Minimum Tax Configuration
The minimum tax configuration to meet the basic tax requirements of your transaction and withholding taxes comprise of defining a tax regime and associated taxes.
The two steps in defining the minimum tax configuration are:
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Define tax regime: This step includes the tax regime definition as well as the subscription by the appropriate legal entity or business unit.
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Define transaction and withholding taxes: This step includes the basic tax definition, controls and defaults, direct and indirect tax rule defaults, and tax accounts.
The following prerequisite setups must be completed for minimum tax configuration:
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First parties, such as legal entities and business units
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Tax geographies and zones
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Ledger and accounts
A legal entity tax profile is automatically created when a legal entity is defined in the implementation. Similarly, a business unit tax profile is automatically created when a business unit is defined. For the business unit, indicate whether it uses the subscription of the legal entity instead of creating its own.
Define Tax Regime
The first step includes the tax regime definition and subscription by an appropriate legal entity or business unit. While creating your tax regime, you can minimize configuration and maintenance costs by creating content that can be shared by more than one entity. For example, legal entities can subscribe to the shared reference data instead of creating separate and repetitive data. If the subscribing legal entities have some variations in their setup, you can create override data to meet the specific exceptions that are applicable to these organizations.
Define Transaction and Withholding Taxes
The second step includes basic tax definition, such as:
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Geographic information
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Controls and defaults
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Direct and indirect tax rule defaults
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Tax accounts
The basic tax definition includes controls that you can set to provide the override capability at transaction time. For example, allow users to make manual updates on transaction tax lines, select the Allow override for calculated tax lines and the Allow entry of manual tax lines options. However, to enforce automatic tax calculation on transaction tax lines, don't enable these options.
Use the direct and indirect tax rule defaults to specify the values that apply to the majority of your transactions. Create tax rules to address the exceptions or variations to the defaults. For example, for the Goods and Services Tax (GST) that applies to the supply of most goods and services in Canada, set the Tax Applicability default to Applicable. A luxury tax, on the other hand, is a tax on luxury goods or products not considered essential. As it doesn't apply to most goods and services, set the Tax Applicability direct tax rule default to Not Applicable. Then create a tax rule to make the tax applicable when the product in the transaction satisfies the luxury requirement.
Assign your default tax accounts for the taxes in a tax regime to post the tax amounts derived from your transactions. The tax accounts you define at the tax level, populate either the tax rate accounts or tax jurisdiction accounts for the same ledger, and optionally, the same business unit. You can update these default tax accounts in the tax rate or tax jurisdiction setup.