1. Implementing Tax
  2. Tax Applicability

Tax Applicability

The tax determination process uses your tax configuration setup and the details on the transaction to determine which taxes apply to the transaction and how to calculate the tax amount for each tax that applies to the transaction.

Tax is applicable to a transaction when nexus, or presence in the geographical scope of the tax, exists. The criterion for nexus or presence differs by governing tax authorities.

Examples for establishing nexus include:

  • A physical establishment in the location

  • Resident employees working in the location

  • Property, including intangible property, in the location

In addition to location, there are other factors that can contribute to the applicability of a tax. Some examples are:

  • Telecommunications specific taxes

  • Sales tax holidays

  • Tax on sale of luxury items

The tax determination process is organized into rule types. Each rule type identifies a particular step in the determination and calculation of taxes on transactions. The rule types and related processes used for tax applicability determination are:

  • Determine Place of Supply: Determines the location where a transaction is considered to have taken place for a specific tax.

  • Determine Tax Applicability: Determines the taxes that apply to a given transaction.

A third rule type, Direct Tax Rate Determination, is a special tax rule type. It lets you specify the results of tax applicability, tax status, and tax rate for a given tax. You use this rule type for specific tax determination requirements. If available, the Direct Tax Rate Determination rules are processed first. If its applicable, then the Determine Tax Applicability rules are processed, followed by the Determine Place of Supply rules. If it isn't applicable, the Determine Place of Supply rules are processed, followed by the Determine Tax Applicability rules.

Determine Place of Supply

The Determine Place of Supply step identifies the applicable place of supply, which is the location type where the supply of goods or services is deemed to have taken place for a specific tax. If Oracle Fusion Tax can't find a tax jurisdiction for the location that corresponds to the place of supply location type, then the tax doesn't apply and it is removed as a candidate tax for the transaction. No jurisdiction is required if it is a migrated tax which has the other jurisdictions indicator equal to No.

For example, the place of supply for UK VAT on goods is generally the ship-from country. Thus, the place of supply of a sale or purchase within the UK is the UK itself. However, if a UK legal entity supplies goods from its French warehouse to a German customer, then the place of supply will not find a jurisdiction for UK VAT in France, and therefore UK VAT doesn't apply.

The following outlines the process that results in a list of applicable taxes per transaction line:

  1. Consider the Determine Place of Supply tax rule of the first candidate tax in order of rule priority.

  2. Use the location type derived from the tax rule for the tax. The possible location types are:

    • Bill from

    • Bill to

    • Point of acceptance (Receivables transactions only)

    • Point of origin (Receivables transactions only)

    • Ship from

    • Ship to

    • Ship to, use bill to if ship to is not found

  3. Identify the location on the transaction that corresponds to the location type derived from step 2. If no location applies, then the default location type for the rule is used.

  4. Identify the tax jurisdiction of the candidate tax to which the location identified in step 3 belongs. If the location doesn't belong to any tax jurisdiction of this tax, then the tax doesn't apply to the transaction.

  5. Repeat steps 1 to 4 for each candidate tax.

  6. Create refined list of candidate taxes.

Determine Tax Applicability

The Determine Tax Applicability step determines the tax applicability of each candidate tax derived from the Determine Place of Supply step, and eliminates taxes that are not applicable.

The tax determination process first attempts to derive the applicability of each candidate tax based on the rule conditions of the Determine Tax Applicability rules for the tax. If no rule applies, the process uses the default value of Applicable or Not Applicable that was assigned to the rule type for the tax. If the tax doesn't apply, it is removed from the list of candidate taxes.

The following outlines the process that results in a final tax of list of taxes that apply to the transaction:

  1. Consider the Determine Tax Applicability tax rules of the first candidate tax in order of rule priority.

  2. Use the Applicable or Not Applicable value derived from the tax rule for the tax.

  3. Use the default value for the rule if no applicability rule evaluates successfully.

  4. Repeat steps 1 to 3 for each candidate tax.

  5. Identify the final tax or list of taxes by eliminating the taxes that have an applicability value of Not Applicable.

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