2.4 Transaction Tax Setup for Procure-to-Pay

The published objective is Set up Transaction and Withholding Taxes. Withholding has its own Payables-specific setup and is covered in section 7.3. This section covers transaction taxes: the VAT, GST, consumption and sales-and-use taxes that Oracle Fusion Tax calculates when an invoice is validated or an expense report is processed. Oracle Fusion Tax is a single service for every Fusion application, so the same configuration serves Payables, Expenses, Purchasing and Receivables.

Task lists and the regime-to-rate hierarchy

In Setup and Maintenance, Oracle splits tax setup into two task lists:

• Define Tax Configuration, for the basic setup of each tax regime.
• Define Advanced Tax Configuration, for exceptions such as complex rules, fiscal classifications and exemptions.

Rapid-implementation spreadsheets, such as the Manage Tax Regimes spreadsheet, can load the basic setup in bulk.

The core is regime-to-rate setup:

For a regime, you choose a regime level of Country or Tax zone. You can also nominate a parent regime for grouped reporting.

Configuration owners and party tax profiles

A configuration owner is the party whose tax setup applies. In each regime subscription, the first party's configuration option decides which taxes are candidates:

Party tax profiles hold each party's tax information:

• First parties. Legal entities, legal reporting units and business units. A business unit can either use its legal entity's tax setup (the Use subscription of the legal entity option) or keep its own configuration options.
• Third parties. Suppliers, customers and their sites, holding registrations, fiscal classifications and reporting codes. Oracle notes you don't need third-party profiles for tax to calculate.
• Tax authorities. Collecting authorities, reporting authorities, or both.

How tax determination runs

Oracle documents the sequence for each transaction line:

1. Identify the first party. Start from the transaction's business unit, then use its own configuration or its legal entity's, according to the party tax profile.
2. Determine applicable tax regimes. Use the regime determination set: the predefined TAXREGIME (geography-based), STCC (standard tax classification code, mainly for migrated data) or a user-defined set. A third option is integration with a tax partner.
3. Find candidate taxes using the configuration option above.
4. Determine tax applicability. Direct tax rate rules are processed first. Then come tax applicability rules and place of supply. If no jurisdiction is found for the place-of-supply location, the tax doesn't apply. Oracle's example: UK VAT doesn't apply to goods shipped from a French warehouse to a German customer.
5. Determine tax registration, tax status and tax rate.
6. Determine the taxable basis and calculate the tax.
7. For purchases, determine the recovery rate.

Tax rules

Each step can be shaped by a tax rule type:

• Place of supply
• Tax applicability
• Tax registration
• Tax status
• Tax rate
• Taxable basis
• Tax calculation
• Tax recovery rate

Rules are tied to a regime, configuration owner and tax. They have event class and geography associations, effective dates, and condition sets of determining factors. Rules are evaluated in priority order until one evaluates successfully. If none does, the default from setup is used. Simple implementations rely mostly on defaults. Rules handle the exceptions.

Payables-specific tax topics

Recovery

Tax recovery is the full or partial reclaim of tax paid on purchases. It is calculated at the item distribution level. The recovery rate comes from the tax rate, the tax's default, or a Determine Recovery Rate rule; Canada, for example, can need primary and secondary recovery types. The recoverable portion goes to a recoverable tax distribution. The rest is nonrecoverable and is generally charged to the item's expense or asset account.

Self-assessment

Sometimes the supplier has no nexus or registration where the goods are received. The buyer must then self-assess the tax: reverse charge in the EU, use tax in the US. The tax is calculated on the invoice but doesn't change the amount payable to the supplier. It is accounted as a tax liability instead.

Oracle's recommended method:

• Set Set as self-assessment (reverse charge) on the first party's tax registration, typically the legal reporting unit's.
• Add a tax registration rule that uses the first party's registration when the supplier's registration status is Not Registered or blank.

Self-assessment applies only to Payables transactions. Older alternatives, still available, are offset taxes (a matching negative-rate tax), reporting-only taxes and use taxes.

Overrides, tolerances and tax holds

The configuration owner tax options for the Payables event classes can limit how far users may override calculated tax. You set a maximum override amount and a maximum percentage. When a user overrides tax and the difference exceeds the limits, the invoice goes on hold. Oracle compares the override against both limits and uses the lower one.

Validation can also place the predefined Tax Variance (percentage) and Tax Amount Range (amount) holds when tax amounts fall outside the configured tolerances. Tax Difference is a matching hold for invoice and PO tax code mismatches. All three can be released manually.

Prepayment tax differences

When the rate changes between a prepayment and the invoice it is applied to, the difference can go to the Prepayment Tax Difference distribution in Common Options for Payables and Procurement. This only applies when the tax's Applied Amount Handling is Recalculate.