Sales and Purchases Tax

SAP supports various tax codes for different countries. This chapter covers only sales purchases taxes. Sales/Purchases Taxes are often referred to as VAT (Value Added Tax) in most countries. These are taxes levied on invoiced goods and services payable by the consumer and are held on behalf of the Tax Authority. There are two major VATs. Namely, Input Tax and Output Tax. Input Taxes are levied on purchases of goods and services received from vendors. While on the other hand, Output Taxes are charged on sales of goods and services provided to customers. For example, company A buys goods from company B and is charged 10% on the invoice price of the goods. Company A sells and charges customer Y a 10% VAT. Company A reconciles its VAT account, and the difference is sent to the tax authority. In the case of the United States, the VAT is sent to the United States government revenue department and in the UK VAT is sent to HMRC (Her Majesty Revenue and Custom). Figure 10-1 illustrates this scenario.

The specification of tax category is very important, because it allows the system to determine whether tax posted is an input tax or output tax and make posting to the appropriate accounts in the system.

If you do not want to post tax manually (i.e., you want the system to automatically post tax during document posting), then you must select Post Automatically Only in the appropriate General ledger.

Basic Settings

SAP S4 HANA comes with standard calculation procedures settings for most countries. It is recommended that you stick with the standard settings in the system, because they are up to date and typically adequate for most tax requirements. The only time you should define calculation procedure for your country is only when your country settings are not included in the standard setting system. However, we recommend that you check the standard calculation procedure to make sure that your country setting is included in the list of calculation procedures provided by SAP in the system.

The standard calculation procedure setting comes with the basic specifications for sales/purchases taxes and contains the calculation and account posting for various countries.

To check the condition types and procedures for every tax group and application rules, follow this menu path: IMG: Financial Accounting ➤ Financial Accounting Global Settings ➤ Tax on Sales/Purchases ➤ Basic Settings ➤ Check Calculation Procedure.

The next step in this activity is to also check if your country is assigned to the calculation procedure provided in the system by SAP. Otherwise, you have to assign your country to an appropriate tax calculation procedure or else your tax calculation will not work.

Check Calculation Procedure

As mentioned above, it is advisable that you use the standard calculation procedure supplied by SAP in the system.

The standard calculation procedures provided by SAP in the system come with the basic specifications for sales/purchases taxes containing the calculation and account postings for various countries. Here you will check the Condition types and Procedures for every tax procedure groups and the applicable calculation rules.

To assign your country to your calculation procedure, follow this menu path: IMG: Financial Accounting ➤ Financial Accounting Global Settings ➤ Tax on Sales/Purchases ➤ Basic Settings ➤ Assign Country to Calculation Procedure.

The Change View “Assign Country _> Calculate Procedure”: Overview screen is displayed (Figure 10-2).

Using the position button at the bottom of the screen search for your country code. For example, the country code for the United States of America is US, for Great Britain is UK, for Canada is CA, and so on.

Assign your country calculation procedure to your country (Figure 10-2). In our activity, our country is USA, and the calculation procedure is TAXUS. Upon the assignment of your tax calculation to your country, save your work by clicking the save button at the bottom right of the screen.

For any other country other than the USA, you have to search for the appropriate country’s tax procedure using the search function button and assign it adequately.

The next step in this activity is to define tax codes for sales and purchases. The tax code you will define for sales will be specific to your company based on your country’s requirements.

Define Tax Codes for Sales

A tax code contains one or more tax rates that are applicable to different tax types represented in SAP S4 HANA. It is recommended that you define different tax codes for different tax types and rates. If your company has operations in more than one country, you should define separate sales/purchase tax codes for each country. Secondly, in some countries, you must report tax-exempt or non-taxable items to the tax authority. Hence, we advised that you should define 0 (zero) value tax code to report tax-exempt or non-table sales.

Problem: Let’s assume in the US, the output sale tax (VAT) is 10%. Spoxio Inc. – C100 want you to define 10% sales tax codes that users will apply to sales during document entry and specify the G/L account output sales tax are posted to.

To define your tax code for sales and purchases, follow this menu path: IMG: Financial Accounting ➤ Financial Accounting Global Settings ➤ Tax on Sales/Purchases ➤ Calculation ➤ Define Tax Codes for Sales and Purchases. The Country dialog box pops up. Enter your country code in the Country field and click the continue bottom at the bottom right of the dialog box. The Maintain Tax code: Initial Screen is displayed (Figure 10-3).

Update the following fields:

Country Key: Enter your company code country tax code in this filed. This is your country identification key. This is usually the first two characters of your company code country. For example, the country code for the United States of America is US, for France is FR, Italy IT, and so on. In this activity, we used US as our country code since our company code country is the United States of America.

Tax Code: Enter a tax code in this field. This is a two-digit character. SAP S4 HANA comes with a predefined tax code in the system. To access the predefined tax code provided by SAP in the system, use the search function by the tax code field. A list of tax codes is displayed. Select the appropriate tax code that best fit the item you are creating a tax code for, better still, you can create your own tax code to meet your requirements. In this activity, we are creating our tax code as the list of tax codes provided in the system did not meet our requirements. The tax code we are creating is I2(i2).

Hit enter on your keyboard for the system to accept your tax code. The Properties screen pops up, as in Figure 10-4.

Update the following fields:

Tax code I2: Enter a description that best describes your tax code in the description field. In our example for tax code I2, we used “10% Output/Sales tax” as our tax code description.

Tax Type: This field is mandatory. SAP S4 HANA comes with a predefined tax type in the system. Using the search function, select the tax type A- Output tax

Click the Continue button at the bottom right of the screen. The Maintain Tax Code: Tax Rate screen is displayed (Figure 10-5).

Using the scroll bar at the right side of the screen, search for the Acct key (Account key) from the account keys list supplied by SAP in the system that meets your requirement. This activity assumes that 10% is the tax rate for our tax code. Since we are creating an output tax for our tax code, we are using A/R Sales Tax 1 Inv – MW1. Enter your percentage rate in the A/R Sales Tax 1 Inv – MW1 field. In this activity, we used 10% as the percentage rate for our tax code (Figure 10-5).

The next step is to define the tax account for our tax code. This setting determines the G/L accounts where the tax amounts arising from tax calculations are posted. The system will apply 10% tax assigned to our tax code to the invoice amount and calculate the tax amount for the output tax. The calculated tax will then be posted to the G/L account you have assigned in the next activity.

Define Tax Account for Output/Sales

In this step, we will specify the G/L account for tax type that output taxes are posted to. The system will automatically determine the G/L account that tax type is posted based on our specifications. The system will calculate the tax amount based on the percentage entered in our tax code and apply the specified tax type and automatically post the tax amount to the account you assigned to your tax code.

To go to the screen where account assignment is customized, follow this menu path: IMG: Financial Accounting ➤ Financial Accounting Global Settings ➤ Tax on Sales/Purchases ➤ Posting ➤ Define Tax Accounts or you could use the Transaction code (TC): OB40.

On the SAP Easy Access screen (Figure 10-6), enter OB40 in the command field at the top left of the screen. When you press the enter key on your keyboard, the Configuration Accounting Maintain: Automatic Posts – Procedures screen is displayed (Figure 10-7).

Using the scroll bar at the left side of the screen search for transaction key Sales tax 1 – MW1. When you double click transaction key Sales tax 1 – MW1, the Enter charts of accounts dialog box pops up. Enter your chart of account ID in the Chart of Accounts field. In this activity, we used CA10 as our chart of account ID. Click continue at the bottom right of the screen, the Configuration Accounting Maintain: Automatic Posts – Procedure screen is displayed. Click the save button at the bottom right of the screen. The Configuration Accounting Maintain: Automatic Posts – Accounts screen comes up. This is the screen where you will assign a G/L account where output tax will be posted.

Enter the G/L account for output tax in the account field and save your work.

Define Tax Codes for Input/Purchases

The same steps are followed when customizing the tax code for input/purchases. The only difference is using a different tax code, tax type, and G/L account. It is important to create different tax code for purchases for different countries (if your company operates in more than one country), because each country tax requirements and specifications are different. Now let’s define the tax code for input/purchases.

Problem: Spoxio Inc. accounting team want you to define a 10% Purchase tax code that users can apply to purchases during document entry and to specify the GL account Purchase Tax are posted to.

To define your tax code for purchases, follow this menu path: IMG: Financial Accounting ➤ Financial Accounting Global Settings ➤ Tax on Sales/Purchases ➤ Calculation ➤ Define Tax Codes for Sales and Purchases. The Country dialog box pops up. Enter your country code in the Country field – US and click the Continue at the bottom right of the screen. The Maintain Tax code: Initial Screen is displayed.

Update the following fields:

Country Key: Enter your company code country tax code in this filed. This is your country identification key. This is usually the first two characters of your company code country. For example, the country code for the United States of America is US, for France is FR, Italy IT, and so on. In this activity, we used US as our country code since our company code country is the United States of America.

Tax Code: Enter a tax code in this field. This is a two-digit character. SAP S4 HANA comes with predefined tax codes in the system. To access the predefined tax code provided by SAP in the system, use the search function by the tax code field. A list of tax codes is displayed. Select the appropriate tax code that best fits the item you are creating a tax code for; better still, you can create your own tax code to meet your requirements. In this activity, we are creating our tax code, as the list of tax codes provided in the system did not meet our requirements. The tax code we are creating is U2.

Hit enter on your keyboard for the system to accept your tax code. The Properties screen pops up, as in Figure 10-9.

Note

Tax codes are unique; you cannot use the same tax code twice, when defining another tax code with a different tax type. For example, for a tax rate of 5%, use I1, as your tax code, I2 for 10%, and so on.

Update the following fields:

Tax code U2: Enter a description that best describes your tax code in the description field. In our example for tax code U2 we used “10% Input/Purchases tax” as our tax code description.

Tax Type: This field is mandatory. SAP S4 HANA comes with predefined tax type in the system. Using the search function, select the tax type V– Input tax

Click the Continue button at the bottom right of the screen. The Maintain Tax Code: Tax Rate screen is displayed (Figure 10-10).

This activity assumes that 10% is the tax rate for our tax code. Since we are creating an output tax for our tax code, enter a percentage rate in the A/P Sales Tax 1 Exp. – VS1 Field. In this activity, we used 10% as the percentage rate for our tax code (Figure 10-5).

The next step is to define the tax account for our tax code. This setting determines the G/L accounts where the tax amounts arising from tax calculations are posted. The system will apply 10% tax assigned to our tax code to the invoice amount and calculate the tax amount for the output tax. The calculated tax will then be posted to the G/L account you have assigned in the next activity.

Define Tax Account for Output/Sales

Note

Before proceeding with this exercise, we advise that you should create a G/L you are assigning to your tax code.

In this activity, you specify the G/L account for posting taxes. The system will automatically determine the G/L account where the tax type is posted. To go to the screen were account assignment is customized, follow this menu path: IMG: Financial Accounting ➤ Financial Accounting Global Settings ➤ Tax on Sales/Purchases ➤ Posting ➤ Define Tax Accounts or you could use the Transaction code (TC): OB40.

Note

Because of the complexity involved in using the menu path, we recommend that you use the TC: OB40 instead of using the menu path.

In the SAP Easy Access screen (Figure 10-6), enter OB40 in the command field at the top left of the screen. When you press the enter key on your keyboard, the Configuration Accounting Maintain: Automatic Posts – Procedures screen is displayed.

Using the scroll bar at the left side of the screen search for transaction key Input tax – VST from the list of procedures listed on the screen. When you double click transaction key Input tax – VST, the Enter charts of accounts dialog box pops up. Enter your chart of account ID in the Chart of Accounts field. In this activity, we used CA10 as our chart of account ID. Click continue at the bottom right of the screen, the Configuration Accounting Maintain: Automatic Posts – Procedure screen is displayed. Click the save button at the bottom right of the screen. The Configuration Accounting Maintain: Automatic Posts – Accounts screen comes up. This is the screen where you will assign the G/L account where the input tax will be posted.

Enter the G/L account for output tax (154000) in the account field and save your work.

Note

As we said earlier, if you have not created your G/L for this activity, when you try to save your customization, the system will tell you that your G/L is created. You can either stop and create your G/L for input/purchase tax that you will be assigning here or you force the system to accept the G/L account you have assigned temporarily. However, refer to Appendix 1 – Chapter 10 for a sample of the G/L account for this activity.

The next step in this activity, which rounds up this exercise, is to explain how to assign taxable codes for non-taxable transactions in SAP S4 HANA. In some countries, it is mandatory to report tax-exempt or non-taxable items to the tax authority. SAP S4 HANA allows you to report tax-exempt or non-Taxable items by assigning a tax code to non-taxable transactions.

Assign Taxable Codes for Non-Taxable Transactions

When you report tax-exempt or non-taxable sales/purchases to a tax authority, it is best to define a 0 (zero) value tax code to track these types of transactions.

In this activity, you specify tax codes for input tax and output tax for your company code, which is used to post non-taxable transactions to the relevant GL accounts.

Tip

SAP S4 HANA provided standard non-taxable tax codes for input and output for most countries. Although standard non-taxable codes are provided in the system, the system also gives you the flexibility to create your own non-taxable tax code if you chose to do so. However, we recommend that you use the standard non-taxable codes supplied by SAP instead of creating your own codes.

To assign tax code to tax-exempt or non-taxable transactions, follow this menu path: IMG: Financial Accounting➤ Financial Accounting Global Settings ➤ Tax on Sales/Purchases ➤ Posting ➤ Assign Tax Codes for Non-Taxable Transactions. The Change View “Allocate Co. Cd. ➤ Non-Taxable Transactions” Overview screen comes up (Figure 10-13).

Search for your Company Code using the position button at the bottom of the screen. Assign V0 (exempt from input tax) to input tax and A0 (exempt from output tax) to output tax for your company code. Then save your work by hitting the save botton at the bottom right of the screen.

Summary

This chapter explained sales and purchase taxes and gave examples of sales and purchase taxes in practice. You looked at how sales and purchase taxes are reconciled and how the differences are passed on to the tax authority. You also looked at the various tax categories in SAP and learned how they are applied in the system. Thereafter, you looked at the basic settings involved in customizing taxes and learned about their relationship to country-specific settings. You learned how to assign a country to the calculation procedures.

You created two tax codes for sales and purchases taxes using two-digit codes. You went on to look at how to define tax accounts so that the system will automatically post them where you specify.

Finally, you learned how to assign taxable codes to non-taxable transactions using the standard non-taxable codes.

In Chapter 11, you will look at the final aspect of bank customizing – the cash journal. You will learn how to set up a new cash journal, define a company code for the cash journal, and assign G/L accounts where cash transactions are posted.