VAT management in purchasing and sales

This chapter focuses on VAT mechanisms in place for purchasing and sales transactions to provide an overview of how tax is determined and calculated.

Posting the purchasing and sales documents creates a journal entry that stores all the tax information through the document type, the account, and the tax code. These three key data define how the VAT return is extracted and calculated.

The tax information, including parties’ identification and mandatory mentions, must be displayed on the invoice layout with all the legal requirements as defined by law. This document does not detail this.

Concepts

VAT rules depend on the characteristics of the seller, the purchaser, and the type of goods or services. The three main concepts that trigger the VAT calculation are the BP tax rule, the product tax level, and the tax code.

BP tax rule

Abrir: Common data > Common tables > Taxes > BP tax rule

In the BP tax rule function (GESVTB), you define the characteristics of the BP for tax management.

The BP tax rule is based on the geographic location of the customer or supplier and is entered in the Customer (GESBPC) or Supplier (GESBPS) record in the Financial section.

Product tax level

Abrir: Common data > Common tables > Taxes > Tax level

Use the Tax level function (GESTVI) to define how it is used for goods and services to determine the tax codes. The tax rule is used when calculating sales and purchasing transactions.

The tax level is entered in the Product record (GESITM) in the Financials section.

Tax determination

Tax code

Abrir: Common data > Common tables > Tax rates

In the Tax rates function (GESTVT), you can define the rate to be applied and the posting rules through the accounting code. This represents the tax rate percentage that is applied to the details line of an order or an invoice.

Management section

Notice how the Tax rule (DMG) defaults from the BP (Tax rule) and the Site (AE-DU) defaults from the Shipment site.

Lines section

Notice how the Tax level 1 (NRG) defaults from the Product (tax rule).

Tax determination

Abrir: Common data > Common tables > Taxes > Tax determination

In the Tax determination function (GESTVC), you define how tax codes are allocated to the sales and purchasing transactions by the combination of:

  • The tax rule linked to the BP in the document header

  • The tax levels linked to products in the document lines

  • The Emirate where the good or service is shipped from or provided for inter-Emirates transactions.

    This is specific to the UAE.

The tax code is used to calculate the taxes to apply to the tax-excluded amount to calculate the tax amount.

The additional tax determination condition as displayed in the screenshot above, SATISS, Equal and the relevant Emirate code, needs to be added for those tax determinations regarding local transactions. Export, import or tax exempt transactions do not need this additional condition.

Tax determination

Abrir: Common data > Common tables > Taxes > Tax determination

Tax codes are determined by the BP tax code, the product tax level, and the Emirate where the good or service is shipped from. Tax codes determine the tax amounts and the accounts to be used for posting.

Journal entry type

Abrir: Setup > Financials > Document Types

The journal entry type is based on the document type. This journal entry type is important for two main reasons:

  • For legislations that allow companies to take into account (pay) the VAT when the invoice is paid, and not when the invoice is registered, the journal entry type is the way to identify the general ledger transactions corresponding to invoices and transactions corresponding to payments.

  • Journal entry type is a criterion for the VAT returns calculation.

For the UAE legislation, VAT on payment is not supported for the VAT declaration but could be useful in specific customer contexts.

Tax account determination

Abrir: Setup > Financials > Accounting interface

Tax accounts are determined using the accounting code associated with the tax code.

Journal entry

Abrir: Financials > Journals > Journal entry

This is the journal entry created by the sales invoice.