Setting up a reverse charge for customers on vendor invoices

Prerequisites:

  • Select EU Reporting on the General Parameters form.
  • Create an item-based tax system on the Tax Systems form. Country-appropriate options, including Active for Purchasing, should be selected for the tax system.

The reverse charge tax must be calculated as a percentage of each post. One tax account is posted as a debit and another tax account is posted as a credit. The reverse charge is used to create offsetting entries for goods between countries, when you want to record the transaction, but not make a payment.

  1. On the Tax Jurisdictions form, set up a new tax jurisdiction for the reverse charge:
    Tax System
    Select the item-based tax system, generally Tax System 1.
    Tax Jurisdiction
    Specify a code for the jurisdiction, for example, 1.
    (Description)

    Specify a description, for example, EU Reverse Charge.

  2. On the Tax Codes form, specify a new tax code for purchase exemptions:
    Type
    Specify Exemption.
    Tax System
    Select the item-based tax system, usually Tax System 1.
    Tax Code
    Specify a new tax code, for example EUPE.
    Description
    Specify the description, for example EU Purchases Exemption.
    Tax Jurisdiction
    Select the jurisdiction you created in the previous step, for example EU Reverse Charge.
    Tax Rate
    Specify an appropriate rate, other than 0 (zero). A non-zero tax rate is required to trigger selection of the item-level tax code set for this jurisdiction on selection of the EUPE tax code on the PO header.
    Category
    Leave this field blank.
    Other options
    Ensure that these options are cleared:
    • Include Price
    • Include Discount
    • Deductible
  3. On the Tax Codes form, set up another tax code for the reverse charge:
    Type
    Specify Rate.
    Tax System
    Select the item-based tax system, usually Tax System 1.
    Tax Code
    Specify a new tax code, for example EUIMP.
    Description
    Specify the description, for example Reverse Charge 25%..
    Tax Jurisdiction
    Leave this field blank.
    Tax Rate
    Specify a rate that matches your tax rate. For example, if your tax rate is 25%, set this reverse charge rate to 25%.
    Category
    Select either Reverse Charge or EU Purchase. Both categories are set to create offsetting tax entries. The VAT Report is sorted by category. You can modify the category description on the EU VAT Reporting Categories form if necessary.
    Other options
    Ensure that these options are selected:
    • Include Price
    • Include Discount
    • Deductible

    Specify the appropriate accounts in the Accounts and VAT Accounts tabs:

    • A/R Tax Acct
    • A/R Tax Acct in Process
    • A/P Tax Acct
    • Acquisition VAT Acct
  4. On the Tax Line Numbers form, create a line number for sales tax and purchase tax.
    This form is used to tie the tax code to a specific number of a box in the VAT Report. The line numbers in this form refer to the lines in the fiscal department tax formula. If line numbers are assigned, you can sort the VAT Report by line number to more easily fill in the required fiscal authority reports.
    1. For Purchase VAT, specify this information:
      Line Number
      Specify the line number (box) from the VAT advance tax return document. These are the numbered lines on the left side of the tax document. Specify only line numbers where an amount must be entered. For example, specify 1.
      Description
      Specify the description for that line from the tax document. For example, specify EU Purchase.
      Effect Year
      Specify the effective year for the tax document that uses these line numbers.
      Tax Type
      Set the tax type for the line number to P (Purchase).
      Number for Tax Basis
      If this line number includes an amount entry box in the first column on the tax document, specify the box number here. For example, specify 1.
      Number for Tax
      If this line number displays an amount entry box in the second column on the tax document, specify the box number here. For example, specify 2.
      Tax System
      Specify the tax system associated with the line number. If there is only one tax system, this field is disabled.
      Tax Code
      A combination of one rate type tax code and one exempt type tax code must be assigned per line number. Continuing the example, specify tax codes EUPE and EUIMP.
    2. For Sales VAT (Reverse Charge), specify this information:
      Line Number
      Specify the line number (box) from the VAT advance tax return document. These are the numbered lines on the left side of the tax document. Specify only line numbers where an amount must be entered. For example, specify 2.
      Description
      Specify the description for that line from the tax document. For example, specify EU Reverse Charge Sales VAT.
      Effect Year
      Specify the effective year for the tax document that uses these line numbers.
      Tax Type
      Set the tax type for the line number to S (Sales Tax).
      Number for Tax Basis
      If this line number includes an amount entry box in the first column on the tax document, specify the box number here. For example, specify 3.
      Number for Tax
      If this line number displays an amount entry box in the second column on the tax document, specify the box number here. For example, specify 4.
      Tax System
      Specify the tax system associated with the line number. If there is only one tax system, this field is disabled.
      Tax Code
      A combination of one rate type tax code and one exempt type tax code must be assigned per line number. Continuing the example, specify tax codes EUPE and EUIMP.
  5. Use the Tax Codes for Item by Jurisdiction form to define, for each item, which EU tax code (type rate) should be used when reverse transactions are generated.
    Continuing the example, specify this information:
    Tax System
    Specify the item-based tax system.
    Tax Jurisdiction
    Select the tax jurisdiction that was defined in Step 1, for example, 1.
    Item
    Select an item to which the tax code applies.
    Tax Code
    Specify the tax code that is defined for reverse charge transactions, for example EUIMP.
  6. On the Vendors form, assign to vendor records the EU exempt tax code that you set for EU Reverse Charge Jurisdiction, for example, EUPE.
    On the Purchase Orders form, when a vendor is selected, the EU exempt tax code from the Vendors form is automatically assigned to the purchase order.

    On the Purchase Order Lines form, the tax code defaults to the code that was set on the Tax Codes for Item by Jurisdiction form.