VAT Exemptions

This document describes the M3 solution for printing VAT exemption texts for VAT exempt and zero-rated goods on customer invoices. It also describes how to replace the VAT codes that are normally retrieved by M3 Business Engine automatically according to user-defined rules to comply with EU VAT rules and legislation in complex VAT scenarios.

Background

Both global and local legislation regulate the charging of VAT. Within the European Union (EU), VAT is normally collected on business transactions that involve supplies of goods and services within the EU. A supply can be standard-rated, reduced-rated, zero-rated or exempt. The exact rates are locally defined.

Note: VAT Exemption and Zero-Rated Supplies

No tax is payable on VAT-exempted supplies and the party making the supply cannot normally recover any of the VAT on their own expenses. For zero-rated supplies, VAT is not payable either. However, zero-rated supplies are treated as taxable supplies in all other respects and the party making the supply can recover receivable or input VAT on their own business expenditure.

For zero-rated supplies and exempt supplies, global and local legislation may stipulate that a VAT exemption text must be printed on the customer invoice. The text should inform the recipient of the invoice document the reason why VAT has not been added or calculated on a specific invoice line.

Overview of the M3 solution

You can select among a large number of criteria for triggering the printout of a VAT exemption text or replacement of a VAT code.
You can store VAT exemption texts in the language of the customer.
The VAT exemption text is printed on all external invoices where no VAT is actually calculated, that is, for both VAT exempt and zero-rated goods.
Some VAT exemption texts can be applied on a global basis by reference to EU legislation.
The same EU legislation can be enforced by specific legislation in a local country, so that a local customer may refer to a different exemption text, even though it is for the same reason.
Each VAT exemption text has a valid date range, making it easy to change texts due to new laws.
When copies of invoices are printed, the correct VAT exemption text of the original invoice is printed, even if another text is valid at the time of the printout.
A different VAT exemption text can be used for an invoice document when compared to a credit note document, even though the reason for the exemption is the same.
Replacement of VAT codes can be used to manage sales tax on purchases, as described in Canadian Sales Tax in M3.

Transaction types for VAT exemptions

These transaction types are available when defining VAT exceptions:

1-'VAT exemption text'. Text printed on the invoice explaining why VAT was not added to a specific invoice line.
2-'Automated replacement of VAT codes for sales to external customers'. A VAT code on a customer order line or a customer invoice is automatically replaced by another VAT code in order to obtain a correct VAT rate.
3-'Automated replacement of VAT codes for purchases'. A VAT code on a purchase order line or a supplier invoice is automatically replaced by another VAT code in order to obtain a correct VAT rate.
4-'Automated replacement of VAT codes for internal sales'. A VAT code on a customer order line or a customer invoice for internal sales is automatically replaced by another VAT code in order to obtain a correct VAT rate.
5-'VAT exemption agreement - Received'.
6-'VAT exemption agreement - Issued'.

Each transaction type consists of a table with up to ten lines where each line can include up to four control objects, each representing a certain type of value such as 'Customer' or 'VAT code'. In the table, each line has a field sequence number that determines in which order the lines are selected in the search for a match. The lines with the lowest sequence number receive the highest priority. For example, if the three first lines in the table have sequence numbers 10, 15 and 20 respectively, they correspond to priorities 1, 2 and 3 respectively in 'VAT Exception. Open' (TXS020).

In the case of an exact match of values for replacement of VAT codes when entering an order, the VAT code is automatically replaced with the replacement VAT code you selected. If there is an exact match against your settings for VAT exemption texts, that text is automatically printed on the invoice.

VAT Exemption Agreements

Transaction type 5-'Received VAT exemption agreements' in (TXS020) applies to manual customer invoices, customer orders, maintenance orders, and service orders in triangular trade only. The intermediary enterprise in triangular trade (that is, the party delivering goods to the party selling them to end users) can apply to be VAT exempt instead of having to pay and reclaim the VAT. A VAT exemption agreement is valid for a specific period of time, for specific customers and items. It also defines a maximum amount, the currency and the exchange rate to use. The company registers each VAT exemption agreement as one line per priority in (TXS020). A chronological number for the exemption agreement is automatically updated. The number is retrieved from number series 64 G in 'Number Series. Open' (CRS165). A VAT exemption agreement always overrules any exact matches against other transaction types in (TXS020). That is, if there is a match against both a line for replacement of VAT codes in external sales and a line for a VAT exemption agreements, the latter overrules the former.

When the company invoices an order in 'CO Invoice. Print' (OIS180), 'Maint Invoice. Print' (COS180) or 'SO Invoice. Print' (SOS180), each order line is matched against the lines in (TXS020). If there is an exact match and the accumulated invoiced amount plus the net amount (minus VAT) is lower than the maximum amount, the replacement VAT code that was selected for the line in (TXS020) to use for VAT exempt goods and services is applied to prevent VAT from being calculated. The agreement number and the agreement date are printed on the invoice line. If you want a more detailed exemption text, it is possible to use a unique replacement VAT code to which you connect a VAT exemption text (transaction type 1).

If there is no exact match between the order line and a line in (TXS020), VAT is calculated as normal. The same applies if the accumulated amount exceeds the maximum amount stipulated in the VAT exemption agreement.

Note: The matching then automatically stops and the search based on VAT exemption agreements with lower priority does not continue.

Transaction type 6-'Issued VAT exemption agreements' in (TXS020) applies to purchase orders and supplier invoices in triangular trade only. The intermediary enterprise in triangular trade - the party purchasing goods in order to sell them to end users - can apply to be VAT exempt instead of having to pay and reclaim the VAT. A VAT exemption agreement is valid for a specific period of time, specific suppliers, and orders. It also defines a maximum amount, the currency and the exchange rate to use. The company registers each VAT exemption agreement as one line per priority in (TXS020). A chronological number for the exemption agreement is automatically updated. The number is retrieved from number series 64 H in (CRS165). A VAT exemption agreement always overrules any exact matches against other transaction types in (TXS020). That is, if there is a match against both a line for replacement VAT code in purchase and a line for a VAT exemption agreement, the latter overrules the former.

When the company records a supplier invoice in 'Supplier Invoice. Record' (APS100) or 'Supplier Invoice Batch. Open' (APS450) each invoice line is matched against the lines in (TXS020). If there is an exact match and the accumulated invoiced amount plus the net amount (minus VAT) is lower than the maximum amount, the replacement VAT code that was selected for the line in (TXS020) to use for VAT exempt goods and services is applied to prevent VAT from being calculated.

Note: The matching then automatically stops and the search based on VAT exemption agreement with lower priority does not continue.

VAT Exemption Letter for Italy

This functionality is only available for Italian country specific in transaction type 6-'Issued VAT exemption agreements' in (TXS020). The ability to produce an electronic file of the Supplier Tax Exemption Declaration to Authority is available in the Italian country configuration.

Two related options are available for transaction type 6-'Issued VAT exemption agreements' in (TXS020):

Select related option 12='Additional Information' to identify the 'Plafond Type' and the different operations that contribute to the formation of the ceiling amount which forms part of the Supplier Tax Exemption Declaration to Authority. Only one check box can be selected from the six different operations that contribute to the formation of the ceiling amount.

This table shows the fields available in 'VAT Exception. Open' (TXIT01):


Field heading	Object	Description
A1: Plafond Type	XPLF	Alternatives are: 1=Fixed 2=Variable.
A2.1: Annual VAT presented	ANVT	Indicates if the exemption amount has been defined based on annual VAT declaration.
A2.2: Exportation	EXPO	Indicates if the exemption amount has been defined based on extra-EU operation.
A2.3: IntraEU Cession	INEU	Indicates if the exemption amount has been defined based on EU operation.
A2.4: SanMarino Cession	SANM	Indicates if the exemption amount has been defined based on San Marino (Italian province) operations.
A2.5: Similar Cession	SICE	Indicates if the exemption amount has been defined for a province with exemption tax rules. For example, Vatican operations.
A2.6: Exceptional Cession	EXCE	Indicates if the exemption amount has been defined based on specific operations.

Select related option 13='Request Letter' to initiate the creation of an electronic file of the Supplier Exemption Declaration to Authority.

VAT Exemption Agreement Constraints

Since the replacement of VAT codes for VAT exemption agreements is done at order invoicing instead of when placing the order, the original VAT codes remain on the order lines. The reason for this solution is the use of an accumulated value displayed for each line for a VAT exemption agreement on (TXS020/E). Changing or deleting order lines would otherwise not be reflected in the accumulated value.

The solution for VAT exemption agreements is not designed to manage charges on order headers or order lines. If the company has a separate agreement for charges, it is possible to set up a line with lower priority in 'Generic Object Control Table. Open' (CMS017) with control objects from the customer master file only, that is, no item-dependent control objects, in order to include charges in the matching. This is a workaround solution.

General control object

The table below lists the objects you can select in (CMS017) when you define a table to use as a basis for the VAT exceptions. The objects available depend on the type of table you are defining, for example, a table for internal sales. The 'Applicable' column defines the purpose for which you can use the respective control object: for printout of VAT exemption texts, for external and internal sales (both included in the term 'sales'), for external purchases, and for VAT exemption agreements.


Object	Description	Selectable Values in (TXS020)	Applicable
&BSCD	Base country	Select from country codes defined in 'Country. Open' (CRS045) to capture order lines and invoices with these country codes.	Exemption texts, sales, purchases, received exemption agreements
&CASE	Case	Select from nine main scenarios where at least two parties of the triangular trade - base country, from/to country and third-party country - are located in different states. The case which applies to each business transaction based on the countries involved is automatically identified. See a specification of each scenario in the section following this table. The &CASE object was introduced to manage scenarios that include triangular trade involving two EU member states only. &CASE is able to manage all triangular trade scenarios. You can use &CASE in combination with &TRIA so that a different VAT code for an external sale is selected if the sale is internal, for example, or replace &TRIA completely with &CASE, if this is in accordance with the local legislation and its definition of triangular trade.	Sales, purchases
&CEXE	Customer exemption agreement exists	Alternatives: 0 =No 1 = Yes. Select from customers with a contract number for tax exemption on 'Customer. Open' (CRS610/L). For Canadian taxes, the field for tax exemption contract number stores a special registration number (SRN) that indicates that all parts, service, and equipment the customer purchases are automatically tax exempt. There could be several reasons for such an exemption, for example, that the customers are resellers who hold their own Provincial Sales Tax registration, or that the customers hold a Generic Exemption Certificate.	Sales
&CRED	Type of invoice	Alternatives: 0 = Invoice 1 = Credit note 2 = Corrective invoice. For customer invoices entered manually in 'Customer Invoice. Enter Manual' (ARS120) the invoice type is indicated by FAM function AR20. For customer orders and service orders, the parameters for the order type determine the type of invoice.	Exemption texts, sales
&CUNO	Customer	Select from customers registered in (CRS610).	Exemption texts, sales, received exemption agreements
&ECAR	Area	Alternatives for sales: Select from states registered in 'States per Country. Open' (CRS046). The state captures manually entered customer invoices and customer orders with this state in the address. Alternatives for purchases: On the purchase side, the state captures purchase orders with this state registered for the suppliers. M3 Business Engine retrieves the state automatically from (CRS620/E) when you register the purchase order. M3 Business Engine validates the state against the base country.	Exemption texts, sales, purchases
&EEXC	Equipment exemption agreement exists	Alternatives: 0 = No 1 = Yes. Select from order lines with a serialized equipment that have a contract number for tax exemption on 'Equipement/Serialized Item. Open' (MMS240/G). For Canadian sales tax, the field for tax exemption contract number is used to store information that the piece of equipment is tax exempt under the PM&E legislation ('FIN 453/M') as well as information about the purchase order that indicates that the purchase is tax exempt under the same legislation ('stamped PO'). This control object can be used in combination with &INAP in (CMS017).	Sales
&EUVT	EU VAT	Alternatives: 0 = No EU VAT transactions. 1 = Only EU VAT transactions. To identify whether an order or a customer/supplier invoice is an EU VAT transaction, the base country is compared to the To country. The invoice is an EU VAT transaction if both countries are different, belong to the EU and have separate VAT registration numbers.	Exemption texts, sales, purchases
&FISR	Fiscal representation	Alternatives: 0 = No 1 = Yes. The value indicates whether there is a fiscal representation in the customer's country, as defined in 'Fiscal Representation. Open' (TXS030). If so, M3 retrieves the VAT registration number from the fiscal representation.	Exemption texts, sales
&FTCO	From/To country	Select from country codes defined in 'Country. Open' (CRS045) to capture order lines and invoices with these country codes.	Exemption texts, sales, purchases, received exemption agreements
&INAP	Industry application	Select from order lines connected to a specific industry application in 'Fleet' (MOS295). The industry application refers to the end use of items or equipment.	Sales
&ITNO	Item	Select from items on order lines. Function program CCHKIFV, the program that checks if VAT is applicable, retrieves the actual values for this object from the order lines, not from 'Item. Open' (MMS001).	Sales, purchases, received exemption agreements
&ORNO	Order number	Select from customer order numbers for which an exemption agreement exists.	Received exemption agreements
&ORTP	Order type	Select among order types registered in 'CO Type. Open' (OIS010).	Sales
&PRNE	PST/QST registration number exists	The value indicates whether the supplier has a tax registration number in a specific state defined in 'Supplier Tax Number. Open' (CRS628). Alternatives: 0 = No 1 = Yes.	Purchases
&PUNO	Purchase order number	Select from purchase order numbers for which an exemption agreement exists.	Issued exemption agreements
&PYNO	Payer	Select from payers registered in (CRS610).	Sales
&SUNO	Supplier number	Select from suppliers registered in 'Supplier. Open' (CRS620).	Purchases, issued exemption agreements
&TEDL	Delivery term	Select from terms of deliveries registered in 'Delivery Term. Open' (CRS065).	Sales
&TRIA	Triangular trade (third-party trading)	Alternatives: 0 = No triangular trade. 1 = Yes, sale of goods with direct delivery from an external supplier based on a customer order with line type 2. 2 = Yes, triangular trade with inter-division supply via MUC order. 3 = Yes, purchase of goods based on a purchase order by the company acting as intermediary party ('middleman') in triangular trade. M3 Business Engine automatically identifies a business transaction as being part of a triangular trade, that is, as a &TRIA 1, 2 or 3 transaction, by means of function program CCHKIFVAT Alternatives 1 and 2 are applicable to sales only. For alternative 1, the third party in the triangular trade is the external supplier. For alternative 2, the third party is the delivering warehouse. Alternative 3 is applicable to purchases only. In such a case, the third party of the triangular trade is the customer on the customer order that is connected to the purchase order. When the company owing the original customer order records the supplier invoice and matches it to the purchase order that was created based on the external customer order, CCHKIFVAT identifies the transaction as a &TRIA 3 transaction. These requirements apply for alternatives 1– 3: a) There are three parties involved in at least two different EU member states. b) Each party has a VAT registration number in the respective country. The latter requirement applies even when one party is located in a country that is not an EU member state. For information about triangular trade and the scenarios that M3 Business Engine supports, see Triangular Trade.	Sales, purchases
&TXAP	Tax applicable	For sales, select customers with one of the following 'Tax applicable' alternatives selected on (CRS610/J) or on 'Customer. Open Local Exceptions' (MFS610/E) or for the customer order: 0 = No VAT is calculated. 1 = VAT is calculated. 2 = No VAT is calculated since the customer has a VAT exemption agreement. For purchases, select suppliers with one of these 'Tax applicable' alternatives selected on 'Supplier. Define Purchase & Financial' (CRS624/F) or for the purchase order: 0 = No tax calculated. 1 = The VAT code is retrieved from the combination of item and warehouse in 'Item. Connect Warehouse' (MMS002). If there is no VAT code there, M3 regards the item as a non-taxable good. If the item itself has no connection to a warehouse in (MMS002), M3 searches for a VAT from the item in (MMS001) instead. 2 = The VAT code is retrieved from the following tables in the these order: the combination of item and warehouse in (MMS002), the item in (MMS001) and the supplier in (CRS624) or on 'Supplier. Open Division' (MFS620/E). If there is no VAT code in the first table, the search continues in the following tables.	Exemption texts, sales, purchases
&VRNE	VAT registration number exists	Alternatives: 0 = The customer/supplier has no VAT registration number. 1 = The customer/supplier has a VAT registration number.	Exemption texts, sales, purchases
&VTCD	VAT code	Select from VAT codes defined in 'VAT Code. Open' (CRS030).	Exemption texts, sales, purchases
BLLTYP	Rental line type	Select from rental agreement lines with a specific line type on 'Individual Item. Display Diary' (STS201/E).	Sales
CTBUAR	Business area	Select from business areas in 'Business Area. Open' (CRS036).	Sales, purchases
IBWSCA	Purchase costing model	Select from purchase costing models in 'Purchase Costing Model. Open' (PPS285).	Purchases
IDCFI1	User-defined field 1	Select from items with a specific value on (CRS620/F).	Purchases, issued exemption agreements
IDCFI2	User-defined field 2	As above.	Purchases, issued exemption agreements
IDCFI3	User-defined field 3	As above.	Purchases, issued exemption agreements
IDCFI4	User-defined field 4	As above.	Purchases, issued exemption agreements
IDCFI5	User-defined field 5	As above.	Purchases, issued exemption agreements
IICFI3	Free field 3	Select from suppliers with a specific value entered in company-defined field 3 on (CRS624/G).	Purchases, issued exemption agreements
IICFI4	Free field 4	Select from suppliers with a specific value entered in company-defined field 4 on (CRS624/G).	Purchases, issued exemption agreements
IISERS	Service code	Select from suppliers with a specific service code selected on (CRS624/F).	Purchases, issued exemption agreements
IISUCL	Supplier group	Select from suppliers connected to a specific supplier group on (CRS624/E).	Purchases, issued exemption agreements
IVCEID	Costing element	Select from purchase costing elements in 'Costing Element. Open' (PPS280).	Purchases
M9CSNO	Customs statistical number	Select from customs statistics numbers in 'Customs Statistics Number. Open' (CRS128).	Sales, purchases, received exemption agreements
MMACRF	User-defined accounting control object	Select from items with a specific accounting control object on (MMS001/E).	Sales, purchases, received exemption agreements
MMECC	Consumption code - trade statistics	Select from items with a specific consumption code on (MMS001/G)	Sales, purchases, received exemption agreements
MMEVGR	Environment group	Select from items with a specific environment group on (MMS001/G).	Sales, purchases, received exemption agreements
MMGRTI	Group technology class	Select from items with a specific group technology class on (MMS001/F).	Sales, purchases, received exemption agreements
MMGRTS	Distribution group technology	Select from items with a specific distribution group technology on (MMS001/F).	Sales, purchases, received exemption agreements
MMITCL	Product group	Select from items with a specific product group on (MMS001/E).	Sales, purchases, received exemption agreements
MMITGR	Item group	Select from items belonging to a specific item group on (MMS001/E).	Sales, purchases, received exemption agreements
MMITTY	Item type	Select from items with a specific item type on (MMS001/E).	Sales, purchases, received exemption agreements
MMPRGP	Procurement group	Select from items with a specific procurement group on (MMS001/E).	Sales, purchases, received exemption agreements
MMSALE	Sales item	Select from items with a specific alternative selected in the 'Sales item' field on (MMS001/G).	Sales, purchases, received exemption agreements
MMTPCD	Item category	Select from items with a specific item category on (MMS001/G).	Sales, purchases, received exemption agreements
OKCFC3	Free field 3	Select from customers with a specific value entered in company-defined field 3 on (CRS610/I).	Exemption texts, sales, received exemption agreements
OKCFC4	Free field 4	Select from customers with a specific value entered in company-defined field 4 on (CRS610/I).	Exemption texts, sales, received exemption agreements
OKCFC8	Free field 8	Select from customers with a specific value entered in company-defined field 8 on (CRS610/I).	Exemption texts, sales, received exemption agreements
OKCFC9	Free field 9	Select from customers with a specific value entered in company-defined field 9 on (CRS610/I).	Exemption texts, sales, received exemption agreements
OKCUCL	Customer group	Select from customers with a specific customer group selected on (CRS610/F).	Exemption texts, sales, received exemption agreements
OKCUTP	Customer type	Select from customers with a specific customer type selected on (CRS610/E).	Exemption texts, sales, received exemption agreements
OKSDST	OKSDST District	Select among customers with a specific district selected on (CRS610/F).	Exemption texts, sales, received exemption agreements
PLPDLN	Product line	Select from product lines in 'Product Line. Open' (CRS099).	Purchases

Follow these steps

Define control object tables for VAT exceptions

Start 'Available Object Control Parameters. Open' (CMS016).
For object 'Tax exemption texts', select option 11='Object table – detail lines' to display (CMS017).
In the Program field, specify 'TXS020' and click Create.
On the E panel, specify the transaction type.
In the table, specify up to four control objects to apply for the line - such as 'Customer' and 'VAT code'. Start with the line with the lowest sequence number and then continue with the other lines, if necessary. End by pressing Enter.
Define VAT exception rules
Start (TXS020) by selecting one of these alternatives:
- Press Enter on (CMS017/E).
- On (CMS017/B), select option 11 for the control object table.
- Start (TXS020) from the menu.
On (TXS020/B), if you started the program from the menu, select the category for which to define VAT exceptions in the Text/VAT code field.
Select one of priorities 1 to 10 and click Apply.
The priority refers to internal priority order of the lines in the control object table. When clicking Apply, fields are displayed on (TXS020/B) based on the control objects in the selected line in the control object table such as 'Customer' and 'VAT code'.
Select one of these alternatives:
- To define VAT exemption texts, go to step 10.
- To define replacement of VAT codes, go to step 16.
- To define VAT Exemption agreements, go to step 19.
Define VAT Exemption Texts
On (TXS020/B), specify the control object-based values displayed.
If you want the rule to be limited in time, specify a valid date range. Click Create.
Note: You cannot change the date range once it is set. If you later want to adjust the date range, you copy the rule if the date ranges do not overlap, adjust the date range in the new rule and then delete the old rule. If the date ranges for the old and new VAT exceptions overlap, first delete the old one and then create a new one. If you do not specify a date range for the VAT exception, it will be used as a general VAT exception unlimited in time, and no other VAT exceptions can be entered.
On the E panel, press Enter to confirm the selection.
On the text panel displayed (function program CRS980), specify the language for which the VAT exemption text is applicable. Click Create.
In the text box displayed, specify the VAT exemption text. Click Next to return to the previous text panel, where you can add new texts for other languages, always with the same text block ID TAXEXEMPT.
Press F3 to finish.
Define Replacement of VAT Codes
On (TXS020/B), specify the control object-based values displayed.
If you want the rule to be limited in time, specify a valid date range. Click Create.
The date range, once set, cannot be changed. If you later want to adjust the date range, you must copy the rule, adjust the date range in the new rule and then delete the old rule.
On the E panel, specify the replacement VAT code. Press Enter.
Define VAT exemption agreements
In (TXS020/B), specify the control object-based values displayed, including a valid date range. Click Create.
The date range, once set, cannot be changed. If you later want to adjust the date range, you must copy the rule, adjust the date range in the new rule and then delete the old rule.
On the E panel, specify the replacement VAT code, VAT exemption agreement number, date of the agreement, the maximum amount for the agreement, currency, and exchange rate type. Press Enter.