Considerations for Tax Recovery

The tax determination process uses your tax configuration setup and the details on the transaction to determine which taxes are recoverable.

You need to decide when to:

• Create Determine Recovery Rate rules

• Specify separate ledger accounts

• Manage tax distributions

• Specify tax point basis

When to Create Determine Recovery Rate Rules

Use recovery rate rules to determine the applicable recovery rates when the determination is based on one or more transaction factors like parties, locations, product, or product purpose.

At transaction time, the tax determination process uses the recovery rate derived from the recovery tax rules. If no recovery rate rules are defined or if no existing recovery rate rule applies to the transaction, the tax determination process uses the default recovery rate that you define.

Commonly used factors in tax recovery rules include:

• Intended use, such as resale or manufacturing

• Party fiscal classification, such as reseller or charitable organization

• Location, such as British Columbia or New Brunswick

When to Specify Separate Ledger Accounts

Recovery details are primarily captured and tracked through invoice distributions. Define the recovery account at the recovery rate level if you require capturing the recovery details into separate general ledger accounts for each tax. If you can combine the recovery and liability at the account level, you can use the common account for liability or recovery defined at the tax rate level.

While generating the invoice distributions, the application first considers the recovery account defined at the recovery rate level. If it's null, the liability or recovery account defined at the tax rate level is used.

The nonrecoverable component of a tax gets registered into the expense account defined at the tax rate level. If no specific expense account is given, the item charge account available on the transaction is used. You may need to apportion the nonrecoverable component of the tax amount on the item cost. As such, you should consider all of the costing requirements while setting up an expense account.

When to Manage Tax Distributions

Use the Tax Distributions window to review and update the tax recovery rate on tax distributions. Oracle Fusion Tax creates recoverable distributions and calculates tax recovery rates when you save the line distribution. This is according to the Determine Recovery Rate tax rule process or the default recovery rate.

You can update the recovery rate code, if the Allow tax recovery rate override option is enabled for the tax.

You can update the recovery rate, if the Allow ad hoc tax rate option is enabled for the recovery rate. The update method differs according to the transaction application:

• Oracle Fusion Purchasing: You can either enter a new recovery rate or select another recovery rate that you previously defined from the list of values.

• Oracle Fusion Payables: You can only select another rate that you previously defined. If you update the recovery rate on a tax distribution, Oracle Fusion Tax also updates the related nonrecoverable rate and amount, and the distribution for the tax line.

If there are tax rules defined based on the Accounting determining factor class, then changing or creating a distribution may affect tax calculation.