VAT Management in M3 Business Engine
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.
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.
VAT in the European Union
VAT in the European Union (EU) is a general, broadly based consumption tax assessed on the value added to goods and services. It applies more or less to all goods and services bought and sold for use or consumption in the EU. Thus, goods sold for export or services sold to customers abroad are usually not subject to VAT. Conversely, imports are taxed to keep the system fair for EU producers so that they can compete on equal terms on the European market with suppliers based outside the EU.
In each EU country, a business supplying taxable goods or services will need to register for VAT in their own country. Once registered, they receive a unique VAT registration number in that country. For each country, the number has a unique format and length that M3 Business Engine can check arithmetically at entry to prove its validity, with or without the country ISO code as a prefix. When printing a VAT registration number on documents like invoices or EU Sales listings, M3 Business Engine always add the relevant country ISO code as a prefix if it is stored in the system without the country code.
Three tax points for VAT reporting
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. Some businesses can report VAT on a cash basis (VAT on payments), that is, based on customer and supplier invoices paid during any VAT reporting period. M3 Business Engine enables you to set up M3 Taxation Management to declare VAT only on paid customer or supplier invoices. At any period, the VAT amounts on supplier and customer invoices are booked to VAT suspense accounts. At the end of each period, the company makes a separate VAT run to account for VAT on paid or partially paid invoices only. In this process, M3 Business Engine moves VAT paid on customer payments and VAT received on supplier payments from the VAT suspense accounts to the regular VAT payable and receivable accounts. The company can then report the net VAT liability or debt to tax authorities in the normal way.
The delivery date of goods and services is another tax point in certain business and countries. M3 Business Engine supports this alternative at the division level by opening up an additional date field for delivery date that users, depending on the setup, must specify when processing supplier invoices. This delivery date will, in that case, become the VAT reporting date used when the company creates periodic VAT declarations, reconciliations, and returns. M3 Business Engine also supports the option to use the accounting, invoice or due date as the VAT reporting date.
Goods receipts in the VAT reporting period that the company has not yet matched to the corresponding supplier invoices when creating the VAT declaration are included in a VAT accrual round in 'VAT Accruals Round. Create Proposal' (APS460). From these records, M3 Business Engine calculates a reclaimable VAT amount on the unmatched goods receipts. The reclaimable VAT updates the General Ledger as a normal reversing voucher for inclusion in the existing VAT declaration and returns process. See Reporting VAT for Goods Received/Not Invoiced.