Set up tax codes

2024-12-26

This article explains how to set up tax codes in the Tax Calculation feature of Globalization studio workspace. It includes the setup for a simple scenario to make the tax code work and information about some advanced tax code functionality for complex scenarios.

Important

The setup of tax codes in the Tax Calculation of Globalization studio workspace is legal entity–agnostic. Tax codes are automatically synced to Sales tax codes when you enable the Enable advanced tax calculation in the Tax calculation parameters for a selected legal entity in Finance.

Simple setup

Follow these steps to use a tax code in a simple scenario, such as a scenario where there is only one tax rate.

Open the Globalization Studio workspace, select Globalization services, and then select the Tax Calculation tile.
On the Tax calculation features page, select the feature and version that you want to set up, and then select Edit.
On the General tab, select Configuration version.
On the Tax codes tab, select Add, and enter the tax code and a description.
Select Calculation origin. A calculation origin is a group of methods that are defined in the tax configuration version that you selected. For this simple scenario, select By net amount.
Select Save. More fields become available, based on the calculation origin that you selected.
On the Rates FastTab, select Add to add one tax rate for this tax code.
Select Save.

Calculation origin

The calculation origin defines how the tax base amount and the tax amount are calculated. The following values are available in the Calculation origin field:

By net amount
By gross amount
By quantity
By margin
Tax on tax

By net amount

If you select By net amount in the Calculation origin field, the tax amount is calculated as a percentage of the purchase or sales amount, excluding any other tax codes.

For example, the tax rate is 25 percent, the invoice line shows a quantity of 10 items at 1.00 each, and the customer is allowed a 10-percent line discount. In this case, amounts are calculated in the following way:

Net amount: (10 × 1.00) – 10 percent = 9.00
Sales tax: 9.00 × 25 percent = 2.25
Total invoice amount: 9.00 + 2.25 = 11.25

By gross amount

If you select By gross amount in the Calculation origin field, the tax amount is calculated as a percentage of the gross sales amount. The gross amount is the line's net amount plus all taxes and fees for the line except the one tax where the Calculation origin field is set to By gross amount.

For example, the tax authority has imposed special duties on an item. The duty amounts are added to the net amount before tax is calculated. The following tax codes are used:

Duty 1 – The rate is 10 percent, and the By net amount calculation method is used.
Duty 2 – The rate is 20 percent, and the By net amount calculation method is used.
Tax rate – The rate is 25 percent, and the By gross amount calculation method is used.

If the net amount is 10.00, the Duty 1 amount is 1.00 (10.00 × 10 percent), and the Duty 2 amount is 2.00 (10.00 × 20 percent). In this case, amounts are calculated in the following way:

Gross amount: Net amount + Duty 1 amount + Duty 2 amount = 10.00 + 1.00 + 2.00 = 13.00
Tax amount: 13.00 × 25 percent = 3.25
Total duties and tax: 1.00 + 2.00 + 3.25 = 6.25
Total invoice amount: 10.00 + 6.25 = 16.25

By quantity

If you select By quantity in the Calculation origin field, the tax amount is calculated as a fixed amount per unit and multiplied by the quantity that is entered on the document line. The amount per unit is specified on the Rates FastTab.

For example, the tax code is set up as 1.20 per unit. On a sales invoice line, 25 units of an item are sold. In this case, the tax amount is calculated as 25 × 1.20 = 30.00.

Note

If the transaction is entered in a unit other than the unit that's specified on the tax code, the unit is automatically converted based on the unit conversions that are set up on the Unit conversions page. This function is available starting from the 10.0.40 update.

By quantity, additional option

You can choose whether a tax amount By quantity is calculated before other tax codes and added to the net amount before other tax codes are calculated where Calculation origin = By Net Amount.

Examples

Assume two tax codes are calculated on a transaction:

Duty: Calculation origin = By quantity, the value is set to 5.00 per unit = pcs
Tax: Calculation origin = as shown in the examples below, the value is set to 25%

One piece of an item is sold at a unit price of 10.00.

Example 1

Tax: Calculation origin = By Gross Amount method. The Calculate before sales tax option has no effect, because Tax is calculated as a percentage of the gross amount. Duty: 1 × 5.00 = 5.00. Gross amount: 10.00 + 5.00 = 15.00. Tax: 15.00 × 25% = 3.75. Total tax: 5.00 + 3.75 = 8.75. Total amount: 10.00 + 8.75 = 18.75.

Example 2

Tax: Calculation origin = By Net Amount. The Calculate before sales tax option isn't selected for the Duty calculation. Net amount: 10.00. Duty: 1 × 5.00 = 5.00. Tax: 10.00 × 25% = 2.50. Total tax: 5.00 + 2.50 = 7.50. Total amount: 10.00 + 7.50 = 17.50.

Example 3

Tax: Calculation origin = By Net Amount. The Calculate before sales tax option is selected for the Duty calculation. Net amount: 10.00. Duty: 1 × 5.00 = 5.00. Tax: (10.00 + 5.00) × 25% = 3.75. Total tax: 5.00 + 3.75 = 8.75. Total amount: 10.00 + 8.75 = 18.75.

Example 4

The results of example 3 and example 1 are the same, because there's only one duty. Assume that you have two duties, and only one of them is included in the net amount for the sales tax calculation: Duty 1: 5.00, using the By Quantity method, and the Calculate before sales tax option is selected. Duty 2: 2.50, using the By Quantity method, and the Calculate before sales tax option isn't selected. Tax: 25%, using the By Net Amount method. Net amount: 10.00. Duty 1: 1 × 5.00 = 5.00. Duty 2: 1 × 2.50 = 2.50. Net amount subject to tax: 10.00 + 5.00 = 15.00. Tax: 15.00 × 25% = 3.75. Total taxes, including duties: 5.00 + 2.50 + 3.75 = 11.25. Total amount: 10.00 + 11.25 = 21.25. The 25% Tax is calculated for the sum of the net amount (10.00) + Duty 1 (5.00) = 15.00. Duty 2 is added to the tax amount after the sales tax is calculated.

By margin

If you select By margin in the Calculation origin field, the tax amount is calculated as a percentage of the sales margin. The sales margin is the sales amount minus the cost amount. This calculation method applies only to sales transactions.

For example, the tax rate is 25 percent, the invoice line shows a quantity of 10 items at 10.00 each, and the cost per item is 6. In this case, amounts are calculated in the following way:

Sales margin: 10 × (10.00 – 6.00) = 40.00
Tax amount: 40.00 × 25 percent = 10.00
Total invoice amount: 100.00 + 10.00 = 110.00

Tax on tax

If you select Tax on tax in the Calculation origin field, the sales tax is calculated as a percentage of all the other tax amounts on the same document line.

For example, the following tax codes are used:

Duty 1 – The rate is 10 percent, and the By net amount calculation method is used.
Duty 2 – The rate is 20 percent, and the By net amount calculation method is used.
Tax on duty – The rate is 25 percent, and the Tax on tax calculation method is used.

In this case, amounts are calculated in the following way:

Net amount: 10.00
Duty 1: 10.00 × 10 percent = 1.00
Duty 2: 10.00 × 20 percent = 2.00
Tax on duty: 3.00 × 25 percent = 0.75
Total tax: 1.00 + 2.00 + 0.75 = 3.75
Total invoice amount: 10.00 + 3.75 = 13.75

Advanced functionality

This section explains some advanced functionality of the tax code setup for complex scenarios.

Tax exemption

If you set the Is Exempt option to Yes on the General FastTab, the tax amount will always be overridden to 0 (zero), regardless of the actual tax rate.

You can set the Exempt Code field to specify the reason for the exemption.

You can enable master data lookup for the Exempt Code field. In that way, you can select among the exempt code values that are defined in Finance. For information about how to enable master data lookup, see Enable master data lookup for tax calculation configuration.

For example, the tax rate is 25 percent, and the Is Exempt option is set to Yes on the tax code. The invoice line shows a quantity of 10 items at 1.00 each, and the customer is allowed a 10-percent line discount. In this case, amounts are calculated in the following way:

Net amount: (10 × 1.00) – 10 percent = 9.00
Sales tax: 0.00
Total invoice amount: 9.00 + 0.00 = 9.00

Use tax

If you set the Is Use Tax option to Yes on the General FastTab, the tax amount will be posted to the Use tax payable account instead of the Vendor summary account.

For example, the tax rate is 25 percent, and the Is Use Tax option is set to Yes on the tax code. The invoice line shows a quantity of 10 items at 1.00 each, and the customer is allowed a 10-percent line discount. In this case, amounts are calculated in the following way:

Net amount: (10 × 1.00) – 10 percent = 9.00
Use tax: 9.00 × 25 percent = 2.25
Total invoice amount: 9.00 + 0.00 = 9.00

Important

If both the Is Exempt option and the Is Use Tax option are set to Yes on a tax code, the code will be recognized as tax-exempt for sales transactions and use tax for purchase transactions.

Reverse charges

If you set the Is Reverse Charge option to Yes on the General FastTab, the tax rate can be configured as negative. For a reverse charge scenario, we recommend that you set up two tax codes: one that has a positive tax rate and one that has a negative tax rate. Both tax codes should have the same rate value, and the Is Reverse Charge option should be set to Yes on the tax code that has a negative tax rate. For more information about the reverse charge solution in Finance, see Reverse charge mechanism for VAT/GST scheme.

For example, two tax codes are determined on one invoice line. One tax rate is 25 percent. The other tax rate is -25 percent, and the Is Reverse Charge option is set to Yes on the second tax code. The invoice line shows a quantity of 10 items at 1.00 each. In this case, the amounts are calculated in the following way:

Net amount: (10 × 1.00) = 10.00
Tax code 1: 10.00 × 25 percent = 2.50
Tax code 2: 10 × -25 percent = -2.50
Total invoice amount: 10.00 + 2.50 -2.50 = 10.00

Exclusion from base amount calculations

If you set the Exclude from base amount calculation option to Yes on the General FastTab, the calculated tax amount of the tax code is excluded from the tax base amount for other tax code calculations in the price-inclusive scenario.

For more information, see Calculate tax on prices when Prices include taxes is enabled.

Rates

On the Rate FastTab, you can define different tax rates for different ranges of tax base amounts. To calculate the tax amount, the Tax Calculation service always uses the rate that matches the tax base amount.

For example, tax rates might be configured as shown in the following table.

Minimum amount	Maximum amount	Tax rate
0	1,000	10 percent
1,000	5,000	15 percent
5,000	10,000	20 percent
10,000	0	30 percent

In this case, the tax amount is calculated in the following way:

If the tax base amount is 300.00, the tax rate is 10 percent, and the tax amount is 300.00 × 10 percent = 30.00.
If the tax base amount is 3,000.00, the tax rate is 15 percent, and the tax amount is 3,000.00 × 15 percent = 450.00.
If the tax base amount is 6,000.00, the tax rate is 20 percent, and the tax amount is 6,000.00 × 10 percent = 1,200.00.
If the tax base amount is 20,000.00, the tax rate is 30 percent, and the tax amount is 20,000.00 × 30 percent = 6,000.00.

Note

If the tax base amount can match both the maximum amount on one line and the minimum amount on the other line, the base will use the tax rate that matches the minimum base amount. For example, if the tax base amount is 1000.00, the tax rate is 15 percent, and the tax amount is 1,000.00 × 15 percent = 150.00.

Limits

On the Limits FastTab, you can define tax limits to override the calculated tax amount if the tax amount falls into the minimum/maximum range.

If the calculated tax amount is more than or equal to the maximum tax amount that is configured on the Limits FastTab, the final tax amount equals the maximum tax amount.
If the calculated tax amount is less than the minimum tax amount that is configured on the Limits FastTab, the final tax amount is 0 (zero).

For example, the tax limits are configured in the following way:

Minimum tax amount: 100
Maximum tax amount: 1,000

If the calculated tax amount is 2,000, the final tax amount is 1,000.

If the calculated tax amount is 500, the final tax amount is 500.

If the calculated tax amount is 80, the final tax amount is 0 (zero).