In each country where you do business, you must analyze how the taxes on your transactions impact your company. Each country has at least one, and often more than one, system of taxation. Some forms of taxation apply to most or all transactions, while others are specific to certain transactions or certain companies only. For example, a sales taxation system addresses the rules and regulations surrounding tax on sales transactions. A value added tax (VAT) taxation system addresses the tax on the value addition in manufacturing and/or an applicable point in the supply chain.
Many countries have more than one system of taxation: Canada, Argentina, Brazil, India, and the United States all have multiple taxes. Some European countries also impose environmental taxes in addition to VAT. Within a country, two different taxes can administer different treatments regarding applicable transactions, tax recovery, tax rates, and many other factors.
Companies that have global operations need to comply with the local laws and regulations of each country in which they operate, specifically local tax laws. From the point of view of an application environment, this means more than simply being able to update or add tax rates. This must include the ability to charge, collect, account for, and pay existing taxes and any new tax that is introduced in a country, as well as support the local tax audit requirements.
Tax authorities that levy or administer taxes define both the regulations that govern the applicability of taxes to transactions, and the administrative obligations that parties subject to these taxes have. The list below indicates the details of what a tax authority specifies for each tax:
The regulations governing the parties that are subject to the tax:
Registered parties - The conditions that require a party to register for the tax, and the rights and obligations of a registered party.
Exempt parties - The conditions that exempt a party from registering, and the regulations that apply to the transactions of an exempt party.
The regulations that identify the types of transactions that come under the purview of the tax:
Place - The geographical areas where the tax applies.
Products - The types of products that are within the scope of the tax, including:
The differences in the treatment between physical goods and services.
The categories of products, and the special treatment of any such category.
Parties - The parties within the scope of the tax, and the differences in the treatment of any such party.
Transactions - Special transaction considerations:
The special treatment, if any, for specific transactions that are within the scope of the tax.
The types of transactions that are out of scope for the tax.
The regulations governing the transactions that are within the scope of a tax:
The regulations defining whether or not a transaction falls within the geographical scope of the tax. Such regulations help decide the place of supply.
The regulations, if any, that exclude transactions for other reasons which fall within the geographical scope of the tax. Such regulations help decide the applicability.
The regulations that decide the taxable nature of a transaction for the purpose of the tax. Such regulations help decide the tax status.
The regulations that indicate the rate of taxation, or tax rate.
The regulations that indicate the basis of taxation, or taxable basis.
The regulations that indicate how the tax amount is determined on a transaction. Such regulations help decide how to calculate tax amounts.
The regulations governing the tax amounts generated by transactions:
The payment and recovery of taxes, including:
Whether the tax amount accrues when the transaction takes place.
Whether the tax amount accrues only when there is (and to the extent there is) a subsequent activity, such as a payment.
The reporting of tax activity, including:
Whether the tax amount needs to be reported in full when the transaction takes place.
Whether the tax amount is reported only when there is (and to the extent there is) a subsequent activity, such as a payment.
You need to consider all of these factors, and the specific details of each regulation, when preparing your tax configuration model. Though tax regulations vary greatly both in terms of the level of complexity and the nature of complexity, you can analyze tax requirements in a structured manner to build a tax model in E-Business Tax that will meet your tax determination and tax reporting needs.
E-Business Tax provides you with a single interface for defining and maintaining the taxes that you are subject to in each country where you do business. E-Business Tax defines the term tax as a distinct charge imposed by a tax or legal authority with its own rates and with the requirement to appear separately on invoices and/or in tax reports. In terms of your actual tax configuration, E-Business Tax applies a still narrower definition to the term tax, and introduces the more inclusive term tax regime.
For example, in Argentina there is a tax similar to European VAT called Impuesto al Valor Agregado (IVA). There is another tax called Impuesto al Valor Agregado Adicional, levied on unregistered customers. These two charges are together commonly referred to as IVA. However, in your tax configuration you define these charges as two different taxes under the one tax regime called, for example, IVA-Argentina. This configuration specifies that a company may charge two taxes--IVA and IVA Adicional--but these two charges are levied by the same tax authority and the company receives only one tax registration for both taxes. In the example above, you define the IVA-Argentina tax regime to contain the taxes IVA and IVA Adicional. You can then define the tax registrations that your company, customers, and suppliers have for this tax regime, instead of defining tax registrations for the individual taxes.
Thus, although UK VAT, French TVA, and Argentine IVA are all value added taxes, you define each as a separate tax regime with one or more taxes under each regime for the applicable country.
The incidence of a tax on a specific geographical area is called a tax jurisdiction. A tax jurisdiction is limited by a geographical boundary that encloses a contiguous political or administrative area, most commonly the borders of a country. For example, the countries of UK, France and Argentina serve as the respective tax jurisdictions for their VAT tax regimes and related taxes. Often this contiguous political or administrative area falls within a country, such as a state, province, city or a county tax jurisdiction; examples include US state sales tax and Canadian Provincial Sales Tax (PST). In countries where you define tax jurisdictions at a level lower than the country level , you typically need to define tax registrations for your company or your third parties at the level of tax jurisdictions. You can define a tax registration, for example, either to capture a tax registration number or to specify nexus for a supplier in a particular tax jurisdiction.
For each tax, a tax authority can specify one or more tax rates. In addition, tax authorities usually revise their tax rates periodically. In some cases, rates stay constant for years, while in other cases they change annually or even bimonthly. Along with the change in tax rates, tax authorities typically divide the scope of what is taxed into categories, each of which carries a separate tax rate. Countries in the European Union, for example, specify categories such as Standard, Reduced, and Exempt, while countries with state or provincial sales taxes use categories such as Inter-state and Intra-state. The tax status is used to define and maintain these categories. You define tax statuses under the definition of a tax
For each of the tax statuses that you define, you define one or more tax rates. For each tax rate that you define, you can also specify a tax jurisdiction, in which case the rate is only used if that tax jurisdiction applies to the transaction.
In some tax regimes, a tax that is paid by a registered establishment can claim back all or part of taxes due from the tax authority. In E-Business Tax this is called tax recovery. There are usually many regulations surrounding the details of tax recovery. Typically only a portion of the tax amount paid is recoverable, and tax authorities designate the tax recovery rates that indicate the extent of recovery for a specific tax.
In Canada, two types of recovery possible on Goods and Services Tax (GST). Certain types of establishment can claim both an Input Tax Credit and a Tax Rebate. Both of these types of recovery will have one or more recovery rates applicable under different transaction conditions. E-Business Tax defines these two recovery types as primary and secondary recovery types. For the primary recovery type (and, in rare cases, the secondary recovery type), you can define one or more recovery rate codes with values between 0% to 100%. Like a tax rate code, the recovery rate code can have different rates for different effective periods.
The table below illustrates some of the key tax configuration concepts described above. These examples are for illustration purposes only and are not intended to reflect the actual tax regulations of any particular country.
| Country | Tax Regime | Tax | Tax Jurisdictions | Tax Statuses |
|---|---|---|---|---|
| United States | US Sales Tax | State Sales Tax | California, Nevada, Texas | Standard Sales, Standard Use |
| US Sales Tax | City Sales Tax | San Francisco, San Jose, Los Angeles | Standard Sales, Standard Use | |
| Canada | Canadian Goods and Services Tax | GST | Canada | Standard, Zero-rated, Exempt |
| Canadian Provincial Sales Tax | PST | Saskatchewan, Ontario, British Colombia | Standard, Special-rated, Exempt | |
| Singapore | Singapore Goods and Services Tax | GST | Singapore | Standard, Zero-rated, Exempt |
| India | India Excise and Customs | Excise Duty | India | Standard, Exempt, Reduced |
| India Excise and Customs | Additional Excise Duty | India | Standard, Exempt, Reduced | |
| Brazil | RICMS - Brazil ICMS Rules | ICMS | Sao Paulo, Rio de Janeiro, Campinas | Interstate, Intrastate, Suspended |
| RIPI - Brazil IPI Rules | IPI | Brazil | Taxable, Exempt, Suspended | |
| Portugal | Portuguese VAT | VAT | Portugal, Lisbon, Madeira | Standard, Exempt, Reduced |
After you set up the basic tax configuration for the taxes that your company's legal entities and operating units are subject to, you must decide how to automate the processing of taxes on your transactions.
The tax determination process derives the taxes that apply to a transaction and the tax amounts charged on the transaction by evaluating the factors of the transaction according to the rules that you define. These taxability factors are:
Place - The places involved in the transaction, including the ship from and ship to locations, and the bill from and bill to locations.
Party - The parties of the transaction. This can include:
First party legal entities.
Ship from/ship to parties; bill from/bill to parties.
Tax registrations and registration statuses of each party.
Type or classification of a party.
Product - The products transacted. This can include:
Designation of physical goods or services.
Type or classification of a product.
Process - The kind of transaction that takes place. This can include:
Procure to Pay transactions, such as purchases, prepayments, and requisitions.
Order to Cash transactions, such as sales, credit memos, and debit memos.
Type of sale or purchase: retail goods, manufactured goods, intellectual property, resales.
Use these factors to develop your tax determination process and translate your operational procedures into tax rules.
See: Tax Determination Processing for information about each step in the tax determination process.