R12 E-Business Tax by André de Ridder
By Georgiana Codrescu on Feb 18, 2010
R12 introduced a completely new concept for calculating taxes on purchase and sales transactions, the E-Business Tax module.
In this tax engine, rule definitions are maintained to allow the automatic retrieval of the proper tax types to be applied on each transaction and the calculation of the tax amounts and their recoverability if applicable.
This new approach provides a single solution to calculate different types of transaction taxes in a global environment.
A number of commonly known types of transaction taxes are:
- Value Added Taxes (VAT); used in all the member countries of the EEC
- Sales Taxes; used in the USA on state, county and city level
- Import Duties
- Environmental Taxes
The E-Business Tax architecture:
- The Tax Definition tier (also known as the Regime-to-Rate flow)
consists of the tax data to be set up for each Tax Regime and Tax
that a company is subject to.
Elements to be maintained are:
- Tax Authority is a government entity that imposes and/or collects one or more taxes (e.g. HM Customs and Excise in the UK)
- Tax Regime is a set of tax rules determining the treatment of one or more taxes administered by a Tax Authority (e.g. UK VAT)
- Tax is a classification of a charge imposed by a government through a Tax Authority (e.g. VAT)
- Tax Jurisdiction is the geographical area where a tax is levied by a specific Tax Authority (e.g. UK)
- Tax Status is the taxable nature of a product in the context of a transaction and a specific tax on that transaction (e.g. Standard, Reduced, Zero, Exempted)
- Tax Rate is the percentage or fixed amount to be applied on the taxable basis
- Tax Recovery Rates to claim full or partial recovery of paid taxes
- The Configuration tier identifies the factors used in determining
the tax on each individual transaction.
These factors are referred to as the 4 P's:
- Party: the parties involved in the transaction (e.g. first party legal entity, ship from/ship to parties, bill from/bill to parties, tax registrations, type or classification of a party)
- Product: the products transacted, including the designation of Goods or Services
- Place: the places involved in the transaction (e.g. ship from and ship to locations, bill from and bill to locations, point of origin, point of acceptance)
- Process: the kind of transaction (e.g. purchases, prepayments, sales, credit memo's) and the type of sale or purchase (e.g. goods, intellectual property)
- The Rule Engine tier consists of the set of tax rules used to
determine and calculate tax on a transaction.
Tax rules must be defined for each combination of Tax Regime, Tax and Configuration Owner!
These tax rules can be seen as a conversion of the tax regulations into Tax Determining Factor sets and Tax Condition sets used to evaluate the applicability of a tax on each transaction line.
The Tax determination process is organized in Rule Types where each rule type identifies a particular step in the determination and calculation of taxes on transactions.
First a Default value - representing the standard taxation situation - is set for each rule type and then completed by defining as many rules as needed to capture every possible deviation from the standard tax regulation. On top of these rules, specific tax Exemptions and tax Exceptions can be defined for applicable Customers and Products.
A preliminary step in this process is the determination of applicable tax regimes and candidate taxes based on the first party of the transaction and the countries associated with it.
Tax rules Types:
- Place of Supply: determines the location (jurisdiction) where a transaction took place for taxation purposes
- Tax Applicability: determines the tax applicability for each previously selected tax candidate in order to eliminate the non-applicable taxes
- Tax Registration: determines the party whose tax registration is used for each tax on the transaction
- Tax Status: determines the tax status of each applicable tax on the transaction
- Tax Rate: determines the tax percentage (or fixed amount) for each tax and tax status derived from the previous process
- Taxable Basis: determines the taxable base amount or quantity
- Tax Calculation: calculates the tax amount for each applicable tax on the transaction (usually taxable basis × tax rate)
- Tax Recovery Rate: determines the recovery rate on Procure to Pay transactions
- The Services tier manages the actual calculation of the tax amounts and tax recovery amounts (if applicable).
- The Tax Management tier maintains complete tax information of all transactions for use in tax reporting (repository, reports, KPI's, dashboards)
In earlier versions of the E-Business suite, transaction tax definitions were maintained per Operating Unit.
A major improvement in the R12 tax concept is the possibility to choose the level for defining the tax rules: Common Configuration, Common Configuration with Party Override or Party Specific Configuration.
All of the R12 tax definitions can be maintained within one single window, accessible through the Tax Manager responsibility.
The way it works:
All of the transactions, entered in any module of the Procure-to-Pay and Order-to-Cash processes, pass their information (about the 4 P's) to the Tax module.
The tax engine then determines and calculates all applicable tax amounts and returns the results, with the proper accounting distribution, to the originating module allowing the proper completion of every transaction.
Detailed tax information for all transactions is stored in the tax module for reporting purposes (tax authorities, internal management).
The R12 E-Business Tax module offers a complete and flexible solution to have transaction taxes calculated in a fully automated way.
The concept also allows an easy adaption in case of changing tax regulations (e.g. tax authorities tend to change tax percentages rather frequently -> in the tax module only the Rate definition would need to be adjusted).
Feel free to contact me with any questions: email@example.com
I hope to meet some of you during one of my future training classes.
André de Ridder, Senior Instructor at Oracle University, describes the new R12 E-Business Tax module for calculating taxes on purchase and sales transactions.