E-Business Tax calculates tax on Order to Cash transactions from Projects and Receivables and on Procure to Pay transactions from Purchasing and Payables. In addition, E-Business Tax calculates tax on transactions from applications that feed data into Payables or Receivables. These applications are called source applications. E-Business Tax supports tax handling on transactions from the source application Trade Management.

A source application can feed data, for example, into Payables for the recording and payment of invoices or into Receivables for invoicing customers or handling adjustments to invoices. The tax determination process only takes place after these applications interface data into Payables or Receivables.

Transactions from source applications sometimes require different tax handling from a regular sales or purchase invoice. For example, a rebate created in Trade Management and credited to a customer account through a credit memo may not include a new tax calculation, as the tax authority may not allow you to adjust your tax liability downward. You can define tax rules for source application event classes to manage these special situations. See: Tax Rules in Oracle E-Business Tax for more information.

This section describes the details of tax handling on certain types of transactions.

Payables Invoices Matched to Purchase Orders

When you create an invoice in Payables by matching it to a purchase order, Payables copies the purchase order tax lines and tax-related information to the invoice and recalculates the tax. 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 using the tax rate that corresponds to the invoice date.

E-Business Tax manages the updates to tax-related information in this way:

1. Tax applies to the purchase order but not to the invoice - The tax line appears with a zero amount.

2. Tax applies to both the purchase order and the invoice but with different tax rate codes and tax rates - The tax line appears with the tax amount as calculated by the invoice. The tax line is created with the tax rate code and tax rate effective on the invoice date. Payables displays the tax rate variance at the distribution level.

   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.

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 the prepayment is applied to an invoice. E-Business 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 $5000 to an invoice with a total amount of $10,000. At the time of prepayment the applicable tax rate was 5% ($250 tax on the prepayment); at the time of invoice creation the applicable tax rate is 10%. E-Business Tax calculates the tax in this way:

• Recalculated - E-Business Tax recalculates the tax on the prepayment using the invoice tax rate, and applies the same tax rate 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 $1000 (10% * $10,000) and a prepayment tax line of -$500 (10% * -$5000). The total tax is $500.

• Prorated - E-Business Tax retains the original tax rate on the prepayment and applies the new tax rate 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 $1000 (10% * $10,000) and a prepayment tax line of -$250 (5% * -$5000). The total tax is $750.

Debit Memos and Credit Memos

There are two types of debit/credit memos: On Account and Applied. E-Business Tax uses a different tax calculation method for each type.

• On Account Debit/Credit Memos - E-Business Tax calculates tax on On Account debit/credit memos in a similar way to normal invoices. The only difference is that if the line amount is negative, the tax calculated is also negative.

  Note: If a particular tax is not required for On Account debit/credit memos, you can set up a Determine Tax Applicability rule for the tax using the Transaction Input Factor determining factor and the Line Class determining factor name with the debit/credit memo transaction event. See: Determine Tax Applicability for more information.

• Applied Debit/Credit Memos - E-Business Tax calculates tax on Applied debit/credit memos in direct proportion to the line amounts on the invoice to which the debit/credit memo is applied.

  For example, if you create an invoice with one line item of $100 and tax of $10, then if the line item is credited $10 with an Applied credit memo the tax line is credited $1.

In Receivables, you can create credit transactions (applied credit memos) at the header level or the line level.

Header level - There are three options available for credit allocation:

• Line Only - Tax is not credited.

• Line and Tax - You enter the amount or percentage to be credited on the line amount. The amount you enter is credited proportionately to each line in the invoice. Each tax line is credited by the same percentage as the corresponding line amount.

• Tax Only - You enter the amount or percentage to be credited on the tax amount. Each tax line is credited by the same percentage in proportion to the tax amount for the line.

Line level - You can credit individual lines. The tax line is credited in proportion to the line amount credit.

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 line amount, either positive or negative. E-Business Tax calculates the tax 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, and two tax lines one of $5 and $10. If the price correction reduces the line amount by $20, then the new invoice creates two tax lines of -$1 and -$2.

Intercompany Transactions

Intercompany transactions must account for tax on both the Receivables (sale) and Payables (purchase) side. If the transaction is between legal entities in different tax regimes, then you may need to account for the tax charged on the sale in a different manner from the purchase.

E-Business Tax accounts for intercompany transactions in this way:

• If a tax is charged on the Receivables sale with a tax amount greater than zero, then E-Business Tax charges the same amount of tax on the Payables purchase side.

  E-Business Tax looks for and applies a Payables tax rate code to match the Receivables tax rate code in order to reconcile the transaction tax. If you are using migrated tax data, then E-Business Tax uses the matching Receivables and Payables tax rate codes. If you are using an E-Business Tax configuration with the legal entities sharing the tax configuration of the Global Configuration Owner, then E-Business Tax applies the same tax rate to the Receivables and Payables transactions.

• If a zero tax amount is charged on the Receivables sale, then E-Business Tax reconciles the Payables purchase in one of two ways:

  • If the Payables side also uses a zero-rated tax rate for goods and services, then E-Business Tax applies the zero-rated tax rate code.

  • If there is no zero-rated tax rate, then E-Business Tax self-assesses the tax using the applicable self-assessment setup: offset taxes; self-assessment/reverse charge; or reporting purposes only tax.

If any special implications apply to intercompany transactions, you can use the transaction business category Intercompany Transaction to identify these transactions. See: Setting Up Transaction Fiscal Classifications for more information.