Manage Tax Compounding

In Brazil, taxes are compounded when calculating the taxable basis.

If both ICMS and IPI are applicable on a transaction then for computing the taxable basis for ICMS, add the IPI tax amount first.

An organization located in Sao Paulo produces and sells an item for 100 BRL to a customer located in the same state. ICMS is applicable at 18% and IPI is applicable at 15%.

IPI Computation	Amount (BRL)	Comments
IPI tax amount = IPI taxable basis * IPI tax rate	100*15% = 15	Calculate the IPI tax amount first.

ICMS Computation	Amount (BRL)	Comments
ICMS taxable basis = ICMS taxable basis + IPI tax amount	100+15 = 115	For computing the taxable basis for ICMS, add the IPI tax amount first.
ICMS tax amount = ICMS taxable basis * ICMS tax rate	115*18% = 20.70

In Oracle ERP Cloud, the cross regime compounding option and taxable basis formulas manage tax compounding. ICMS and IPI are created as separate regimes.

To enable cross regime compounding option, follow these steps:

1. Sign in as a Tax Manager.
2. Click Navigator, Setup and Maintenance.
3. Search for Manage Tax Regimes.
4. Search for the ICMS and IPI tax regimes. Select Allow cross regime compounding to set taxes within the ICMS regime to be based on the calculation of taxes in the IPI tax regime.
5. Enter a value as the compounding precedence to indicate the order of cross regime compounding.
   Note: Allowing gaps between numbers provide flexibility in the event that another higher priority tax regime is introduced in the future. Provide a precedence number to IPI regime that is lower than ICMS. A lower number indicates which tax regime is processed first. The IPI tax computation occurs first followed by compounding of the IPI tax amount for computing the taxable basis for ICMS.

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. Click Add to create a new formula with these attributes:

5. Header Attribute	Value	Comments
   Taxable Basis Type	Line Amount	Amount given on the transaction line use to derive the taxable basis.
   Tax Regime Code	ICMS	IPI tax amount is compounded for computing the taxable basis for ICMS.
   Compounding Tax Regime Code	IPI	IPI tax regime is included in the compounding operation with the ICMS tax regime selected in the header.
   Compounding Tax	IPI	IPI tax is included in the compounding operation with the tax defined in the header.

Create Taxable Basis Rule

Define a taxable basis rule by using the appropriate tax determining factor to default the newly defined taxable basis formula in the tax determination process.

A tax determining factor can be a geographical location, tax registration status, or a product fiscal classification and so on, that contributes to the outcome of a tax determination process. Tax determining factors are categorized into logical groupings called tax determining factor class. Each tax determining factor class contains determining factor names that constitute the contents of the class. This example uses product fiscal classification based tax determining factor for taxable basis rule.

To create a taxable basis rule, follow these steps:

1. Sign in as a Tax Manager.
2. Click Navigator, Setup and Maintenance.
3. Search for Manage Tax Rules.
4. Define a taxable basis rule by using the appropriate tax determining factors.
5. Create the invoice in Payables using these transaction lines.

   Line	Item	Unit Price	Quantity	Line Amount
   1	A (Inventory Item)	1.00 BRL	100	100.00
   Total in BRL				100.00

6. Use this configuration to calculate IPI tax and add the tax amount to the ICMS taxable basis to create the tax lines for ICMS and IPI taxes.

   Tax Line	Rate Name	Rate	Tax Amount	Tax Regime	Tax Name	Tax Status	Tax Jurisdiction
   1	IPI_15	15	15.00	IPI	IPI	Standard	Brazil
   2	ICMS_18	18	20.70	ICMS	ICMS	Standard	SP