1. Using Tax
  2. Examples of Tax Handling on Payables Transactions

Examples of Tax Handling on Payables Transactions

The tax determination process uses your tax configuration setup and the details on the Oracle Fusion Payables transaction to determine which taxes apply to the transaction and how to calculate the tax amount for each tax that applies to the transaction.

Oracle Fusion Tax provides tax calculation for Payables event classes of standard invoices, prepayment invoices, credit memos, debit memos, and expense reports. Tax determinants are a part of the transaction header and line. You can review the defaulted values and override them as necessary. Taxes are calculated automatically on validation when you access the tax lines or by the Calculate Taxes action.

Examples of tax handling on Payables transactions are discussed in the following sections:

  • Standard invoices

  • Invoices matched to purchase orders

  • Prepayment and applied prepayment invoices

  • Price corrections

  • Self-assessed tax lines

Standard Invoices

Oracle Fusion Tax automatically calculates transaction taxes based on the document details and the relevant tax configuration. Depending on your security settings and options specified during tax setup you can:

  • Override the tax attributes to change the tax calculated

  • Enter manual tax lines

Invoices Matched to Purchase Orders

Oracle Fusion Purchasing integrates with Oracle Fusion Tax to automatically determine the applicable taxes on a purchase order. You provide key tax-related information, known as tax determinants, on the purchase order header and lines. Oracle Fusion Tax uses this information, along with other transaction information and defined tax setup, and calculates the taxes that are applicable on the purchase order.

Taxes are calculated on a purchase order in view-only, for example, you cannot directly update or override any tax details. However, you can modify the tax determinants on the purchase order so that the taxes are recalculated based on the revised information.

Taxes are also calculated on a purchase requisition in a quote mode. The calculated taxes are available for reference purpose only. The nonrecoverable portion of the total calculated tax amount applicable on a requisition is displayed as part of the requisition approval amount. When you create a purchase order from a requisition, the tax determinants available on the requisition are copied to the purchase order and the taxes are recalculated based on the tax setup available as of the date of the purchase order.

When you create an invoice in Payables by matching it to a purchase order, the purchase order tax lines and tax-related information is copied to the invoice and tax is recalculated. The tax rate that is used in tax calculation is always derived from the invoice date.

If the tax rate has not changed between the purchase order date and the invoice date, then the tax calculation results in the same tax lines on the invoice as on the purchase order shipment line. If the tax rate has changed between the purchase order date and the invoice date, then the tax calculation results in the same tax lines (but the tax rate used corresponds to the invoice date).

While creating the distributions on the invoice, Oracle Fusion Tax compares the taxes applicable on the invoice to the taxes calculated on the purchase order and generates variances for the difference between the two. The possible deviations in the taxes between the invoice and purchase order can be due to:

  1. Tax applies to the purchase order but not to the invoice: The tax line appears on the invoice with a zero amount. The tax distribution displays two tax lines, one with a positive amount and the other with same negative amount.

  2. Tax applies to both the purchase order and the invoice but with different amounts: The tax line appears with the tax amount as calculated by the invoice. The tax distribution displays two tax lines, one line with the tax amount equal to the purchase order tax amount and one line with the tax amount equal to the difference between the purchase order tax amount and the invoice tax amount.

    The difference in the tax amounts between a purchase order and the invoice matched can be caused by changes in the invoice price, changes in the applicable tax rates, or changes in the conversion rates (in case of foreign currency invoices). Different distribution types are used to capture these variances. They are:

    • Tax invoice price variance: For changes to the invoice price

    • Tax rate variance: For changes to the applicable tax rates

    • Tax conversion rate variance: For changes in the conversion rates

    If the Enforce tax from reference document tax option is enabled for the applicable configuration owner and event class, the tax line for the invoice inherits the corresponding tax rate code and recovery rate code (if applicable) from the purchase order, but the actual tax rate and recovery rate used in the tax calculation are the rates defined for the rate period that corresponds to the invoice date.

Note: Self-assessed taxes and inclusive taxes are not handled as part of the purchase order tax functionality.

The following table is an example of three invoices matched to a purchase order and resulting variance types:

Document

Quantity

Price

Invoice Currency

Tax Currency

Conversion Rate

Tax Rate

Tax Amount

Variance Type

Variance Amount

Purchase Order

10

100

CAD

USD

1

10%

100

Invoice-A

10

90

CAD

USD

1

10%

90

Tax invoice price variance

10 CAD

Invoice-B

10

100

CAD

USD

1

12%

120

Tax rate variance

20 CAD

Invoice-C

10

100

CAD

USD

1.5

10%

100

Tax conversion rate variance

50 USD

Prepayment and Applied Prepayment Invoices

When you apply a prepayment to an invoice, the tax rate at the time of prepayment may differ from the tax rate at the time that the prepayment is applied to an invoice. Oracle Fusion Tax considers the tax calculated on the prepayment according to the value assigned to the Applied Amount Handling option in the tax record. The values are Recalculated and Prorated.

For example, you apply a prepayment amount of 5,000 USD to an invoice with a total amount of 10,000 USD. At the time of prepayment, the applicable tax rate was 5% (250 USD tax on the prepayment); at the time of invoice creation, the applicable tax rate is 10%. Tax is calculated in this way:

  • Recalculated: The tax is recalculated on the prepayment using the invoice tax rate and the same tax rate is applied to the invoice line amount. The tax calculation creates two tax lines: one for the invoice line amount and one for the prepayment with a negative amount. In the invoice example, the calculation creates an invoice line amount tax line of 1,000 USD (10% * 10,000 USD) and a prepayment tax line of -500 USD (10% * -5000 USD). This reverses tax calculated on the invoice for the prepayment amount applied. The tax calculated on the prepayment is retained.

  • Prorated: The tax calculated on the prepayment is reversed and the tax rate applied to the invoice line is retained. The tax calculation creates two tax lines: one for the invoice line amount and one for the prepayment with a negative amount. In the invoice example, the calculation creates an invoice line amount tax line of 1,000 USD (10% * 10,000 USD) and a prepayment tax line of -250 USD (5% * -5000 USD). The total tax is 750 USD.

Price Corrections

In Payables, you can create a new invoice to correct the quantity or amount of an existing invoice. The correction results in a change in the line amount, either positive or negative. Tax is calculated on the new invoice created as a result of the price correction in proportion to the taxes on the original corrected invoice. For example, an original invoice has a line amount of 100 USD and two tax lines: 5 USD and 10 USD. If the price correction reduces the line amount by 20 USD, then the new invoice creates two tax lines: -1 USD and -2 USD.

Note: In many countries you must record the value that appears on the invoice or reject the invoice. Ask for a new invoice with the correct amount and a credit for the original invoice amount if you have already paid it.

Self-Assessed Tax Lines

Where a tax was not levied by the supplier, but is deemed as due by the purchaser, you can self-assess the taxes calculated on the invoices that you receive. When self-assessment applies to an invoice no transaction line is created for the tax since the self-assessed tax is not included in the invoice total. However, when you access the detail tax lines region you see the self-assessed tax calculated. In addition, offsetting distributions are created in the Payables subledger to negate the self-assessed tax impact as an open invoice balance. You can also self assess taxes using offset taxes and reporting only taxes. An offset tax record is a matching, duplicate record with negative amounts that reduces or completely offsets the tax liability recorded in the tax transactions. Reporting only taxes do not create invoice distributions, but you can use them to capture additional tax information on transactions for your tax reports.

For example using self-assessed taxes, you enter an invoice from a supplier for 1000 USD. The supplier did not charge tax on the invoice, however, according to tax rules, as the purchaser you are liable to pay a 5% tax on the item to your tax authority. The self-assessed tax amount is 50 USD. Provided the tax setup allows self-assessed taxes, 50 USD is applied to the invoice as a self-assessed tax amount. The amount of the self-assessed tax does not impact the amount due to the supplier. With regard to self-assessed taxes, the accounting debit entry in the Payables subledger captures the self-assessed tax expense, and the corresponding accounting credit entry in the Payables subledger captures the self-assessed tax liability.

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