VAT Management in M3 Business Engine

This document presents an overview of how M3 Business Engine automatically proposes, calculates, and records value-added tax (VAT) in national and international scenarios based on the interaction of different VAT-related components. The document does not cover country-specific localizations delivered as part of M3 Business Engine.

Use the information to prepare for the configuration of VAT management in M3 Business Engine, as described in Configuring M3 Business Engine for VAT Management.

Index

  1. Introduction

  2. The VAT process

  3. Making VAT decision

  4. Determining VAT rate

  5. Triangular trade

  6. Summary of functional solution

1. Introduction

In Europe and other parts of the world, VAT is the normal business taxation regime that controls the buying and selling of goods and services. In business, every transaction can create a taxable situation for both the buyer and seller, situations in which there are complex rules to adhere to in making the correct tax decision. In addition, each country has specific reporting requirements, the burden of which falls upon the legal business unit – usually corresponding to a company division in M3 Business Engine– which in turn expects M3 Business Engine to produce the relevant VAT declarations.

The M3 Tax Management module supports VAT management for goods, services, and the many complex variants of transaction taxation. It offers numerous methods available for calculating and reporting VAT, including single rate, combined rates, chained rates, the reverse charge, and tax-shift or self-assessment of VAT required on imported services and very specific domestic purchases. If a business transaction for the supply of goods and services crosses national borders, the built-in 'VAT engine' in M3 Business Engine automatically changes its VAT decisions.

2. The VAT process

3. Making VAT decision

The remaining part of this document primarily focuses on the rules and the procedure M3 Business Enginefollows to apply the correct VAT amounts in different scenarios, that is, the first box in the model of the VAT process above. This step consists of two parts:

When is a sale or purchase of goods or services 'vatable', that is, subject to VAT? This question of whether to calculate VAT in a specific business transaction is a greater challenge than the actual calculation of VAT. The rule of thumb is that the location of supply of goods and services and the location delivery of the same goods and services together determine whether to calculate and record VAT. National regulations and EU regulations then stipulate whether the supply of goods or services is subject to VAT in specific scenarios and, naturally, which VAT rates to apply.

Different rules apply to the supply of goods and the supply of services respectively to a taxable 'person'. The invoicing programs in M3 Business Engine consequently follow different decision paths for VAT: invoices based on service orders, customer orders and maintenance customer orders use different VAT-related information as compared to invoices for short-term rental and long-term rental.

The country of customer, country of delivery, country of supplier and existence of a VAT registration number are critical to the final VAT decision. M3 Business Engine stores and uses this information by retrieving relevant country codes from the customer, from a delivery address, from a warehouse, from the division, and so on. Once the VAT decision is made and the customer invoice is generated, then the relevant country codes are stored in the general ledger and used again as part of the VAT reporting process.

M3 Business Engine automates the procedure of determining whether a sale or a purchase is subject to VAT. Whenever you create an order, a customer invoice or records a supplier invoice, M3 Business Engine performs a series of checks in the background. These checks result in a VAT decision:

4. Determining VAT rate

The following sections describe how the components in M3 Business Engine interact to retrieve and propose the correct VAT rate automatically after a positive VAT decision.

The rate or rates at which VAT is calculated on supplies of goods and services will vary, both by country and over time. Certain types of supplies are zero rated in some countries, accrue VAT in other countries, and in other countries are completely exempt from VAT.

5. Triangular trade

Triangulation is the term used to describe a chain of supplies of goods involving three parties – selling party (the company owing the customer order), delivering party and receiving party – in two or three EU member states. The goods are delivered directly to the last party in the chain, instead of physically passing from one party to the next. A fiscal representative can be involved for each one of these parties.

In a scenario where only two EU member states are involved, the intermediate supplier (the party owing the original customer order based on the external customer's order) would in normal circumstances be required to register for VAT in the country where the goods are delivered and declare VAT there on their supply. To avoid imposing this burden on intermediate suppliers (sellers), all European Union countries have agreed on a simplified procedure. This simplified triangulation means that if goods are purchased from a company in one EU member state and sold via an intermediate supplier to a company in another EU member state, the latter company can zero-rate the goods. All parties involved must be registered for VAT.

6. Summary of functional solution

The different scenarios are managed automatically based on the company's definitions in 'VAT Exception. Open' (TXS020). When there is a match in the company-defined criteria, the default VAT code is automatically replaced by another VAT code so that the correct VAT amount is charged. See VAT Exemption Texts and Automated Replacement of VAT Codes in M3

In certain cases, agreements between countries make it necessary 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 the 'VAT override' check box for the applicable VAT codes on 'VAT Code. Open' (CRS030/E). M3 Business Engine then always calculates VAT for this VAT code, even if the countries of the parties involved would have resulted in a negative VAT decision.

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