Global Withholding Tax Whitepaper

Global Withholding Tax
Author: Hans van Berkum Page 1 of 30
Global Withholding Tax Table of content: 1 Background ........................................................................................................................ 3 1.1 1.2 1.3 1.4 1.5 2 2.1 Definition ..................................................................................................................... 3 Purpose ........................................................................................................................ 3 How does WHT works .................................................................................................. 3 Drivers for WHT ........................................................................................................... 4 Gross up ....................................................................................................................... 4 Oracle Payables Set up ................................................................................................ 5
Oracle Set up ...................................................................................................................... 5 2.1.1 Tax Code setup ...................................................................................................... 7 2.1.2 Tax Groups ........................................................................................................... 17 2.1.3 Required Tax code setup for the company .......................................................... 17 Supplier setup .................................................................................................................. 18 3.1.1 Tax Authority Setup ............................................................................................. 18 3.1.2 Supplier Setup ..................................................................................................... 20 Proposed Solution when WHT is known upfront for the project/supplier ...................... 22
4 5 6
Proposed solution for Gross up ........................................................................................ 26

Withholding Tax Inquiry and Reports .............................................................................. 30
BACKGROUND
This document describes the solution for a company that is subject to withholding tax (WHT). WHT is a common solution supported by Oracle. In some cases however the solution cannot be used (in case of gross up, meaning the company has to take the tax amount to its own cost instead of the supplier) and modifications to the process and to the Oracle system has to be made. In this document youll find a description and possible solutions to overcome gross up. 1.1 Definition
Withholding tax (WHT) is the amount withheld by the party making a payment to another (payee) and paid to the taxation authorities. The amount the payer deducts may vary, depending on: The nature of the product or service being paid for (supply of goods, equipment, rental of services) The status of the payer and the status of the payee (supplier) in the related country (PE, certificate Y/N, country of residence etc.) The location where the service are performed or made (in- or outside the country)
1.2
Purpose
The purpose of WHT is to counteract tax evasion and tax avoidance by domestic or international taxpayers. In some jurisdictions, the purpose of deduction is also to facilitate or accelerate tax collection. 1.3 How does WHT works
To comply for WHT the company has to: Withhold tax from the payment to the supplier/subcontractor (when there is no exemption certificate) Obtain an exemption certificate from the supplier before any payment is made Take the WHT on our account. The supplier is paid the full amount of the invoice, even if there is no exemption certificate. The WHT is an additional operating cost that we agree to pay for the goods or services purchased (Gross up) When no exemption certificate is granted to the supplier, the company needs to withhold, declare and pay the WHT-amount to the tax authorities. A certificate confirming the remitted amounts may be provided or arranged by the payer and sent to the supplier. The supplier can declare its activities, pay taxes and reclaim the amount of WHT already paid by the company. Generally, a payment is subject to WHT if: The supplier/subcontractor is a non-resident of the project-country The services/goods are provided within the project-country (on site)
1.4
Drivers for WHT
The main drivers for WHT are; Country of the project Residence of the supplier/subcontractor Source of the income the place where the services are performed Product or service Examples: 1. A non US-resident subcontractor performs dredging activities in the US waters. Payments to this subcontractor are subject to WHT 2. Equipment is rented by the company in e.g. Ireland from a non-resident company. The rental payment is subject to WHT 1.5 Gross up
When the purchasing department decides to gross-up costs for a supplier (because there is no alternative supplier accepting the withholding tax/lack of experience in the country etc.), the following rules apply: 1. this is an exceptional purchasing decision by supplier that needs to be validated by management 2. the existing PO must be updated by adding an item Gross up linked to the appropriate GLaccount 3. Project control needs to include these costs (when third party costs) from the outset of the project.
Global Withholding Tax 2 ORACLE SET UP
This section describes the set up in Oracle for WHT. 2.1 Oracle Payables Set up To enable Withholding Tax within a company the Payables options have to be setup Oracle Payables>>Setup>>Options>>Payables>>[TAB] Withholding Tax
Use Withholding Tax: This option needs to be enabled Allow Manual Withholding: This option needs to be enabled to allow manual creation and adjustments of WHT Type distributions for the invoices. Tax Group: This field is optional. Used for defaulting the WHT Group for new suppliers entered. My preference would be to leave this field blank. Withholding Amount Basis Include Discount Amount: The invoice discount amount is also included when the WHT amount is calculated. Include Tax Amount: The tax amount (not WHT!!!) is also included in the WHT-calculation.
Global Withholding Tax Apply Withholding Tax Later in this document you will find a more detailed description (with screenshots) what happens once a WHT-code is linked to a supplier and a Tax Authority. Basically what happens is that on invoice line-level an extra line is created with the WHT-code and a negative amount to reduce the payment to the supplier. Equally it creates (based on the settings for the option Create Withholding Tax Invoices) a WHT-invoice for the Tax Authority with the amount that was deducted on the supplier invoice. To explain the other two settings: At Payment Time means the WHT is applied (as an extra line on the invoice) once the invoice is selected for payment. Be aware that these methods are applicable only for the standard setup of WHT and is not applicable for Gross-up which is discussed later in this document. The option Never will not create a WHT invoice line. Create Withholding Tax Invoices Oracle Payables will automatically create invoices based on these setting (except for the option Never). Basically the same happens as described in the previous section, but now it will create an invoice for the Tax authority that is linked to the WHT-code. Include Income tax Type on Withholding Distributions This option is specific for 1099 Reporting in the U.S. and dont need to be set up.
Global Withholding Tax Tax code and Tax Group set up Setting up Tax Codes for WHT differs from setting up the usual Tax Codes like Sales Tax. WHT needs extra setup which will be described in the next paragraphs. 2.1.1 Tax Code setup
Oracle Payables>>Setup>>Tax>>Codes
In this form you need to enter a Tax code. The proposed naming convention is WHT-<<abbreviation of country name>>-<<tax code percentage>>. So for the UK 25% WHT it looks like WHT-UK-25. The Tax Type will be Withholding Tax. Of course you need to enter the appropriate GL-account as well. Once entered you will notice the button Withholding Tax Details is highlighted.
Clicking the button opens a new form
In the next section the various options of the Withholding Tax Detail-form will be described.
Global Withholding Tax 2.1.1.1 Rate Structure Period Limit is used to limit the amount of tax withheld during a withholding tax calendar period. After you paid the amount of WHT specified the system stops creating WHT-invoices. Payables will not withhold more than the specified amount for the specified period(s). If you choose this option it is also obligatory to fill in the fields: Tax Authority, Site, Calendar and Period Limit.
In the screen prints a Specific Tax code for Period Limit is created. In the period between 01-Mar-2010 and 31-Mar-2010 no more Tax than 10.000 will be withheld. On the invoices (where applicable) in this period 25% WHT will be withheld until the amount of 10.000 in total has been withheld. Between 01APR-2010 and 30-APR-2010 the WHT percentage is 20% that will be deducted on the invoices. Before and after the specified periods no WHT will be withheld.
Global Withholding Tax Flat Rate is used when you have no amount or period limits
The above screen prints shows the setup for WHT in the UK at a percentage of 25 meaning that on every invoice where this WHT code is used 25% of the invoice amount will be withheld. If the WHT rate change frequently (e.g. on a yearly basis) another possibility is to setup a more generic WHT-code on the first form (like WHT-UK) and attach the WHT-rate to the effective dates in the Tax rates block of the Withholding Tax Details-form (as shown in the next screen print).
Amount Ranges is used when your WHT rate depends on what you already have paid during a time period. For the amount basis you can choose between Gross Amount and Withheld Amount. The time period is either per withholding tax calendar period or per invoice.
Global Withholding Tax Amount Basis is Gross Amount and Period Basis is Invoice:
This setup means that up to a total invoice amount of 100.000 25% WHT is applicable. When the total invoice amount is over 100,000 15% WHT will be applied. Example: Invoice 1 Gross amount = 40.000 WHT = 25% = 10.000 Invoice 2 Gross amount = 50.000 WHT = 25% = 12.500 Invoice 3 Gross amount = 20.000 WHT = 25% over 10.000 = 2.500 and WHT = 15% 0ver 10.000 = 1.500
Global Withholding Tax Amount Basis is Gross Amount and Period Basis is Period:
Using this setup also requires a Special Calendar setup. In the Special Calendar you define that the calendar is used for Withholding Tax. In this example the WHT-calendar is setup into 4 Quarters. Example: Invoice 1 (date 28-02-2010) Gross Amount = 40.000 Invoice 2 (date 31-03-2010) Gross Amount = 70.000 Invoice 3 (date 01-05-2010) Gross Amount = 60.000 Invoice 4 (date 01-08-2010) Gross Amount = 110.000 WHT WHT WHT WHT WHT WHT = = = = = = 25% 25% 15% 25% 25% 15% = 10.000 of 60.000 = 15.000 and of 10.000 = 1.500 of 60.000 = 15.000 of 100.000= 25.000 and of 10.000 = 1.500
Global Withholding Tax Amount Basis is Withheld Amount and Period Basis is Invoice:
When the Amount Basis is Withheld Amount the system calculates the WHT based on the already withheld amounts on previous invoices. Invoice 1 Gross Amount = 200.000 Invoice 2 Gross Amount = 600.000 WHT= 25% = 50.000 WHT= 25 % of 200.000 = 50.000 and WHT = 15% of 400.000 = 60.000 Any new invoice will be withheld against a rate of 15%
Global Withholding Tax Amount Basis is Withheld Amount and Period Basis is Period:
Using the Withheld Amount and the Period Basis is Period you are required to use the Calendar again (setup Special Calendar). Example: Invoice 1 (date Invoice 2 (date Invoice 3 (date Invoice 4 (date 28-02-2010) 31-03-2010) 01-05-2010) 31-08-2010) Gross Gross Gross Gross Amount Amount Amount Amount = = = = 400.000 100.000 300.000 600.000 WHT= 25% = 100.000 WHT= 15% = 15.000 WHT = 25% = 75.000 WHT = 25% = 100.000 and WHT = 15% = 30.000 (15% of 200.000)
Global Withholding Tax 2.1.2 Tax Groups
In the Withholding Tax Groups window you can combine multiple Withholding Tax Codes. WHT codes can be assigned to more than one group. If this is used Payables calculates invoice withholding tax based on every tax code in the withholding tax group (Based on the ranking). Because you can only apply Withholding Tax Groups to an invoice (and not an individual Withholding Tax Code) you have to create a Withholding Tax Group even if it only applies to one Withholding Tax Code. You can enforce this by clicking the Create Tax Group field in the Withholding Tax Details form. Payables>>Setup>>Tax>>Withholding>>Groups
2.1.3
Required Tax code setup for the company
Setup of the WHT Tax Codes and WHT Tax Groups is dependent on the regulations of the country the company is dealing with. Therefore the companys Tax Department has to come up with the applicable rules for the country.
Global Withholding Tax 3 SUPPLIER SETUP
Using Withholding Tax requires some extra setup on the suppliers as well. This chapter describes the setup that has to be done on the suppliers. 3.1.1 Tax Authority Setup
The Tax Authority has to be setup as a supplier with a supplier type Tax Authority. A supplier site for the Tax Authority needs to be setup as well. Optional Components for the Tax Authority setup are: A unique Pay Group (so you can separate the payments to the Tax Authorities from the other payments) A payment format that uses the Tax Authority Remittance Advice as its Separate remittance Advice
Global Withholding Tax Within the site setup one additional setup needs to be done under the Control TAB:
To prevent payment to the Tax Authority without approval from the companys Tax Department the option Hold All Payments have to be set. An additional alert to the companys Finance and the companys Tax Department needs to be defined so the WHT payment to the Tax Authority can be released manually within the Oracle system (see Chapter 4 and 5)
Global Withholding Tax 3.1.2 Supplier Setup
When we know upfront the supplier is subject to WHT and the WHT-percentage is known, a specific site for the supplier needs to be setup. The recommended naming convention for this site is WHT<<country abbreviation where supplier is subject to WHT>>-<<WHT percentage>>
To automate the calculation of WHT, besides the usual setup, two extra steps in the supplier site setup are required: 1. Fill the Withholding Tax Group-field under the Withholding Tax TAB with the correct WHTcode/percentage 2. Make sure the Allow Withholding Tax field is enabled 3. Prevent payment of the WHT-supplier site automatically by enabling the Hold All Payment field under the Control-TAB. The second requirement requires also the definition of an alert to the companys Finance and the companys Tax Department for releasing the payment hold on the invoice. (See also Chapter 4 and 5)
When the supplier is Grossed Up for WHT a supplier site also needs to be setup. The naming convention for this site should be WHT-Gross Up-<<abbreviation of the country>>. For the Gross Up site a WHT-100-<<abbreviation of the country>> code should be applied in The Withholding Tax TAB.
Global Withholding Tax 4 PROPOSED SOLUTION WHEN WHT IS KNOWN UPFRONT FOR THE PROJECT/SUPPLIER
In this solution the assumption is that the companys Procurement Department has informed the suppliers that they are subject to Withholding Tax. When supplier/suppliers is/are subject to WHT the calculation and handling of the WHT can be done automatically by the system. The required steps are: 1. 2. Oracle Payables: setup all the required WHT-codes Supplier setup: a. Setup the Tax Authorities b. Setup WHT-sites for the involved Suppliers and attach the correct WHT-codes to the WHT-sites Oracle Purchasing: Raise the Requisition/PO (as usual). The only difference with normal procedure is the Supplier Site on the PO needs to be WHT-<<>>-<<percentage>> (see supplier setup). This is an essential part in the process. PO receipt Invoice matching to the PO
3. 4. 5.
This process, besides WHT-supplier site setup, is not different from the current process so there is no change for the companys Procurement and the companys Project Control (in case this is projectrelated). Process description: 1. Book the invoice and match it to the PO
(Note: in this example the invoice is not matched to a PO)
2. Validation of the invoice (scheduled process)
(Note: in this example Validation is done manually)
Global Withholding Tax After Validation the invoice distribution looks like this:
3. Query for the WHT-invoice (Invoice Type is Withholding Tax)
Global Withholding Tax 4. Check the WHT-invoice
At this stage the alert should go to the companys Finance and Tax Department stating that a WHTinvoice has been created out of invoice that needs to be approved.
Global Withholding Tax 5. PROPOSED SOLUTION FOR GROSS UP Gross up is a decision to be approved by management. Unlike the solution described in Chapter 4 some modifications to the setup needs to be done which affects the companys Procurement and Projects Departments. The modifications/additions in Oracle to be made are: 1. A item for Gross Up needs to be created with the proper accounting 2. A new line type in Procurement needs to be setup Oracle Purchasing>>Setup>>Purchasing>>Line Types
The purpose for this new line type is to use this in a to be defined alert This setup can be skipped when the alert is based on the Gross Upitem (see 1.) 3. Project Department has to decide whether the item is linked to an existing task in the project or to a new task (specifically for the Gross Up). If the Gross Up-item has to be linked to a new task to separate it the Project templates have to be updated. 4. A specific WHT-code called WHT-100-<<Country abbreviation>> needs to be setup and linked to the correct Tax Authority 5. Set up a WHT-Gross Up site for the supplier who has been awarded the Gross Up and link the WHT100 code to it
Global Withholding Tax Process description: For the awarded Gross Up a separate PO has to be raised. The PO needs to be raised on the specific WHT-Gross Up site for the supplier This PO has to be sent to management for approval. There is no need to send this PO to the supplier. For this Gross Up the company will not receive an invoice from the supplier. To have this Gross Up booked on the Project (if project-related) and to create a payment to the Tax Authority there needs to be a record in the Payables system. To accomplish this, an alert needs to go out (after PO-approval by management) to the companys Payables and Tax Departments so the invoice can be manually created in the system. This Invoice needs to be matched to the Gross Up PO.
Global Withholding Tax After Validation of the invoice it will look like this:
A new Invoice for the Tax Authority is also created.
After this step the approval from the companys Tax Department is required. An alert has to be defined sending to companys Tax Department for releasing the Payment Hold on the Tax Authority.
6. WITHHOLDING TAX INQUIRY AND REPORTS Oracle Payables has a number of reports on Tax Authority and Supplier for Withholding Tax. These reports are standard reports: 1. Withholding Tax by Invoice Report 2. Withholding Tax by Payment Report 3. Withholding Tax by Supplier Report 4. Withholding Tax by Tax Authority report It is also possible to search for Withholding Tax via the application: Oracle Payables>>Invoices>>Inquiry>>Withheld Amounts

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