Dual currency support for sales tax

This article explains how to extend dual currency accounting for sales taxes and the impact on sales tax calculations, posting, and settlements.

The Dual currency feature for Dynamics 365 Finance changes the way that accounting entries in the reporting currency are calculated.

In earlier versions, the system converts transactions to the reporting currency in the following sequence:

• The system calculates the transaction total in the transaction currency.

• The system converts the transaction amount to the accounting currency.

• The system converts the accounting currency amount to the reporting currency.

For more information about dual currency, see Dual currency.

As a consequence of support for dual currencies, two new features are available in feature management:

• Sales tax conversion
• Populate financial dimensions to the realized currency adjustment profits/loss accounts for sales tax settlement

Dual currency support for sales taxes ensures that the system accurately calculates taxes in the tax currency, and that the sales tax settlement balance is accurately calculated in both the accounting currency and the reporting currency.

Sales tax conversion

The Sales tax conversion parameter provides two options to convert the tax amount from transaction currency to tax currency:

• Accounting currency: The conversion path is Amount in transaction currency > Amount in accounting currency > Amount in tax currency. This option uses the accounting currency exchange rate type, which you configure in Ledger setup, for the currency conversion.
• Reporting currency: The conversion path is Amount in transaction currency > Amount in reporting currency > Amount in tax currency. This option uses the reporting currency exchange rate type, which you configure in Ledger setup, for the currency conversion.

Example

A simple example to demonstrate this functionality is:

Currency setup for ledger and tax

Transaction currency	Accounting currency	Reporting currency	Tax currency
EUR	USD	GBP	GBP

Exchange rate

From currency	To currency	Factor	Exchange rate
EUR	USD	1	1.11
EUR	GBP	1	0.83
USD	GBP	1	0.75

Tax amount calculation in different parameter options

Tax amount = 100 EUR

Sales tax conversion parameters	Transaction currency (EUR)	Accounting currency (USD)	Reporting currency (GBP)	Tax currency (GBP)
Accounting currency	100	111	83	83.25
Reporting currency	100	111	83	83

You can configure this parameter based on the compliance needs of the tax authority.

Upgrade consideration

This feature only applies to new transactions. For tax transactions already saved in the TAXTRANS table but not settled yet, the system doesn't recalculate the tax amount in tax currency because the exchange rate at the time of posting tax is missing.

To prevent the preceding scenario, change this parameter value in a new (clean) tax settlement period that doesn't contain any unsettled tax transactions. To change this value in the middle of a tax settlement period, run the Settle and post sales tax program for current tax settlement period before changing this parameter value.

This feature adds accounting entries that clarify gains and losses from currency exchanges. The entries are made in the realized currency adjustment profit and loss accounts when revaluation is done during sales tax settlement. For more information, see the Tax settlement auto-balance in reporting currency section later in this article.

Note

During settlement, the system takes information for financial dimensions from sales tax accounts, which are balance sheet accounts, and enters it in currency adjustment profit and loss accounts, which are profit and loss statement accounts. Because restrictions on the value of financial dimensions differ between balance sheet accounts and profit and loss statement accounts, an error can occur during the Settle and post sales tax process. To avoid having to modify account structures, turn on the Populate financial dimensions to the realized currency adjustment profits/loss accounts for sales tax settlement feature. This feature forces the derivation of financial dimensions to currency adjustment profits/loss accounts.

Track reporting currency tax amount

Three new fields were added to tax-related tables to track amounts in the reporting currency. These fields are within the TAXUNCOMMITTED and TAXTRANS tables:

• TaxAmountRep: tax amount in reporting currency
• TaxBaseAmountRep: base amount in reporting currency
• TaxInCostPriceRep: non-deductible amount in reporting currency

For tax only saved in TAXUNCOMMITTED table but not posted yet, system will recalculate tax amount in reporting currency at the time of posting and save in TAXTRANS table.

This release doesn't include changes to reports and pages that show the tax amount in the reporting currency. Changes to reports and pages will be delivered in a future release.

Tax settlement auto-balance in reporting currency

If the tax settlement isn't balanced in the reporting currency for certain reason such as the sales tax conversion path is "Accounting currency", or the exchange rate change in a single tax settlement period, then the system will automatically generate accounting entries to adjust the tax amount variance and offset it against realized exchange gain/loss account, which is configured in Ledger setup.

Using the previous example to demonstrate this feature, suppose that the data in the TAXTRANS table at the time of posting is as follows.

Sales tax conversion parameters	Transaction currency (EUR)	Accounting currency (USD)	Reporting currency (GBP)	Tax currency (GBP)
Accounting currency	100	111	83	83.25
Reporting currency	100	111	83	83

When you run the sales tax settlement program at month-end, the accounting entry is as follows.

Scenario: sales tax conversion = "Accounting currency"

Main account	Transaction currency (GBP)	Accounting currency (USD)	Reporting currency (GBP)
Tax Payable/Receivable	-83.25	-111	-83.25
Tax Settlement	83.25	111	83.25
Realized Gain/Loss	0	0	-0.25
Tax Payable/Receivable	0	0	0.25

Scenario: sales tax conversion = "Reporting currency"

Main account	Transaction currency (GBP)	Accounting currency (USD)	Reporting currency (GBP)
Tax Payable/Receivable	-83	-110.67	-83
Tax Settlement	83	110.67	83
Realized Gain/Loss	0	0.33	0
Tax Payable/Receivable	0	-0.33	0

For more information, see the following articles:

• Dual currency
• Sales tax overview