Dual currency support for sales tax

2023-06-17

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

The Dual currency feature for Dynamics 365 Finance was introduced in version 8.1 (October 2018). It changes the way that accounting entries in the reporting currency are calculated.

In earlier versions, transactions were converted to the reporting currency in the following sequence:

Transaction total was calculated in the transaction currency > Transaction amount was converted to the accounting currency > Accounting currency amount was converted to the Reporting currency

After enabling the dual currency feature, transactions were converted to the reporting currency in the following sequence:

Transaction currency amount > Reporting currency amount

For more information about dual currency, please refer to Dual currency.

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

Sales tax conversion (new in version 10.0.13)
Populate financial dimensions to the realized currency adjustment profits/loss accounts for sales tax settlement (new in version 10.0.17)

Dual currency support for sales taxes ensures that taxes are accurately calculated 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 tax amount from transaction currency to tax currency.

Accounting currency: The path will be "Amount in transaction currency > Amount in accounting currency > Amount in tax currency". The accounting currency exchange rate type (configured in Ledger setup) will be used for the currency conversion.
Reporting currency: The path will be "Amount in transaction currency > Amount in reporting currency > Amount in tax currency". The reporting currency exchange rate type (configured in Ledger setup) will be used 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

This parameter can be configured based on the compliance need from tax authority.

Upgrade Consideration

This feature will only apply for new transactions. For tax transaction already saved in TAXTRANS table but not settled yet, system will not recalculate tax amount in tax currency because the exchange rate at time point of posting tax is already missing.

To prevent preceding scenario, we recommend changing 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, please run "Settle and post sales tax" program for current tax settlement period before changing this parameter value.

This feature will add accounting entries that clarify gains and losses from currency exchanges. The entries will be 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, information for financial dimensions is taken from sales tax accounts, which are balance sheet accounts, and entered 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, you can turn on the "Populate financial dimensions to the realized currency adjustment profits/loss accounts for sales tax settlement" feature. This feature will force 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 will not include changes to reports and forms that show the tax amount in the reporting currency. Changes to reports and forms will be delivered in the future release.

Tax settlement auto-balance in reporting currency

If the tax settlement is not 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 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 will be 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 topics: