Create VAT Codes for VAT Transaction Entry and Reporting

This document explains how you create VAT codes, which are the key tax component in M3 Business Engine.

Outcome

The company has a set of VAT codes, each one defining the VAT method to apply and the VAT rates to use for a specific region from a specific date.

Use this procedure to connect a VAT code to a supplier/payer in 'Supplier. Define Purchase & Financial' (CRS624/F), a customer/payer in 'Customer. Open' (CRS610/J), an item in 'Item. Open' (MMS001/G), and an item warehouse in 'Item. Connect Warehouse' (MMS002/I). M3 Business Engine then automatically proposes a matching VAT code in a business transaction.

For more details, refer to the documents listed in the See also section.

Before you start

Follow these steps

To create a VAT code, follow these steps:

  1. Start 'VAT Code. Open' (CRS030/B).

  2. Define the values described in the Parameters to set table for each VAT code you define in (CRS030) and its sub-program 'VAT Rate. Open' (CRS031).

Parameters to set

This table shows which parameters to set in (CRS030):

Field The field indicates...
VAT code … a numeric ID of a component that determines the VAT method and VAT rate to apply. The valid alternatives are 00–99. Note that you should use VAT code 00 for transactions outside the scope of VAT, that is, exempt supplies.
VAT method

… the VAT method, that is, how to calculate VAT for this VAT code. The decision about whether to charge VAT is based on a combination of country codes and VAT method.

Alternatives

1 = Normal VAT. 2 = Combined VAT. 3 = Chain VAT. 7 = Purchase of goods by intermediate party ("middleman") in triangular trade. 8 = Reverse charge of VAT.

VAT Method 1

VAT method 1 (Normal VAT): M3 Business Engine applies one VAT rate and creates one VAT payable or VAT receivable transaction. You also use this method for normal EU VAT.

The following applies:

– If a VAT code with VAT method 1 is used on a domestic invoice (base country and From/to country being the same), one VAT payable transaction is created for the customer invoice and one VAT receivable transaction for the supplier invoice.

– If a VAT code with VAT method 1 is used on an EU invoice (base country and From/to country being two different EU member states; see below), no VAT transaction is created for the customer invoice. However, one VAT payable transaction and one VAT receivable transaction is created for the supplier invoice.

– If a VAT code with VAT method 1 is used on a non-domestic/non-EU invoice (one or both of base country and From/to country are non-EU member state), no VAT is created, neither for customer invoices nor for supplier invoices.

Prerequisites for EU VAT are: 1) The base country is not the same as the From/to country when registering a supplier invoice in (APS100). 2) Alternative 1 is selected in the Extrastat/Intrastat field in (CRS045) for both the base country and the From/to country. 3) A VAT registration number is entered for the supplier in (CRS620/E).

For examples of purchase using VAT method 1, see below.

VAT Method 2

VAT method 2 (Combined VAT): Two VAT rates are used in combination with two VAT accounts for VAT receivable and/or VAT payable. Two VAT calculations are done, both based on the same amount. Combined VAT is only used in very specific situations. It does not work in combination with EU VAT.

VAT Method 3

VAT method 3 (Chain VAT): Two VAT rates are used in combination with two accounts for VAT receivable and/or VAT payable. Two calculations are made. The first calculation is based on the VAT base amount. The second calculation is based on the sum of the VAT base amount and the first VAT calculation.

VAT Method 7

VAT method 7 (Purchase of goods by intermediate party in three-party trading): This VAT method identifies the VAT code as the replacement VAT code for transactions that meet the requirements for purchase of goods by a "middleman" in three-party trading for direct resale, that is, the goods are delivered directly from the vendor to a customer in another EU member state:

1. Each party involved – the customer, the intermediate party and the vendor – is in a different EU member state.

2. Each one has a VAT registration number in the respective country.

3. The vendor delivers the goods directly to the customer.

This VAT method is only applicable to companies acting as intermediate party in such a scenario, since the intermediate party does not pay VAT on that type of third-party acquisitions. The VAT method enables companies to be VAT-exempted and to be able to declare this type of transactions in the VAT declaration. More specifically: the intermediate party uses VAT codes with VAT method 7 on the purchase order it creates based on a customer order with line type 2. (The purchase order is sent to the vendor making the direct delivery.) When the intermediate company matches the invoice from the vendor against the purchase order, M3 Business Engine creates no debit or credit account entries for VAT.

Note that the same VAT code must exist in a VAT exception for replacement of VAT codes in (TXS020) where alternative 3 (Purchase of goods by intermediate party in three-party trading) is selected for control object &TRIA. For details, see the topic VAT Exemptions.

VAT Method 8

VAT method 8 (Reverse charge of VAT): This VAT method is used when a reversed VAT liability is applied, meaning that it is the purchaser and not the vendor that is liable to VAT. The VAT is not charged to the purchaser; instead the invoice states that reverse charge of VAT is applied and the reasons for this. One VAT payable transaction and one VAT receivable transaction are created. This VAT method is not used for customer invoices.

Reverse charge of VAT is used for offset VAT outside the scope of normal EU VAT. Example: A lawyer temporarily working in Switzerland invoices the Swiss employer for services rendered. This export invoice does not include VAT, since Switzerland is not part of the EU. However, the Swiss company is required to report VAT for that invoice and so uses a VAT code with VAT method 8.

VAT reported on payment day

… whether to use payment date as the "taxation point".

Normally, most businesses declare VAT on an invoiced basis, since tax authorities of each country use customer and supplier invoices as the "tax point" for VAT payable and VAT receivable. However, it is possible in some businesses to report VAT on a cash basis (VAT on payments), based on customer and supplier invoices paid during any VAT reporting period. M3 Business Engine enables you to configure VAT codes to report VAT only on paid supplier or customer invoices. During any period, the VAT amounts on supplier and customer invoices are booked to VAT suspense accounts. At the end of each period, a separate VAT run is made to account for VAT only on paid or partially paid invoices. In this process, VAT paid on customer payments and VAT received on supplier payments is moved from the VAT suspense accounts to the normal VAT payable and receivable accounts. Then the net VAT liability or debt can be reported to tax authorities in the normal way.

If this check box is selected, VAT is based on either the accounting date or invoice date, depending on your selection in 'Settings - General Ledger' (CRS750/F). The VAT is automatically booked to the accounts reserved for VAT Payable or VAT Receivable.

If the check box is selected, VAT is based on the payment date. VAT is then booked to a VAT suspense account when the invoice is created or recorded. Accounting types 113, 114, 213 and 214 in 'Accounting Rule. Set' (CRS395) are reserved for this type of VAT. When payment is made, you create a contra transaction in 'VAT on Payment. Create Voucher' (TXS115) to post the VAT to the VAT Payable/Receivable account, with the payment date as the VAT date.

VAT corrections … whether the VAT code is reserved for creating manual VAT corrections only. By using a separate VAT code for this purpose, you can easily identify such corrective transactions in VAT reporting.
VAT override

… whether M3 Business Engine will always calculate VAT for this VAT code.

In certain cases, agreements between countries make it necessary to be able to overrule the default VAT decision of M3 Business Engine. For example, deliveries from Switzerland to Liechtenstein are subject to VAT as are export deliveries from Russia to other countries. The company manages such exceptions by selecting this check box for the applicable VAT codes. M3 Business Engine then always calculates VAT for this VAT code, even if the countries of the parties involved in normal circumstances would have resulted in a negative VAT decision.

The standard scenarios result in the following output if you select this check box: 1) For domestic customer invoices: domestic VAT is calculated. 2) For EU customer invoices: domestic VAT is calculated. 3) For non-domestic/non EU customer invoices: domestic VAT is calculated. 4) For domestic supplier invoices: domestic VAT is calculated. 5) For EU supplier invoices: offsetting EU VAT is calculated. 6) For non-domestic/non-EU supplier invoices: domestic VAT is calculated.

This table shows which parameters to set in (CRS031):

Field The field indicates...
Country … a code for the country for which the VAT rate is applicable. If this field is left blank, the VAT rate is not limited to a specific country.
Area/state … a province that has been granted a different VAT rate than the rest of the country to which it belongs. Examples of such provinces are the Canary Islands, Jersey Island and Finnish land.
From date … the date from which the VAT rate is considered valid by M3 Business Engine.
VAT rate 1 … the VAT rate expressed as a percentage to use for the VAT code. The rate can be defined with up to two decimals.
VAT rate 2 … the second rate to use if you selected VAT method 2 (combined VAT) for the VAT code.
Deductible VAT 1

… the portion of VAT that will be automatically deducted from the VAT receivable and added to the cost during the recording of supplier invoices in (APS100).

The value is used in the calculation of VAT rate 1. If the field is left blank, no deduction is made. If you enter 10, then 10% of the VAT receivable is deducted. If you enter 100, the entire VAT receivable amount is deducted.

Companies are not always permitted to reclaim the entire VAT on certain supplies of goods and services to businesses, such as promotional and marketing expenses, or they are only able to reclaim the VAT partially. M3 Business Engine supports this requirement by using a deductible percentage on a specific VAT code to prevent the VAT receivable from being incorrectly reclaimed. We recommend that you use a FAM function with automatic VAT accounting selected when recording supplier invoices with deductible VAT. Otherwise, you would need to enter VAT amounts manually in (APS100/F).

Example 1

Deduction based on net invoice amount: A company rents a car for a cost of EUR 1,000 including 25% VAT. However, it can only reclaim 75% of the VAT. In practice this means that the non-reclaimable VAT must be deducted from the VAT receivable and included in the VAT base amount when the invoice is recorded. When the invoice for the car rent is received and is ready for entry in (APS100), the company selects a FAM function in (APS100) specifying that VAT account entries are automatically created and that the VAT calculation method is Net. On the coding panel, the invoice net amount (the VAT base amount), that is, EUR 800, is entered together with a VAT code with a VAT deductible percentage of 25. When you press Enter, M3 first calculates the VAT without any deduction: 25% VAT (0.25) multiplied by the invoice net amount of 800 = 200. 25% of the 200 is not reclaimable so M3 multiplies 200 by 0.25 = 50. The EUR 50 are then automatically added to the VAT base amount. The result is two accounting lines on the coding panel, one for the VAT base amount of 850 and one for the reclaimable VAT of 150.

Example 2

Deduction based on gross invoice amount: The scenario is the same but in this case the company selects a FAM function with the VAT calculation method Gross. On the coding panel, the net amount of 1,000 is entered together with the VAT code with the deductible percentage of 25. When you press Enter, M3 first calculates the VAT without any deduction: the invoice gross amount of 1,000 is divided by 1.25 = 800. Consequently, the VAT is 200 (1,000 minus 800). 25% of the 200 is not reclaimable, so 200 is multiplied by 0.25 = 50. The EUR 50 are then added to the VAT base amount. The accounting lines created are the same as in the previous example.

Deductible VAT 2 … the same value as in the 'Deductible VAT 1' field but applies to VAT rate 2 instead. This value is only used if you selected VAT method 2 or 3 above.
Note: M3 Business Engine retrieves and proposes the correct VAT code to use according to the following priority order: 1) VAT code, date, country, area/state; 2) VAT code, date, country (and area/state left blank); 3) VAT code, date (and country and area/state blank).

Example of domestic purchase (within EU) using VAT method 1

The following example is based on a VAT rate of 20%. Net method is selected as the VAT calculation method for FAM function AP10. There is no fiscal representative involved.

An Austrian division purchases goods of a net value of EUR 1,000 from a supplier based in Austria. The following account entries are created:

Account Comment Amount
AP account Based on accounting rule AP10-200. – 1,200
VAT receivable Based on accounting rule AP10-211 + 200
Cost/Inventory or Goods Delivered/Not Invoiced Account manually entered or based on either accounting rule PP20-952 or PP20-225. + 1,000

Example of purchase from another EU member state using VAT method 1

The following example is based on a VAT rate of 20%. Net method is selected as the VAT calculation method for FAM function AP10. There is no fiscal representative involved.

An Austrian division purchases goods of a net value of EUR 1,000 from a supplier based in Germany. The supplier has a valid VAT registration number. The following account entries are created:

Account Comment Amount
AP account Based on accounting rule AP10-200. –1,000
VAT payable Based on accounting rule AP10-111. –200
VAT receivable Based on accounting rule AP10-211. +200
Cost/Inventory or Goods Delivered/Not Invoiced Account manually entered or based on either accounting rule PP20-952 or PP20-225. +1000

Example of purchase from Non-EU member state using VAT method 1

The following example is based on a VAT rate of 20%. Net method is selected as the VAT calculation method for FAM function AP10. There is no fiscal representative involved.

An Austrian division purchases goods of a net value of EUR 1,000 from a supplier based in Switzerland. The following account entries are created:

Account Comment Amount
AP account Based on accounting rule AP10-200. –1,000
Cost/Inventory or Goods Delivered/Not Invoiced Account manually entered or based on either accounting rule PP20-952 or PP20-225. +1000
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