Making VAT decision

Making a VAT decision is the first step the M3 Business Engine performs in the VAT process.

This step consists of two parts:
  • Make a VAT decision by identifying whether a business transaction is subject to VAT.
  • Determine the VAT rate to apply, and calculate and record the VAT amounts.

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 of 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 record a supplier invoice, M3 Business Engine performs a series of checks in the background. These checks result in a VAT decision:

  • Is the company division registered for VAT?
  • Is the customer/supplier required to declare VAT?
  • Does the customer/supplier have a VAT registration number?
  • Which is the country of the customer's delivery address?
  • At which stage during the transportation does the customer assume ownership of the good?
  • Is the sale domestic, within the EU or non-domestic/non-EU?
  • Is the sale part of a triangular trade involving at least two EU member states?
  • Does the division have any fiscal representation in the country in which the delivery is received (the receiving country)?
  • In a company-internal transaction, is the good distributed between warehouses within the same division or in different divisions?

VAT on purchases

Businesses that are VAT registered in their countries of origin are allowed to reclaim VAT on their purchases (VAT receivable or input VAT) against the VAT they collect from their customers. The M3 Suite manages the VAT of supplier invoices for all of these entry methods:

  • Manual entry
  • Scanned invoices using Automatic Data Capture (ADC)
  • Through EDI
  • Through self-billing
  • From an inter-division invoice created by another division
  • From an intra-division invoice created by the division for its fiscal representative
  • Entry of supplier invoice transactions from a spreadsheet using the General Ledger interface, 'FIM Interface. Open' (GLS850).

Again, the VAT decision is based on the countries involved. The supplier registered on 'Supplier. Open' (CRS620/E) provides the country from which the supplier sends the invoice.

There are many possible variants in processing a supplier invoice and you can set up the M3 Business Engine for each of these alternative methods. In some countries, you can validate the VAT amount on the supplier invoice manually. In other countries, the input VAT calculation is an automated step. In the latter case, there is an online check comparing the actual recorded VAT against the calculated value. M3 Business Engine for later follow-up as part of the company's VAT reporting.

When processing purchase orders, M3 Business Engine makes preliminary VAT decisions based on the items and charges being added to the purchase order lines and the expected country of supply. When the invoice arrives and is matched to the purchase order, the VAT decision is checked again to ensure that VAT is correctly recorded in the General Ledger with the correct base country and From/To country codes.

Non-deductible VAT

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 non-deductible percentage on a specific VAT code; this VAT code can be connected to the relevant General Ledger account for VAT-generating amounts (VAT account types 3–9). When booking the invoice cost against this account, the user can only use a VAT code that will make a non-deductible adjustment to the VAT shown on the supplier invoice and pre-vent the input VAT from being incorrectly reclaimed.

The impact of fiscal representatives

A fiscal representative is usually a local resident party that accepts joint liability for taxes payable by a company in another country. In practice, this means that a business headquartered in one country is registered for VAT in another country. Sometimes, this is a necessity for trading with customers in that country and sometimes it provides an efficient way for the business to process VAT-related business transactions in a foreign country. Fiscal representation occurs most frequently when a business opens a sales office in a foreign country. Registering for VAT means that the business can reclaim VAT paid on local purchases to run that office. M3 Business Engine supports this requirement and ensures that if a business registers for VAT in a foreign country, then sales of goods with delivery to customers in that country will be treated as domestic sales. Purchases made in the country can be processed with the correct base country code, and input VAT can be reclaimed; for purchases, the check for a fiscal representative is a manual procedure.

In terms of logistics, some businesses deliver from a local warehouse. Other companies simply open a sales office and deliver from a central distribution warehouse. M3 Business Engine supports either alternative from the legal VAT trading perspective. To reflect the fact that the fiscal representative is itself a trading customer of the company, since it is buying and selling goods owned by the business, internal invoice transactions can be generated between the two entities (customer and supplier) to support the VAT invoicing rules as goods move between countries.

In the M3 Tax Management module, VAT reporting is controlled by base country code and allows the business to prepare the correct local VAT reports in the valid local currency. So, in one legal business entity (that is, company division), you can produce more than one VAT report, each in the correct local currency, where the business has registered for VAT in more than one country.

In M3 Business Engine, a fiscal representative represents a VAT registration number for a specific division in another member state in the European Union. For more information about fiscal representatives and common scenarios involving fiscal representatives, see Fiscal representatives in M3 and their impact on VAT calculation and internal invoicing.

Countries involved

The country of the customer, the country of delivery, the country of the supplier, and the existence of a VAT registration number are critical to the final VAT decision. The M3 tax 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 has been made and the customer invoice generated, then the relevant country codes are stored in the general ledger and used again as part of the VAT reporting process.

To cover all types of international trade, M3 Business Engine uses the terms 'base country' and 'From/To country'. The meaning of these countries varies depending on the type of business transaction: external customer invoices, company-internal customer invoices, and external supplier invoices. M3 Business Engine checks each country against the setup in 'Country. Open'(CRS045). The country is treated as an EU member state if alternative 1 = 'Intrastat' is selected in the 'Create Intrastat or Extrastat' field on the E panel. Companies create VAT declarations per base country in 'VAT Run. Open' (TXS100).

The countries involved are saved in the General Ledger table (FGLEDG) for each accounting line in every voucher containing an accounts receivable or accounts payable account defined as a VAT account. A VAT account is an account belonging to one of VAT account types 1 or 2 in 'Accounting Identity. Open' (CRS630). Accounts for VAT-generating amounts (VAT base amounts) belong to VAT account types 3–9.

On invoices to external customers:

  • Base country: The country from which the company physically delivers goods.
    • If there is no delivering warehouse: The country of the selling division.
    • If there is a fiscal representative in the To country: The country of the fiscal representative (being the same as the To country).
  • To country: The country of the customer's delivery address.
    Note: The customer invoices created manually in 'Customer Invoice. Enter Manual' (ARS120), 'Interest Invoice. Open' (ARS660) and 'Fixed Asset. Sell' (FAS130) have no delivering warehouse specified. For customer orders, service orders and maintenance customer orders, the tax point and the use of a ship via address affect which countries M3 Business Engine identifies as base country and the To country.

On company-internal customer invoices (MUC Invoicing):

  • Base country:
    • If the invoice refers to sales within the facility or the same division: The country of the delivering warehouse.
    • If the invoice refers to sales between two divisions: The country of the selling warehouse, that is, not the country of the physical delivery.
    • If there is a fiscal representative defined for the combination of the To country and the country of the delivering warehouse: the country of the fiscal representative (being the same as the To country).
  • To country: The country of the purchasing facility's delivery address.

On invoices from external suppliers:

  • Base country: The country that receives the goods.
  • From country: The country from which the supplier physically delivered the goods.

Using ship via addresses

Companies incorporated in countries outside the EU that register for VAT in the EU have to report VAT, EU sales and Intrastat for the country through which their goods, intended for European customers, initially enter the EU market. When goods from a non-EU member state enters a port in an EU member state, this port is considered the ship via address and M3 Business Engine uses the country of this address as the base country in the VAT decision. The only exception is when the delivering warehouse or the main warehouse in the selling facility (depending on the MUC trigger; see section Retrieval of VAT Registration Number) has a fiscal representative in the country of the customer; the country of the fiscal representative is then the base country, regardless of the ship-via address. For a description of the fiscal representative setup required and for examples, see Fiscal representatives in M3 and their impact on VAT calculation and internal invoicing.

The impact of tax point

M3 Business Engine can use either a 'ship via address' or the end delivery address for a customer delivery when making the VAT decision for the supply of goods. The tax point that is selected in the terms of delivery in 'Delivery Terms. Open' (CRS065) and connected to the order, determines which country is used as the final 'deliver to' country.

  • If the customers assumes liability when the goods leave the supplier's inventory, M3 Business Engine regards the To country and the base country as the same.
  • If the buyer assumes liability when the goods are received at the customer's transport address, M3 Business Engine regards the To country as the same as the country of the ship-via address. If there is no ship-via address, the To country and the customer's delivery address are regarded as the same.
  • If the customer assumes liability when the goods are received at the customer's final address. In the VAT decision, M3 Business Engine regards the To country as the same as the country of the customer's delivery address.

This functionality is implemented for customer orders, service orders, and maintenance customer orders.

Retrieval of 'our' VAT registration number

In scenarios with company-external customers, M3 Business Engine retrieves the division's ('our') VAT registration number for invoices, EU sales transactions, and Intrastat transactions based on these search paths:

  • Priority 1: From the internal supplier (when delivering goods to customers) selected for the fiscal representative in 'Fiscal Representation. Open' (TXS030).
  • Priority 2: From the delivering warehouse in 'Warehouse. Open' (MMS005), identified by the internal supplier selected for the delivering warehouse, provided there is a warehouse specified on the invoice.
  • Priority 3: From the division on 'Company. Connect Division' (MNS100/G).

In scenarios with company-external suppliers, M3 Business Engine retrieves 'our' VAT registration number for invoices and Intrastat transactions based on these search paths:

  • Priority 1: From the customer selected for the receiving warehouse in (MMS005), if there is a warehouse specified on the invoice.
  • Priority 2: From the division on (MNS100/G).

Retrieval of 'your' VAT registration number

In scenarios with company-external customers, M3 Business Engine retrieves the customer's ('your') VAT registration number based on these search paths:

  • Priority 1: From the customer's delivery address.
  • Priority 2: From the customer on 'Customer. Open' (CRS610/J)

In scenarios with company-external suppliers, M3 Business Engine retrieves 'your' VAT registration number from the supplier on 'Supplier. Open' (CRS620/E).

Using VAT override

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.