Does SAP always calculate VAT on sales?

Dmitry Kaglik

January 13, 2014

SAP

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Taxes are an inevitable part of our life. Like death is.

The most common tax in the business world is value added tax (VAT), or sales tax. You have probably read the article that describes the difference between the two.

VAT or sales tax should be calculated on every sale the company makes. Even if the transaction is non-taxable, or taxable with a zero percent rate, you need to prove it first. You probably know that most cross-border sales are usually tax-free, that some customers don’t pay VAT thus VAT should not be charged on sales to them, that some products (usually books, food etc) have special low VAT rates.

How can you manage all this complexity?

SAP gives you a wonderful tool to calculate taxes during the sales process: pricing conditions, which are part of pricing procedures. Pricing conditions for taxes usually consider the following parameters:

  • Country of the company
  • Country of the customer
  • Tax category of the customer
  • Tax category of the product or service

For each of the possible combinations you can determine the tax code, which will bring up the tax rate for the particular item in the invoice. The rates and other details of tax code are stored in special tables in SAP.

Next, tax reports can show you tax and tax base amounts for each of the tax codes, together with the possible drilldown to the document level.

But is it mandatory to calculate VAT or sales tax in SAP for all transactions?

Of course not! It is not possible sometimes to ask SAP for this calculation.

Here is a short list of examples, where tax calculation happens externally.

Sales tax in the USA

There are so many “tax jurisdictions” in the USA, and their tax rates change so often, that it is impossible to catch up with all of the changes. In this case, special external systems (taxware) are there to help. If necessary, SAP can transmit their amount, ZIP code of the customer, date of the sale, and get an amount of tax to be added to the sales invoice.

Sales managed in external system

There are cases when companies manage all or some portion of their sales in external operational systems. The best examples are billing systems in telecoms, or highly specialized IT services systems. It is quite often that these systems calculate and produce the customer invoice. In this case, the external system is responsible for tax calculation. SAP is only a receiver of the information for financial reporting. There are different ways to organise the transfer: IDOC, batch input etc. However, whatever the transfer mechanism is, the SAP team needs to ensure that tax is transferred between the systems in the way it was shown on the customer invoice, and not re-calculated again.

Retail

Retail sales are one of the flavours of the previous point, but still worth separate mention. Effectively, retail companies manage their [retail] sales externally, through the Point-of-Sales (POS) system. Of course, the SAP ECC system has its own version of POS, which can use SAP functionality to calculate taxes. But it is more common to use 3rd party solutions for POS terminals. Each POS terminal then calculates VAT either itself, or through the permanent connection to the POS management system. Periodically, the POS management system sends the data to the special SAP POS DM (POS Data management) system. POS DM aggregates the data before the financial part of it is sent to SAP ERP system for financial records. Because both POS DM and ERP system are SAP-based, the most common mechanism on the last leg is IDOC.

As you can see, SAP ERP system receives the tax data from POS terminal through a number of intermediary systems. It is very important to test that tax amounts are calculated and aggregated correctly on each part of the journey.

Which system is responsible for the calculation of taxes in your company?

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