Example of Setting Up Tax Applicability

This example shows the tax setup for two taxes: one that generally applies, the other that applies only by exception. The taxes are set to apply generally by default.

Tax rules, however, are used to switch between a general and an exception-based use when certain criteria are met.

Scenario

In Canada, the First Nations Goods and Services Tax (FNGST) applies to goods and services consumed within Aboriginal reserves or settlement lands. All participating Aboriginal governments administer the 5 percent FNGST in exactly the same way as the federal government administers the Goods and Services Tax (GST). However, where FNGST applies, GST doesn't apply.

The tax implications are:

FNGST generally applies only on an exception basis.
The place of delivery or ship-to location determines the place of supply for FNGST.
GST isn't applicable if FNGST applies.

Transaction Details

A customer who resides on lands where FNGST applies buys supplies from ABC Corporation. This store is located in Ontario, not on lands where FNGST applies. The sales invoice indicates that ABC Corporation delivers the furniture to the customer's residence. The FNGST applies to the sale, and GST doesn't apply.

As part of the setup, create a tax that applies to any party qualifying as First Nation. Due to the specificity of the tax, set the default to Not Applicable. In this example, you don't have to configure a place of supply rule. The default value is Ship to, and it's sufficient.

You can use the following methods to configure this rule:

Define an applicability rule and use a default status and rate associated with the tax.
Define a direct rate rule to apply the tax, tax status, and tax rate directly.

This scenario requires, the following setup:

Create a tax regime for the tax that's applicable to any First Nation party. The regime level is Country and the country of applicability is Canada.
Create a tax with a default of Not Applicable since this tax applies only in exception cases. Set the default Place of Supply as Ship to. To make this tax applicable, you must create a tax rule.
Create a standard tax status and a standard tax rate. Create the default tax rate with a rate percentage of 5 percent. You don't have to define a jurisdiction rate since the rate is standard across Canada.
For FNGST, identify a driver to determine applicability, such as a party fiscal classification. Create a party fiscal classification for First Nation, and associate the tax regimes affected by this tax. Associate CA FNGST to trigger applicability. Associate CA GST AND HST to avoid applicability when CA FNGST applies.
After you create a party fiscal classification with associated tax regimes, associate the classification with the specific party. To do so, create or edit an existing third-party tax profile and associate it with the First Nation party fiscal classification.
For FNGST, create a tax applicability rule that's Applicable when the conditions for FNGST are met. Recall that by default, FNGST is Not Applicable since in most cases it only applies as an exception. For this tax rule, you require a tax determining factor set and associated tax condition set. Here, the party fiscal classification of the ship-to party must correspond to the First Nation party fiscal classification you created.
For GST, create a tax applicability rule that's Not Applicable when the conditions for FNGST are met. By default, GST is Applicable since it usually applies and FNGST is the exception.

Resulting Tax Applicability

FNGST, a tax that's not applicable by default, becomes applicable on transactions to First Nation parties. The first Determine Tax Applicability rule makes FNGST applicable. This happens only when the ship-to party on the transaction corresponds to the party fiscal classification that identifies a First Nation party. Since GST doesn't apply when FNGST is applicable, the second Determine Tax Applicability rule has the opposite result. GST isn't applicable when the ship-to party on the transaction is a First Nation party.