How Tax Exception is Applied to a Transaction Line
Set up tax exceptions to apply special tax rates to products. At transaction time, Oracle Fusion Tax determines whether the tax exception applies to the transaction line for the product, and if so, uses the applicable exception rate.
Settings That Affect Tax Exceptions
A tax exception must belong to a combination of tax regime, configuration owner, and tax. You can also assign tax exceptions to a tax status or tax rate belonging to the tax or to a tax jurisdiction.
You can define Oracle Fusion Inventory organization tax exceptions for items, or you can define tax exceptions for Inventory-based product fiscal classifications or noninventory-based product categories. If you are using Inventory-based product fiscal classifications then generally, the application classifies the transaction line based on the item. If you are using noninventory-based product category fiscal classifications, you enter the appropriate product category on all applicable lines to influence the tax result.
Product categories and product fiscal classifications are defined in a hierarchical structure. It is important that you select the appropriate level where the tax exception is applicable. For product fiscal classifications to be used in item exceptions, you must indicate that it is used in item exceptions at the tax regime association to the product fiscal classification. You can set up only one product fiscal classification for any specific tax regime with the Used in Item Exceptions option selected.
When you set up configuration options for first-party legal entities and business units, you can set a separate configuration option for the owning and sharing of product tax exceptions for a combination of party and tax regime.
The Allow tax exceptions option is set at the tax regime level and you can override it at the tax and tax status levels. However, the setup you define for the tax rate is what is evaluated during tax rate determination.
The Use Tax Exceptions from an Existing Tax option and the Tax Exceptions Source value are set at the tax level. You can use these to derive the tax exceptions defined against another tax of the same regime related to the same tax line at transaction time. You can derive the Tax Exception Rate for lower-level jurisdictions by using the Tax Exception Source Tax specified at the Tax level. For example, you can specify the Tax Exception Source Tax as State for the county tax. If this is done, the Tax engine will use the exception derived from the state tax for the current transaction line and apply it to the tax line for the county tax.
To apply the tax exception to lower tax from source tax, both taxes should apply to the transaction. This ensures that the correct tax exception against the source tax and jurisdiction is picked up while calculating the lower-level tax amount.
The compounding precedence of source tax should be lower than the compounding precedence of lower tax.
If an exception is defined at a lower level, it will take precedence. If not found engine will search for source tax exception.
If no source tax is applicable during tax calculation, the engine will consider it as no exception from source tax.
If the exception type from source tax is 'Special Rate,' it is not applied to the lower-level tax.
At transaction time, the tax exception is used if the details of the transaction and the tax match all of the entities assigned to the tax exception. Only one tax exception can apply to a transaction line for a specific tax.
How Tax Exceptions Are Calculated
The tax determination process determines tax applicability, tax status, and the tax rate for the transaction line. If tax exceptions are allowed, the application looks at the item entered on the transaction line to determine if an exception is defined at the tax, tax status, tax rate, tax jurisdiction, Inventory organization, or Inventory level and uses the exception at the most specific level.
If the application doesn't find any tax exception for the item, it looks for a product fiscal classification associated with the transaction line. If one exists, the application determines if an exception is defined at the tax, tax status, tax rate, tax jurisdiction, and product fiscal classification level and uses the exception at the most specific level with the highest precedence.
The tax rate is then based on the exception type and calculated as follows:
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Discount: A reduction of the base tax rate. For example, if the discount is 15% off the standard rate and the standard rate is 10%, then the discount rate is 85% of the original 10%, or 8.5%.
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Surcharge: An increase to the base tax rate. For example, if the surcharge is 10% and the standard rate is 10%, then the surcharge rate is 110% of the original 10%, or 11%.
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Special Rate: A rate that replaces the base tax rate. For example, if the special rate is 5% and the standard rate is 10%, the tax rate is the special rate of 5%.
Finally, the new tax rate is applied to the taxable basis and the tax amount is calculated.
For manual tax lines, no additional processing is performed and exceptions aren't considered. A manual tax lines suggests that you have specific business requirements for a particular transaction to apply a manual tax. No additional processing is performed for manual tax lines to avoid any applying conflicting or inconsistent values to the user-entered tax line. The tax calculation on a manual tax line is the standard formula of: tax amount is equal to the taxable basis multiplied by the tax rate.