Tax Calculation on Transactions
Taxes for a transaction are determined by evaluating the transaction information in the context of applicable tax configuration.
Following are the four broad processes involved in determination of taxes, and are listed in the order in which they're evaluated:
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Determine applicable tax regimes and taxes
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Tax status and rate
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Tax calculation
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Tax recovery
Determine Applicable Tax Regimes and Taxes
The first step is to determine the first party for the transaction. It is usually the first-party legal entity for the transaction, but can also be a business unit. The first-party legal entity generally subscribes to several tax regimes of which some may apply to the transaction. The tax regimes applicable depend on the configuration owner tax options created for the first party and the transaction event class. You assign a regime determination template to the tax option, which lists the tax locations for the transactions.
Of the tax regimes to which the first party subscribes, the tax determination process selects those with countries matching the countries assigned to the relevant transaction location. The tax determination process considers all taxes for these tax regimes that are enabled and effective as of the transaction date as candidates for further evaluation.
For the candidate tax, if the default value for tax applicability is set to Applicable, then it is considered to be applicable.
For each applicable tax, the tax determination process determines the location type assigned for the default place of supply and the geography type. The tax determination process determines the transaction location address for the location type. The relevant information on the address is the geography value for the geography type assigned to the tax. For the tax, the tax determination process determines if a tax jurisdiction is defined for the geography value. If there is one, then the tax and the relevant tax jurisdiction is applicable to the transaction.
For each applicable tax, a valid tax registration that is used for reporting is determined. The tax determination process determines this based on the party type assigned to the default tax registration for the tax. For this party on the transaction, determine the most specific tax registration for tax regime, tax, and tax jurisdiction combination, effective as of the transaction date. The tax and tax jurisdiction are optional for defining registrations.
Tax Status and Rate
For the tax, the tax determination process selects the tax status that has default effectivity as of the transaction date. For this tax status, the default tax rate that's applicable as of the transaction date is determined. You can optionally define tax rates for tax jurisdictions. You usually define these for state, provincial, and city taxes where tax rates vary by the tax jurisdiction. If there is a tax rate defined then this takes precedence over the default tax rate defined for the tax status. If applicable, the tax rate is then modified by any exception rate or tax exemption that applies.
Tax Calculation
The tax determination process applies the tax rate on a taxable basis. The default taxable basis formula assigned to the tax is used for tax calculation. This is usually the line amount. However, the formula can include other elements that alter the taxable basis.
The default tax calculation formula assigned to the tax is used for tax calculation. The tax determination process performs tax rounding for the calculated taxes as applicable.
Tax Recovery
Taxes for a purchase transaction can be recovered fully or partially. This is dependent on the default tax recovery rate assigned to the transaction. The tax determination process applies the recovery rate on the tax amount (calculated in the tax calculation step) to determine recoverable and nonrecoverable tax amounts.