Examples of Taxable Basis Tax Formula

The tax calculation process uses the taxable basis tax formula to determine the amount or quantity that should be considered as the taxable basis of a transaction line.

The tax rate is applied on the taxable basis amount to derive the basic tax amount on a transaction line.

Taxable basis type that is defined in the taxable basis formula is a key factor that decides the characteristics of the taxable basis amount. The taxable basis types are:

Assessable value
Line amount
Prior tax
Quantity

Taxable Basis Formula Based on Assessable Value

The tax formula that is based on assessable value is used as the taxable basis for calculating tax when the tax authority doesn't consider the transaction amount to reflect the true sale consideration, from the tax perspective.

Consider a sales transaction between two companies, A and B. The item value on the invoice is 1000 USD. However, if they're related companies, that is, within the same group, the tax authority can mark the item value as 5000 USD for the purpose of tax based on the average market price. The tax authority can choose to collect the tax based on that value instead of the actual sales value of 1000 USD.

The tax amount is calculated from the transaction details and tax setup as follows:

Invoice line amount: 1000 USD
Assessable value: 5000 USD
State tax rate: 10%
Taxable basis type: Assessable value
Taxable Basis: 5000 USD

The state tax is equal to the taxable basis multiplied by the state tax rate (5000 USD * 10% = 500 USD).

Taxable Basis Formula Based on Line Amount

In this case, the amount given on the transaction line is considered for deriving the taxable basis.

Consider a situation when two taxes, state tax and county tax, are applicable on a transaction. In this situation, the transaction details and tax setup is as follows:

Invoice line amount: 1000 USD
Payment terms: 2/10, Net 30
State tax rate: 20%
County tax rate 10%
Taxable basis type: Line amount
Subtract cash discount: Yes
Base rate modifier: 50%
Compounding tax regime: Sale and use tax
Compounding tax: State tax

The tax calculation is as follows:

The state tax is equal to the invoice line amount multiplied by the state tax rate (1000 USD * 20% = 200 USD).
The taxable basis for the county tax is equal to the line amount plus the base rate modifier less the cash discount at 2% plus the state tax (1000 USD + 500 USD - 20 USD + 200 USD = 1680 USD).

The country tax is equal to the taxable basis multiplied by the county tax rate (1680 USD * 10% = 168 USD).

Taxable Basis Formula Based on Prior Tax

In this case, the previous tax that is calculated on a transaction is considered as the taxable basis.

Consider a situation when two taxes, state tax and county tax, are applicable on a transaction. In this situation, the transaction details and tax setup is as follows:

Invoice line amount: 1000 USD
State tax rate: 20%
Country tax rate: 10%
Taxable basis type: Prior tax
Compounding regime: Sale and use tax
Compounding tax: State tax

The tax calculation is as follows:

The state tax is equal to the invoice line amount multiplied by the state tax rate (1000 USD * 20% = 200 USD).
The taxable basis for the county tax is the tax calculated for the state tax (200 USD).

The country tax is equal to the taxable basis multiplied by the county tax rate (200 USD * 10% = 20 USD).

Taxable Basis Formula Based on Quantity

In this case, the quantity of the goods or serviceable units is considered as the taxable basis.

Consider a scenario in which liquor is transacted between two organizations in Canada. In this situation, when excise tax is levied on it, the transaction details and tax setup is as follows:

Line amount: 1000 CAD
Quantity: 50 liters
Price per liter: 20 CAD
Excise tax: 11.69 CAD per liter
Taxable basis type: Quantity

The tax calculation is as follows:

The taxable basis for the excise tax is the quantity given on the invoice (50).
The excise tax is equal to the taxable basis multiplied by the excise tax (50 * 11.69 CAD = 584.5 CAD).