INTRODUCTION TO TAXES
Taxes are derived from Products and Charges. They are assigned a specific Tax Category and then the desired tax is selected on Orders and/or Invoices. Compiere can accommodate multiple taxes as well as Business Partners that are Tax Exempt.
To get an overview of the Tax Setup in Compiere, open the Tax Setup workflow from the Main Menu.
To navigate through the different steps and open the appropriate window double-click on the specific workflow icon.
This workflow demonstrates how to define the Taxes used in an Organization
The Tax Category defines classifications of Taxes. A Tax Category is assigned to Products and Charges so the appropriate Tax Rate can be derived. This facilitates reacting to changing tax rates.
Click on Tax Category in the workflow or simply open the Tax Category window from the Main Menu.
Enter the Name and the Description for the Tax Category. You can also enter a Commodity Code. Click on the Translation tab to enter the Translation information for your Tax Category.
The Product window allows you to assign a Tax Category to a Product. When a product is entered on an Order or Invoice the Tax Category is used to determine the tax and tax rate to assign.
You may use the Workflow buttons to open the Product window. Alternatively, you may click on Product in the Workflow or simply open the Product window from the Main Menu.
Select the Tax Category that will be used to derive taxes when this Product is purchased or sold.
Products are discussed in detail in the Products Chapter.
There are different costs that are incurred or billed to a customer. In Compiere they are called Charges. A charge may be a shipping fee, a bank fee, or a handling fee for example. Taxes for Charges are derived based on the Tax Category associated with them.
Click on Charges in the Workflow or simply open the Charges window from the Main Menu.
Select the Tax Category that will be used to derive taxes when this Charge is used in an Invoice.
Charges are discussed in detail in the Utilities Chapter.
The Tax Rate Window allows you to define and maintain different taxes used for each tax category. These Tax Rates are derived for Products and Charges based on the Tax Category. For example, Sales Tax must be defined for each State or Region in which it applies. If you have multiple taxes, create a summary level tax with the approximate total tax rate and the actual tax rates pointing to the summary level tax as their parent. When entering the order or invoice lines, the tax is estimated, the correct tax is calculated when the document is processed. The tax is always calculated from the line net amount. If one tax has a tax basis that is line net amount and another tax, you need to adjust the percentage to result in the correct amount.
Click on Tax Rate in the Workflow or simply, open the Tax Rate window from the Main Menu.
Enter the Name and the Description for the Tax Rate. Select the Active check box to indicate that this Tax is Active.
Select the Document Level check box if you want taxes calculated on a document basis as opposed to line by line. If this is selected, then all lines with the same tax rate are totaled and the tax is calculated based on that total. If the check box is not selected taxes are calculated on each individual line. Be aware that the final tax calculated may differ based on the method used as rounding may occur.
Select the Default check box if you want this tax rate to be used as the default value.
Enter a 'Valid From' date to indicate the starting date for this Tax Rate. If multiple Tax Rates are found, the system will use the one with the most current date.
Select a Tax Category for which the Tax Rate belongs. Select the Requires Tax Certificate check box if this tax rate requires a tax certificate for a Business Partner to be tax exempt.
Select the Summary Level check box if this Tax will be a Parent tax. This is used if more than one Tax must be applied to a Product or Charge.
Select a Parent Tax if this tax is one of multiple taxes that will be applied to a Product or Charge. The Parent Tax will be used on the document. For additional details on multiple taxes, refer to the example at the end of this chapter.
Select a SO/PO Type of Purchase Tax, Sales Tax, or Both to indicate if this Tax Rate should be used for Purchases or Sales. This allows you to define different tax rates or different accounts to be used for taxes incurred vs. taxes charged if necessary.
Select the Tax Exempt check box if this rate is to be used when a Business Partner is classified as Tax Exempt. For this, you need to set up a tax rate with a 0% rate and indicate that this is your tax exempt rate. This is required for tax reporting, so that you can track tax exempt transactions.
Enter a Rate to indicate the percentage to be multiplied by the source to arrive at the tax amount.
Enter a Tax Indicator for this Tax Rate. This will print on documents that refer to this tax.
Enter a Country and To Country and a Region and To Region to indicate the when this tax will be applied. The system uses the "Bill From" and "Bill To" locations to derive the Country and Region. If any of these fields are left blank then all values are valid.
Click on the Tax ZIP tab to insert or modify zip code restrictions for this Tax Rate.
Select the Active check box to indicate that this Tax ZIP restriction is active.
Enter a 'ZIP From' and 'ZIP To' value in the fields provided to indicate the "from and to" location zip codes in which this Tax Rate is applied. If no records are entered in the Tax ZIP window, then the tax applies to all ZIP codes.
Click on the Accounting tab to view and modify the Accounting information for this Tax Rate.
The values here have defaulted from the Accounting Schema. The values in the Accounting Schema as populated by the Initial Tenant Set up. You may leave these default values as they are, or update them to define specific accounts for this Tax.
The Tax Due account is used to record the taxes charged to Customers in AR Invoices.
The Tax Credit account is used to record the taxes paid by you to a Vendor in AP Invoices.
The Tax Liability and Tax Receivables accounts are not used at this time but are intended for tax reporting
The Tax Expense account is not used at this time.
Tax Hints and Tips
- You should set up a Tax Rate for each Tax Type you need to report. This may include 0% Exempt, 0% Export, 0% Not Taxed, 8% Sales Tax, 5% Half Rate, 10% Full Rate, etc.
- Even though the tax amount is 0.00, you need to define as many zero tax rates as you need to report on.
- You should define a tax for Sales and Purchases by setting the SO/PO type accordingly.
REPORTING ON TAXES
You can generate reports on taxes collected and paid in the following ways:
Invoice Tax - This report lists Invoice Tax lines with Business Partner Tax information. This should be sufficient if you have no foreign currency invoices or adjustments to the tax amount (e.g. payment discounts)
Accounting Fact Details - This report displays all accounting information details. The parameters include Organization, Date range, Period, Account, Business Partner, Product and Tax.
Accounting Fact Daily - This report provides accounting information summarized by date. The parameters include Organization, Date range, Period, Account, Business Partner, Product and Tax.
Accounting Fact Period - This report provides accounting information summarized by Accounting Period. The parameters include Organization, Date range, Period, Account, Business Partner, Product and Tax.
Here are some examples for setting up some specific tax situations.
Taxes applied to all Regions
Situation: A tax that applies for all when specific product is sent from CT in the USA to any other state in the USA.
Implementation: Define the Tax Rate with a Country and To Country value of USA and a Region of CT and To Region of blank.
Multiple Taxes per Line
Situation: A product in Canada is subject to both GST and PST taxes.
Implementation: Define the Parent Tax (GST/PST). Enter the approximate Rate (8%) and define the Location rules (Country, To Country, Region, and To Region). Select the Summary Check box. Define the individual Taxes, GST with a Rate of 6% and PST with a Rate of 2%. In both cases select the Parent Tax of GST/PST. Note that these 2 individual taxes have no Location rules defined.
When entering an Order or Invoice you enter/select the GST/PST Tax Rate. If you refer to the Tax tab you will see just the single line with the approximate tax. When you process the document, the system will split the Summary Tax into its individual lines and the Tax tab will then show 2 lines for the tax and this will print correctly on the documents
Situation: Similar to the multiple taxes except the second tax is calculated on the basis amount plus the first tax
Implementation: First you must calculate the correct second tax rate to use. For example, the first tax is 10% and the second tax is 10% on the basis amount plus the first tax. This results in a compound tax of 21%. Enter a Summary or Parent Tax as in the previous example with a Rate of 21%. Then enter the first lie tax with a rate of 10% and the second with a rate of 11%. Both of these taxes would refer to the Parent Tax entered.