Inclusive Taxes

Calculating tax on a transaction as inclusive of the line amount is generally a business decision. This decision is based on the relationship between the transacting parties and the items or taxes involved.

Taxes applicable on a transaction are made inclusive of the item line amount either:

• Manually

• Automatically

Manual Approach

In the manual approach, you access the calculated tax lines on a transaction and select the Inclusive option. This action includes the calculated tax amount with the item value.

However, this option is controlled through two factors:

• Privileges are assigned to the users for accessing and editing the calculated tax lines.

• Setup restrictions are applied to edit the Inclusive option on the calculated tax lines.

Automatic Approach

In the automatic approach, you can configure the tax setup and calculate the tax on a transaction as inclusive of the item line amount. Since the tax legislation and the business relationship between the transacting parties primarily drive this requirement, the option for configuring the inclusiveness is made available on the tax and tax rate definition and the third party and legal reporting unit tax profiles on the tax registration and general data tabs. The tax determination process uses a hierarchy approach to evaluate the defined setup and applies the inclusiveness option on the transaction.

In tax setup, the options to choose for applying the inclusiveness on a transaction are:

• Standard noninclusive handling: This option calculates the taxes as exclusive of the given transaction line amount.

• Standard inclusive handling: This option calculates the taxes as inclusive of the given transaction line amount.

• Special inclusive handling: This option calculates the taxes as inclusive of the given transaction line amount, but the calculation methodology differs from the standard inclusive process.

The following table illustrates the calculation methodology used with each of these options when a transaction line amount is 1000 USD and the applicable tax rate is 10% of the taxable basis amount. For example, line amount:

Method	Calculation	Taxable Basis Amount	Tax Amount	Transaction Line Amount
Standard Noninclusive	1000 USD * 10/100	1000 USD	100 USD	1100 USD
Standard Inclusive	1000 USD * 10/110	909.09 USD	90.91 USD	1000 USD
Special Inclusive	1000 USD * 10/100	900 USD	100 USD	1000 USD