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European Single Market and VAT Processing: Overview

With the advent of the European Single Market, the tax frontiers between the individual states of the European Union have been abolished. Border controls have been replaced by ore extensive reporting for deliveries ade to co panies in other countries of the EU. !endors have to report these deliveries"goods ove ents to their own tax authorities in an E# sales list. $elivery itself is tax%exe pt with tax being levied in the country of destination. & port tax has been replaced by ac'uisition tax. (o enable the authorities to check that the new law is applied correctly, every co pany that has to pay tax on an ac'uisition within the Union is assigned a !)( registration nu ber *!)( reg.no.+. (his nu ber ust be specified on invoices, and vendors ust enter both their own !)( registration nu ber and their custo ers, registration nu ber in the sales lists for the tax authorities. -or financial accounting purposes, the above legislation eans co panies need to produce an extended advance return for tax on sales"purchases and an additional report. -or reporting purposes, new fields have been included in the line ite s. .ew tax codes are re'uired for posting the tax and for docu enting the tax%exe pt deliveries. (he changes that affect financial accounting are explained in the following topics. &f you are affected by this new legislation, you should check that you have ade the necessary syste settings described in the following topics.

(he settings you ake when configuring your syste ust be in line with the laws passed in your country concerning !)( processing within the European Single Market.

VAT Registration Number


)s part of the process of establishing the European Single Market, the tax authorities in each EU e ber state assign !)( registration nu bers to co panies. )ll co panies that are entitled to deduct input tax can receive a !)( registration nu ber. ) !)( registration nu ber is alphanu eric and consists of up to /0 characters. (he first two letters indicate the respective e ber state, for exa ple $E for 1er any or ES for Spain.

(he !)( registration nu ber is designed to specify the tax processing involved in certain transactions and to allow the financial authorities to onitor the application of the new regulation. -or this reason, the !)( registration nu ber of the co pany code and that of the custo er ust be specified on invoices for tax%exe pt deliveries and other goods and services within the European Union. (he !)( registration nu ber is thus part of the control procedure that has replaced the for er border controls *E# sales list+. 2ou can define !)( registration nu bers in the syste for every custo er, co pany code, and vendor. (he !)( registration nu bers in the vendor aster record are currently only used in Spain for infor ation purposes.

ields in t!e "ine #tem


(here are four fields in the line ite which enable !)( on transactions within the European Single Market to be displayed correctly. (hese fields are currently only used for business transactions with custo ers. (hese are the fields3 Ta$ number (his is the !)( registration nu ber of the custo er. Reporting countr% (his is the country to which the goods are delivered and therefore where the custo er ac'uired a !)( registration nu ber. (his field is ready for input, so that the relevant !)( registration nu ber can be called up auto atically fro the custo er aster record. (he reporting country is, however, not stored in the docu ent. &elivering countr% (his is the country fro which the delivery is ade4 the syste auto atically takes the country of the co pany code as the delivering country. (he contents of this field are not displayed in the docu ent and cannot therefore be changed. E' triangular deals (his indicator is necessary so that triangular deals can be displayed separately in the E# sales list.

#denti(%ing t!e E' )ountries


(he fields for !)( processing in the EU are only needed if the co pany code country and the country of the business partner are e ber states of the EU. -or this reason, every EU country ust be indicated as such.

(here are also check rules defined in the syste which the syste uses to recogni5e an incorrectly entered !)( registration nu ber. -or every country, you also enter the &S6 code for the E# sales list and a nu eric country key for the &ntrastat declaration.

)ompan% )ode VAT Registration Number


2ou ust define a !)( registration nu ber for every co pany code that is located in an EU country and undertakes business transactions with other EU e ber states. (he nu ber is to be specified on invoices for tax%exe pt deliveries and in the sales lists for the tax authorities. 2ou can assign both do estic and foreign !)( registration nu bers, since you can have a nu ber assigned to you in the country of your co pany code and in other EU e ber states.

Preparations (or Outgoing #nvoices


$eliveries to custo ers with a !)( registration nu ber in other EU e ber states are exe pt fro tax. 2ou ust note on the outgoing invoices that they are tax%exe pt. 2ou ust also specify the custo er7s !)( registration nu ber and your own. $eliveries of this type ust be declared separately in the advance return for tax on sales"purchases. .ote the following for outgoing invoices3 ields in t!e line item (he fields for the entry of the !)( registration nu ber and further specifications are only ready for input if this is necessary. (he re'uire ents that ust be et for this are described in the following topics. Ta$ code (he re'uire ents for tax%exe pt delivery to other EU e ber states ust be docu ented both in the appropriate ledger and in the docu ent. -or this reason, you ust post a tax ite with a separate tax code using the tax rate 5ero in the -& docu ent.

ields in t!e "ine #tem


(he custo er,s !)( registration nu ber ust be specified in the -& docu ent. (he !)( registration nu ber field is not ready for input in the line ite . (his value can only be retrieved fro the custo er aster record. (his is done when you enter a reporting country. (he reporting country is the country in which the custo er was assigned his or her !)( registration nu ber. (he Reporting country field is ready for input if the following conditions are (he co pany code country is identified as an EU country et3

(he posting is sales%relevant (he ter s of pay ent field is ready for input

&f, in addition, the country key contained in the custo er aster record is different fro the country of the co pany code and if this is an EU country, the !)( registration nu ber specified for the custo er,s country is defaulted as the tax nu ber. &f the reporting country is deleted fro the line ite , the !)( registration nu ber is also deleted. (he country of the co pany code is always adopted as the delivering country if a !)( registration nu ber exists in the line ite . (he Delivering country field is not displayed in the line ite . )ll specifications ust be entered for the custo er ite on an additional screen. &f the additional screen is not called up when you enter a docu ent, the syste auto atically adopts the default values. -or postings to a one*time account, the !)( registration nu ber is not displayed on the additional screen but on the screen for the one%ti e data. &t can be entered directly here. (here is no field for the reporting country. -or recurring documents, the country in which the custo er is located is adopted as the reporting country, and the relevant !)( registration nu ber is also deter ined fro the aster record. (he syste is so configured that the fields Reporting country and Tax number are only displayed if the posting is sales%related. (his infor ation is contained in the posting key. (hese fields are also ready for input if ter s of pay ent can be entered in a non%sales%related posting. (he syste needs these postings to be able to enter tax data in the cash discount ite s. (his is necessary for a residual ite that is paid at a later date with cash discount deduction, for exa ple. (hese non%sales%related postings are not included in the reports for the tax authorities.

+!at to )onsider +!en Entering t!e ,-" Account "ine #tem


(he new tax rules are only relevant for postings for cash discount paid. By using a separate field status group for these accounts, you can ensure that the necessary tax data can only be entered for these accounts. When you enter docu ents for all other 1"8 accounts, these fields are hidden. &n the case of auto atic postings, the syste auto atically copies the tax nu ber and the delivering country fro the open ite account line ite to the cash discount ite s. When you enter cash discount paid anually, you cannot enter the tax nu ber directly. &t is deter ined on the basis of a custo er nu ber and the reporting country. Both specifications ust be entered in the cash discount paid ite to call the custo er,s !)( registration nu ber.

Ta$ )odes and Ta$ Accounts


$eliveries to custo ers with a !)( registration nu ber in other EU e ber states are exe pt fro tax. (o be able to furnish proof of such a delivery, however, and to be able to report according to legal re'uire ents, you ust post a tax ite . 2ou need a separate tax code to do this. 2ou ust also specify an account for this code.

So that the type of delivery can be recogni5ed, specify for every tax code whether it is a delivery of goods, subcontracting, or a service. #urrently only deliveries of goods are displayed in the returns.

Preparations (or Posting Outgoing #nvoices


(o be able to co plete outgoing invoices correctly for the reports for the tax authorities in the -& application co ponent, you ust3 Enter the assigned !)( registration nu ber under a country key for every customer. (he custo er,s reconciliation account ust be indicated as tax%relevant. #reate a ta$ code for output tax, which shows a tax rate of 5ero percent. -or this tax code, you specify the type of delivery in 'uestion *goods delivery, service, or subcontracting+.

(o be able to co plete outgoing invoices in -inancial )ccounting so that the docu ents contain the necessary specifications for the new tax rules, proceed as follows3 /. Enter the !)( registration nu ber of every customer under the corresponding country key in the custo er aster record. (o do so, go to the )ccounts 9eceivable enu and select the custo er aster records in the change function, or transfer these specifications with the other aster data by batch input fro a legacy syste or a non%S): syste . ;. #reate accounts for output tax, if you have not already done so or if you are posting to separate accounts according to tax code. <. #reate tax codes for posting output tax with a percentage rate of 5ero by choosing the activity Define Tax Codes for Sales and Purchases in the & ple entation 1uide for Financial Accounting.

Preparations (or #ncoming #nvoices


-or deliveries i ported fro other EU e ber states, no i port tax is posted, but ac'uisition tax is. (his tax a ount can be deducted as input tax. &f the buyer is entitled to deduct the full a ount of input tax, he does not have to debit fro his profit"loss any tax for ac'uisitions within the EU. -or the tax postings you need special tax codes and, if you want to separate accounts, special tax accounts. anage the ac'uisition tax in

Preparations (or Posting #ncoming #nvoices


2ou create the tax codes for ac'uisition tax the sa e way as you create output tax codes. -or ore infor ation, see :reparations for :osting 6utgoing &nvoices. 2ou should note the following3 &n this case, the tax type you tax. ust specify for the properties of the indicator is V for input

2ou enter the percentage rate for ac'uisition tax on the entry screen for the percentage rates in the line Ac uisition tax outgoing !SA. (his ay be /0 percent, for exa ple. &nsert a inus sign *= - =+ after the figure, since the tax ust be posted to the opposite side of the account to the expense line ite . &n the line Ac uisition tax incoming !S!, enter /00* if you are entitled to deduct />> percent of input tax. (his results in a line ite being created with the sa e a ount as the =outgoing= ac'uisition tax but which is in turn posted to the other side of the account. ay also have to

9epeat this transaction for each tax code you re'uire for ac'uisition tax. 2ou aintain the accounts in other charts of accounts.

&f you now post a vendor invoice with the new ac'uisition tax code and select the Calculate tax field for the tax a ount, the syste generates two line ite s for the tax posting.

VAT Registration Number in t!e Vendor Master Record


2ou can define several !)( registration nu bers in the vendor aster record. (he !)( registration nu ber is not currently being used in the -& application co ponent.

&eliver% o( ,oods as Part o( Triangular &eals


$eliveries of goods as part of triangular deals ust be listed separately in the E# sales list. 2ou ust identify these deliveries as such when you enter the line ite . (o do this, select the !" triangular deal field when entering the line ite . (his indicator causes the transaction to be identified as a triangular deal in the E# sales list. When the inco ing pay ent is posted, the indicator is also copied to any resulting postings for cash discount paid or residual ite s.

Reports (or t!e Ta$ Aut!orities

Advance Return (or Ta$ on Sales-Purc!ases


Since ?anuary /st /@@<, every co pany has to list tax%exe pt export deliveries and tax%exe pt EU%internal deliveries separately. (hey ust also specify the base value of the goods on which the ac'uisition within the EU was taxed in the reporting period. )s before, the advance return for tax on sales"purchases is created fro -& docu ents. (he necessary infor ation is taken fro tax codes set up specifically for these business transactions.

E) Sales "ist
(he E# sales lists for e ber states. the basis of the infor ation supplied by do estic tax authorities to other

Since ?anuary /st /@@<, every organi5ation has to send an E# sales list to the relevant tax authorities, providing infor ation on the tax%exe pt deliveries of goods within the European Union and goods ove ents to registered organi5ations ade in the reporting period. 2ou create the E# sales list using the 9-)S8M>> progra .

T!e )ondition T%pe


2ou define the following infor ation for each condition type3 )ondition t%pe and condition class. -or exa ple, where tax is to be calculated, the condition type ight be =base a ount= *A+ or =tax= *$+, and the condition class =base a ount= *)+ or =tax= *$+. )alculation rule3 Either =percentage included= *)+ or =percentage separate= *&+ (he side o( t!e account to which the tax a ount is posted. (his need only be specified for additional taxes, since these *in contrast to input, output, and ac'uisition tax+ can be posted to either side of the account. &f you want tax to be posted to the opposite side of the account, select the B"% sign field. Whether it is possible to c!ange the ta$ amounts and percentages *which are displayed on a special screen+ when you enter a docu ent. (o ake this possible, choose the #anual entries field, then choose either Rate$percent *to ake the percentages changeable+, or %alue *to ake the tax a ounts changeable+.

T!e Process 1e%


(he process key contains the following properties3 Ta$ t%pe. (his is re'uired for reporting purposes, to be able to deter ine where the individual tax line ite s in a docu ent are to be displayed. )s tax type you can specify either output tax * 1 +, input tax * 2 +, additional tax * 3 + or not relevant to tax * 4 +. Non*deductible input ta$. (his specification is also re'uired for reporting. When input tax and non%deductible input tax is posted, separate line ite s are created if the non% deductible part is not to be distributed to the 1"8 account line ite s and asset line ite s. -or tax reporting, you ust indicate the input tax line ite s that do not display the non% deductible portion of input tax. Posting indicator. 2ou specify whether the tax a ount is posted separately * 2 + or distributed between expense and revenue line ite s * 3 +.

(he syste posts tax to the tax accounts auto atically. 2ou can specify tax account nu bers for each process key. (his is not necessary for process keys for which it has been specified that the tax a ount is to be distributed *posting indicator 3 +. (herefore, these keys are not offered in the function for entering the tax account nu bers.

+it!!olding Ta$
&e(inition
Tax that is charged at the beginning of the payment flow in some countries. Usually, the party that is subject to tax does not pay the withholding tax over to the tax authorities himself.

When a customer that is authorized to deduct withholding tax pays invoices from a vendor subject to withholding tax, the customer reduces the payment amount by the withholding tax proportion. The customer then pays the tax withheld directly to the appropriate tax authorities (see diagram .
+it!!olding Ta$

!n exception to this rule is self"withholding. The vendor subject to tax then has the right to pay the tax to the authorities himself.

'se
To calculate, pay, and report the withholding tax, the #!$ #ystem provides two functions% 1. 2. &lassic Withholding Tax (all 'eleases (xtended Withholding Tax (from 'elease ).*

+or each company code, you can decide whether you want to use classic or extended withholding tax. #ince the extended withholding tax option includes all the functions of classic withholding tax, #!$ recommends the use of extended withholding tax (see below% Table of &lassic and (xtended Withholding Tax +unctions .

&f you have previously used classic withholding tax, and now wish to change over to extended withholding tax, you ust first convert the withholding tax data in all the co pany codes affected. $o not activate extended withholding tax before you have converted the data. S): has developed a special tool to support the withholding tax changeover. -or ore infor ation, see Withholding (ax #hangeover

)lassic and E$tended +it!!olding Ta$ unctions Individual Functions Classic Withholding Tax
Withholding tax on outgoing pay ent 2

Withholding tax on incoming payment Withholding tax posting at time of payment Withholding tax posting at time of invoice Withholding tax posting on partial payment ,umber of withholding taxes for each document item Withholding tax base% ,et amount -odified net amount .ross amount Tax amount -odified tax amount 'ounding rule &ash discount considered !ccumulation -inimum/maximum amounts and exemption limits ,umber assignment on document posting (certificate numbering &alculation formulas

X Max. 1 X X

Extended Withholding Tax X X X X X Several X X X X X X X X X X

)ountr%*Speci(ic Re3uirements 0ue to legal re1uirements, the following countries use extended withholding tax% America !rgentina 4razil &hile &olombia -exico Euro e and A!rica United 2ingdom #lova5ia Tur5ey Asia"#aci!ic 3ndia The $hilippines #outh 2orea Thailand

America $eru 6enezuela

Euro e and A!rica

Asia"#aci!ic

)lassic +it!!olding Ta$


'se
&n so e countries, the law provides that invoice recipients ust withhold a certain portion of the pay ent a ount and pay this to the tax authorities as withholding tax on behalf of the vendor. (his re'uire ent exists in the United Aingdo , for exa ple. &n other countries, withholding tax need only be reported to the tax authorities for certain vendors, such as self%e ployed people. Withholding tax is not posted in these countries. (his is the case in -rance, for exa ple. Withholding tax a ounts are reported to the tax authorities at regular intervals and a state ent is also sent to the vendor periodically. (hese reporting periods vary fro country to country. (he way in which withholding tax is calculated depends on the type of service. (ransactions Cave a variable base for tax"S& contributions Cave different tax rates .ot relevant for withholding tax ay3

Prere3uisites
Make the re'uired syste settings for classic withholding tax in the & ple entation 1uide for Financial Accounting. -or ore infor ation, see Specifications for Withholding (ax

eatures
-or ore infor ation about the functions of classic *in co parison to extended withholding tax+, see Withholding (ax

+it!!olding Ta$ Speci(ications


(o enable withholding tax to be posted and the a ounts to be reported to the vendor and the tax authorities, you ust enter certain infor ation in the syste . 2ou ust specify a wit!!olding ta$ code to enable the syste to calculate the tax a ount. (his code is defaulted fro the vendor aster record when you enter a line ite if the vendor is subDect to withholding tax. &f a vendor is exe pt fro withholding tax, you ust specify this in the aster record. (he basis of the wit!!olding ta$ e$emption is an exe ption certificate, possibly te porary. &n the aster record of the vendor, you enter the nu ber of this certificate and the date up to which the exe ption is valid. &f an exe ption exists, the syste either posts no withholding tax or the reduced tax rate. Withholding tax is only relevant for specific posting transactions in certain countries and even there, only for so e groups of vendors. 2ou therefore deter ine, depending on your co pany code, business partner, and the business transaction, the cases in which the (ields (or wit!!olding ta$ beco e ready for input . -or ore infor ation, see3

+it!!olding Ta$ )odes +it!!olding Ta$ ields &ispla%ing +it!!olding Ta$ ields &e(ining orms and Sender Speci(ications +it!!olding Ta$ E$emption Parameters in t!e Ta$ Account +it!!olding Ta$: Automatic Postings

+it!!olding Ta$ )odes


(he withholding tax code defines the following3 )alculation o( t!e Ta$ 4ase 2ou specify whether the invoice a ount, including the tax on sales"purchases, is to be used as the tax base a ount.

Ta$able Amount 2ou specify the percentage of the tax base to be used to calculate withholding tax. Rate o( Ta$ation 2ou specify the percentage of the taxable a ount to be paid or reported to the tax office. Reduced Rate ) reduced tax rate can be entered in place of the alternative tax rate. 1iven a valid exe ption certificate, the syste calculates the withholding tax a ount using this rate. Posting +it!!olding Ta$ 2ou deter ine whether the a ount is to be paid to the authorities *in which case it be posted to a separate account+ or only reported.

ust

(he above infor ation is country%specific. (hese codes are used for the following purposes3 (o deter ine the tax a ount auto atically (o deter ine auto atically the tax accounts to which the tax a ount is to be posted (o assign a certain tax rate to a line ite

(he definitions for the codes for withholding tax ust not be changed or deleted while there are still outstanding ite s in the syste posted under the code in 'uestion. &f you do not observe this rule, you ay find errors occur when carrying out pay ent transactions. -or infor ation on how to define and aintain withholding tax codes, see the & ple entation 1uide for Financial Accounting under &ithholding Tax #aintain Tax Codes. See also #onfiguring the Syste Using the & ple entation 1uide.