Manage Differential Taxes Due to Differences in Tax Rates

In Brazil, differential taxes are levied for some taxable events. ICMS-DF is levied on goods that are procured from a different state at a lower tax rate, instead of sourced from within the state.

The regular tax is levied on the customer and also the difference between the intrastate and interstate tax rates is additionally levied as a differential tax on the customer procuring the goods. The differential tax is a tax liability once the goods are received, and must be paid to the tax authorities. It is non recoverable.

Here's an example.

An organization located in Sao Paulo procures an item from a supplier located in BA State. ICMS tax is applicable on the transaction. Per tax laws, ICMS tax rate is 18% if it is sourced from within the state (intrastate rate) and 12% if sourced from outside the state (interstate rate).

This table displays how taxes are calculated for ICMS:

ICMS
Transaction amount	1000 BRL
Tax Rate (interstate)	12%
Tax amount	1000 * 12% = 120 BRL

This table displays how taxes are calculated for ICMS (Differential):

ICMS (Differential)
Transaction amount	1000 BRL
Differential Rate	18% - 12% = 6%
Tax amount	1000 * 6% = 60 BRL

The tax rate percentage of ICMS-DF is a derived value and the difference between intrastate and interstate ICMS tax rates.

You can use the tax calculation formula to determine the tax amount on a transaction line.

ICMS-DF tax amount is modified by deducting ICMS, as both the taxes are applicable on the same transaction line. You can define the tax calculation formula with compounding criteria to address this requirement. ICMS tax uses an interstate tax rate percentage to calculate the tax amount. ICMS-DF tax must be configured to derive the corresponding intrastate tax rate.

Tax configuration for ICMS (Differential) is as follows:

Tax configuration for ICMS (Differential)

Tax	Configure ICMS (Differential) as a separate tax.
Tax Rate	Tax rate must be configured at 18% (intrastate rate). Derive the tax conditions such as: Ship from State > Ship to State Ship to State = SP
Tax Calculation Formula	For tax compounding on ICMS tax, define the tax calculation formula with the compounding rule set to Subtract.

To create a taxable basis formula, follow these steps:

1. Sign in as a Tax Manager.
2. Click Navigator, Setup and Maintenance.
3. Search for Manage Tax Formulas.
4. Select Tax Calculation Formulas as the tax formula type.
5. Click Add.

These prerequisites are required for the tax calculation formula:

• Configure the appropriate tax applicability rules. ICMS-DF is calculated with ICMS Tax for interstate trade.

  Here's a sample applicability rule:

  Transaction Tax	Tax Determining Factor Set	Tax Determining Factor Name	Tax Condition Set	Tax Rules
  ICMS	Registration (Qualifier Ship from party)	Registration Status	Equal to = Registered	ICMS applicable
  	Transaction Input Factor	Product Type	Equal to = Goods
  ICMS-DF	Geography (Qualifier Ship from)	State	Not equal to determining factor = Ship to	ICMS-DF applicable
  	Transaction Input Factor	Product Type	Equal to = Goods
  	Registration (Qualifier Ship from party)	Registration Status	Equal to = Registered

• Specify a compounding precedence on the respective tax to support this required configuration. ICMS-DF includes compounding on ICMS tax. The precedence number for ICMS should be less than ICMS-DT. This tax is not applied on the transaction if the differential amount between the compounded taxes results in a negative value.

Payables Transaction Line

Create the invoice in Payables using these transaction lines.

Line	Item	Unit Price	Quantity	Line Amount	Ship From	Ship To
1	Cigars	1000	1	1000.00	BA	SP
Total in BRL				1000.00	-	-

Tax Determination Process

After you set up the required configuration, ICMS tax amount is calculated as

1000 * 12% = 120 BRL.

During processing, the tax calculation formula is associated with ICMS-DT, and the tax amount is equal to the difference between intrastate and interstate tax rates.

Tax calculation processing for ICMS differential
Calculated tax amount (before compounding)	1000 * 18% = 180 BRL
Less: ICMS tax (as per compounding rule)	120 BRL
Calculated tax amount (after compounding)	180 - 120 = 60 BRL

These tax lines are created after you complete the tax determination process successfully:

Tax Line	Rate Name	Rate	Tax Amount	Tax Regime	Tax Name	Tax Status	Tax Jurisdiction
1	ICMS_12	12	120.00	ICMS	ICMS	Standard	SP
2	ICMS-DT_18	6	60.00	ICMS	ICMS-DT	Standard	SP