How Tax on Intercompany Transactions is Calculated

Oracle Fusion Tax enables you to calculate taxes on the intercompany Oracle Fusion Receivables and Oracle Fusion Payables transactions. You can use both standard tax classification code and regime-based determination methods.

In intercompany transactions, a Receivables transaction is first generated and then the applicable taxes get calculated. The Receivables transaction information, including the tax determinants, is then populated into the Payables interface tables. While creating and importing the Payables transaction from the interface tables, you can validate the taxes calculated on the Receivables transaction for their applicability on the Payables transaction. If applicable, the application applies them to the Payables transaction.

If you use the regime-based tax determination method, applicability for any additional taxes is also determined, with reference to the available tax determinants and the tax rules configured in the tax setup.

How Taxes on Intercompany Transactions Are Calculated

Some of the key process and setup considerations that you must note to ensure smooth calculation of taxes on the intercompany transactions are:

When a Receivables transaction is generated through the intercompany process, the tax determinants appear as defaults. This is based on the information defined in the country defaults and the application tax options. Oracle Fusion Tax calculates the corresponding taxes accordingly. If you need to revise the taxes, make the Receivables transaction incomplete and revise the tax determinants to recalculate taxes based on your revised values.
While copying the Receivable transaction information to the Payables interface tables, the transaction business category of SALES_TRANSACTION available on the Receivables transaction is replaced with PURCHASE_TRANSACTION. If there are any specific tax rules driven based on the transaction business category, you must configure them for both Receivables and Payables transactions.
To apply the same tax on the Payables transaction that's calculated on the Receivables transaction, ensure that both the receiver and provider business units and legal entities are subscribed to the applicable tax regime on the transaction date.
When you use the standard tax classification code method, the tax calculation process expects the same tax classification code to be available on both the Receivables and Payables transactions. If you define a new tax rate code that may be applied to an intercompany transaction, ensure that it's specified for usage on both Receivables and Payables transactions. If the tax rate code used on the Receivables transaction is a migrated tax rate code, then ensure that the same tax rate code is defined for the Payables business unit also.
If the tax amount on the Receivables invoice is zero, then the Payables invoice can have a zero-rated tax rate associated, resulting in a zero tax amount. However, if the derived tax amount on the Payables transaction isn't zero, then the corresponding tax rate needs an offset tax rate associated to it and the offset tax setup enabled to zero out the intercompany tax amount.
If there is a possibility of the Payables tax rate being different from the Receivables tax rate, then select the Allow ad hoc tax rate option on the Payables tax rate code.
Establish customer and supplier relationships for enabling invoicing between two related organizations during intercompany transactions. Use the corresponding party tax profiles of these representative customers and suppliers to configure the required tax setup.