining a tax rule for the default value, you can assign the least frequent result as the default value. The tax determination process processes the maximum number of tax rules on the minimum number of occasions. In this kind of an implementation, you must ensure that your tax rules and conditions cover all of the more common results in order to prevent the tax determination process from using an incorrect result as a default.
If more than one tax rate is possible for a given tax this may be a consideration for a tax rule.
If you define multiple tax rules to derive distinct results for a process, assign the least frequent result as the default value for the process. The most frequent value should be the first tax rule. There are occasions for the default to be the most frequent value so you may want to define tax rules for exceptions, such as by item. In general, define tax rules for exceptions, but if there are a lot of tax rules that you need to define, then you may want to define a tax rule for the most common scenario to avoid processing all of the exceptions.
When you define tax rules consider the need to repeat tax conditions in multiple rule types if the condition is part of the applicability evaluation. For example, if you define a Determine Tax Applicability rule for UK VAT that only applies when ship to is equal to United Kingdom, then you do not need to repeat this condition in a tax rule for a subsequent tax determination process, such as a Determine Tax Status rule.
Where possible, use the tax rule header information instead of creating tax conditions that arrive at the same result. For example, if tax rules apply to the Purchase business process, set the tax event class to Purchase transaction rather than defining a tax condition within the tax rule, such as tax event class is equal to Purchase transaction.
When you order the tax condition sets within a tax rule, assign the higher priority to the set of conditions that occurs more frequently. Similarly, when you order the tax rules within a rule type and tax, assign the higher priority to the tax rule that gives the most frequently arrived at process result.
Use product tax exceptions for special rates based on product fiscal classifications rather than defining a Determine Tax Rate rule based on product fiscal classifications. For example, if three out of five product fiscal classifications use a special rate, define three product tax exceptions based on the three product fiscal classifications that need a special rate, and set the standard rate as the default rate.
Define the minimum number of tax conditions necessary for a tax rule. For example, if a special rate applies to goods shipped outside a state as opposed to within a state, define one tax condition as ship from state isn't equal to ship to state, rather than defining two separate tax conditions for each ship from and ship to location, such as ship from state is equal to Nevada and ship to state is not equal to Nevada.
Consider using the existing determining factor sets during the creation process. Any determining factor not set as required in the determining factor set definition can be set to ignore in the condition set. You don't have to define the condition and it is not evaluated. This allows flexibility in the condition set definition not requiring a unique determining factor set for every variation in condition set logic.
For tax rules that involve the shipping to and from a tax zone, for example the European Union. Define a tax condition for all ship to countries within the tax zone rather than separate tax conditions for each country, such as ship to is equal to Great Britain, ship to is equal to France, and so on.
For tax rules that apply to a specific geographic area, define tax rules with the additional context of the geographic area rather than adding location-based equal to tax conditions. For example, consider that you have a tax rule that only applies if the ship to state is California. In that case, you must define the tax rule such that it's only evaluated when the ship to state is California. You can do this by associating geography during the first step of the tax rule definition at the tax rule header level.
Define tax rules that are common across all legal entities or business units under the global configuration owner. This prevents the need to create the same tax rules for each legal entity or business unit. If all tax rules aren't commonly applicable to all legal entities or business units, then:
- Set the configuration option of the legal entities or business units that require additional rules to Common configuration with party overrides
- Define supplementary party-specific rules under the applicable legal entities or business units. You can set priority values for party-specific rules that complement the tax rules of the global configuration owner, in accordance with the tax requirements.