Tax configuration in sap: Tax procedure, Tax code & Tax jurisdiction code

For calculation of tax, we need to have tax base amount and tax rate.

Tax rate is the tax percentage which is to be applied on tax base amount to arrive at tax amount. Tax
base amount is the amount on which tax rate is to be applied.

As directed by tax authority in a country:

 Every country has a list of different taxes which may be applicable on a business transaction
in the country.
 Different business transaction might invite different types of taxes with different tax rates.
 Tax base amount can be inclusive or exclusive of cash discount.

Once tax base amount and tax rate is known for a transaction, tax amount can be calculated.

Calculated tax amount along with business transaction details need to be recorded.

Let’s see how sap handles the above requirements for tax calculation

Every country has a list of different taxes which may be applicable on a business transaction in the
country.

TAX PROCEDURE

In sap, country specific tax procedure is created and assigned to country. Tax procedure is a list of tax
condition types. Each condition type represents a type of tax applicable in the country.

Hence tax procedure represents the list of different types of taxes which are valid in the country.

TAX CODE, TAX JURISDICTION CODE

Different business transaction might invite different types of taxes with different tax rates.

In sap, tax code is created to store the value of tax percentage.

A business transaction might invite different type of taxes with different tax rates. Hence in sap, tax
condition types are assigned to tax percentage. This combination of tax condition types and
corresponding tax percentage is stored in tax code.

A tax code in sap is a two digit alphanumeric code which stores different tax conditions (defined in
tax procedure) and corresponding tax percentage.
Normally tax code is created at national level but in few countries like USA, different areas have
different tax authority and each tax authority decides its own tax percentage. Hence applicable tax
percentage depends upon which tax authority the business transaction belongs to.

In sap, each tax authority is created as tax jurisdiction code.

Hence in USA, tax percentages are assigned to tax condition types for the combination of tax code
and tax jurisdiction code.

When a business transaction happens, tax code is supplied and system derives tax jurisdiction code
information. Corresponding tax percentage maintained against tax condition type is applied for tax
amount calculation. Tax amount is posted to GL account assigned to condition type.

With huge number of tax jurisdiction code (tax authority) and each are regulating its own tax
percentage, it becomes very challenging for companies to keep track to up to date tax percentage.
Instead of committing resources on keeping track of tax percentage, companies take help from other
companies who maintain up to date tax percentage for each tax jurisdiction code.

Companies like vertex, taxware, sabrix maintain tax percentage on their server. When transaction is
entered in sap, software determines the jurisdiction code and fetches tax percentage from vertex/
taxware/ sabrix server.

Hence companies free themselves from the load of maintaining tax percentages by using the services
provided by other companies. Hence tax percentage is fetched from external sources like vertex,
sabrix and taxware.
TAX BASE AMOUNT

Tax base amount can be inclusive or exclusive of cash discount.

In sap, for each company code we can define if tax base amount is inclusive of cash discount or
exclusive of tax discount.

POSTING OF TAX AMOUNT

When a business transaction is recorded, tax code is supplied. System calculates the tax amount for
each condition type. Condition types are mapped to account key and account key is linked to GL
account.

When document is posted, system automatically picks the mapped GL account for posting tax
amount.

Let’s put the entire concept tog ether to understand calculation and posting of tax amount in sap

From entered document, system knows the company code. Company code leads to country and
country leads to tax procedure.

From tax code which is entered while posting document, system fetches the percentage against each
tax condition type and applies the percentage on determined tax base amount.

— Tax condition types are assigned tax percentage in tax code.

— Tax condition types are assigned tax percentage in (tax code and tax jurisdiction code)
combination.

— Tax percentage is fetched from external sources like vertex/ taxware/ sabrix etc on the basis of tax
jurisdiction code.
Calculated tax is posted in GL account assigned to tax condition type.