Tax code in SAP is an object that determines the tax treatment of certain transaction. It also drives the postings generated be the system when the tax code is used.
Generally speaking, there are two types of taxes that are relevant to SAP Finance postings: withholding tax and sales tax. This article is about sales tax codes. To limit out scope even further, let’s concentrate on sales tax how it works in Europe and some other countries like Singapore, Australia etc. The ideas may also be applicable to other countries, but be aware of local requirements that may not be fully covered here. Some other countries like USA and Canada use their own logic for sales taxes. They are not covered here at all. This article will also use term VAT, which is sometimes interchangeable with term GST in certain countries.
We have already covered special cases of tax postings. Today we will talk about more standard business processes.
There are some different types of tax codes in SAP system. Each of them serves its own purposes and has its own setup. Let’s check these types in details.
Regular purchases or sales
This is the most common type of tax code. It usually applies to domestic purchases (or sales) from a VAT-registered company. Tax rate depends on the country and type of product. It is specified in tax condition with account key VST for purchases or MWS for sales.
When the document is posted with such tax code, the VAT amount is posted on a separate GL account waiting for further processing during the tax return process.
Purchase and sales without tax
There are some scenarios where tax is not applicable to the transaction. This can be 0%-rated domestic transaction, or transaction not relevant to tax at all, or transaction with a foreign entity. Generally speaking, all these transaction contain 0% tax rate in VST or MWS account keys. Technically you can do with only one tax code for sales and one for purchases, but it is usually recommended to create several of them, as per requirements of tax reporting.
Of course, no separate line item for tax is generated in FI document from such tax code.
Non-deductible purchases
There are certain cases where purchase of a product or service is done for company’s own needs and VAT on such purchases cannot be fully or partially claimed in the tax return. In this case, tax code should be created with tax rate in condition with account key NVV.
This condition determines necessary amount of tax and distributes it across the GL accounts for costs or products purchased. It may be stock, P&L or GR/IR account depending on the situation.
Intra-EU purchases
European Union (EU) is a political organization that includes several states. The Union has its own policy on inter-EU trade, goods movement, accounting and so on. One of the rules applicable within EU is that sales between companies registered in different EU states usually bear zero VAT. While sales part of that transaction is covered in the section above, the purchases part has its own complexity. It is called “reverse charge of VAT”.
In short, buying company needs to reflect the VAT amount with domestic rate as both sales and purchase transaction. They offset each other, making zero in total, but still need to be shown in GL accounts and in tax reporting. That is why tax codes for such transactions use account keys ESE and ESA with domestic tax rate associated with them. Two additional line items appear in the finance document with such tax code.
Full-revenue sales
Majority of states require posting of customer invoices showing only net amount as revenue, while the tax part of the invoice is posted to VAT account. For a 20%-rated tax code the posting looks like:
| Dr Customer | … | 120 |
| Cr Revenue | … | 100 |
| Cr VAT | … | 20 |
However, some countries (e.g. Russia) require different logic for sales-related taxes. Gross amount of sales should be posted to a Revenue account, while special GL account “VAT on sales” is posted with VAT amount only. In theory, the posting should look like this:
| Dr Customer | … | 120 |
| Cr Revenue | … | 120 |
| Dr VAT on sales | … | 20 |
| Cr VAT | … | 20 |
While it is not technically possible to post Cr Revenue 120 in this case, the following logic is used in SAP:
| Dr Customer | … | 120 |
| Cr Revenue | … | 100 |
| Cr Revenue | … | 20 |
| Dr VAT on sales | … | 20 |
| Cr VAT | … | 20 |
It means that, in addition to standard logic of sales transaction, two more line items should be created from tax code treatment:
| Cr Revenue | … | 20 |
| Dr VAT on sales | … | 20 |
That is why tax code conditions with account keys ZUD and ZUK are employed to generate these line items in FI document. It means that tax code contains three active account keys: MWS, ZUD and ZUK.
You can understand that one of the GL accounts assigned to tax code posting is actually a revenue P&L account. If you have several P&L accounts for revenue postings in your Chart of Accounts, then you need to create as many tax codes in your system, and teach your users to use a correct tax code in each transaction, or use a correct tax code determination for automatic postings.
When you created necessary tax codes in your development system, please remember that there is a special procedure to transport them across the landscape.
What types of tax codes are used in your SAP system?
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