Determining VAT Rate

The role of the VAT code

In the M3 tax engine, we use a VAT code, the key component in the M3 Tax Engine, to store and then control the retrieval of the correct VAT rate or, for sales tax on purchases, the sales tax rate. Each VAT code represents the calculation method and the tax rate to apply. The tax rate per VAT code is set to be effective during a specific time period, as well as for a country and within the country by region or area. The predefined VAT code 00 indicates that no VAT or sales tax is to be charged. In VAT reporting, we use both VAT code and country code to ensure that country-specific reporting requirements for VAT are met. See Create VAT codes for VAT transaction entry and reporting.

The tax rates are retrieved using a date on the invoice. The invoice date is used to retrieve the tax rate on a customer invoice. On a supplier invoice, the tax rate is retrieved according to the VAT date method on the VAT code. The date to retrieve a tax rate can be the invoice date, the accounting date, the delivery date, or the due date.

The company connects VAT codes to items, items per warehouse, customers and suppliers. M3 Business Engine then proposes the VAT codes to apply depending on the type of business transaction, the goods and the parties involved. You are able to define per customer/payer and supplier/payee where to search for the default VAT code. For example, M3 Business Engine proposes by default the VAT code of a specific item in a specific warehouse when you create a customer order or purchase order that include a line with this item. Usually, the VAT code of the item is used in domestic sales transactions whereas the VAT code of the customer is used for non-domestic sales transactions. M3 Business Engine also proposes the VAT code of the supplier when you record an invoice from this supplier. M3 Business Engine then records the VAT for the business transaction based on the VAT code.

Even if a supplier offers taxable goods, certain customers can be exempt from VAT for a number of different reasons. For example, a customer whose own goods are sold mainly for export can apply for an exemption certificate for their domestic purchases. Goods supplied domestically to this customer can be invoiced without VAT. In the M3 Tax Engine we can set a VAT exemption condition for the customer and then check for this when making the VAT decision. A VAT exemption text is printed on the sales invoice explaining why no VAT is charged with a reference to the appropriate VAT legislation to explain the VAT exemption.

If the company knows of specific, recurring scenarios in which a different VAT code than the default one applies, you can define such exceptions and which replacement VAT codes M3 Business Engine will use in 'VAT Exception. Open' (TXS020). For example, you can define that a specific combination of item number and To country triggers the replacement of the default VAT code, or setting up the VAT exceptions so that the correct VAT code is always applied in triangular trade. This functionality is at the heart of the M3 VAT Engine. For details, see VAT Exemptions. Such VAT exceptions, together with the standard defaulting of VAT codes, ensure a very high level of consistency and accuracy in the VAT calculation.

VAT is added on EU customer invoices where the customer does not have a VAT registration number (B2C) using the VAT rate of the base country. As the heart of the 2021 EU e-commerce package from July 2021, B2C sellers dispatching their goods or providing electronic services from a single EU country must use the VAT rate of the receiving EU country. The overall target is to reduce VAT Fraud within the EU, to simplify the VAT reporting to one single point only and to strengthen the cooperation and data exchange between the EU member states. To achieve this, companies can either register a fiscal representative in the receiving country in 'Fiscal Representation. Open' (TXS030) or define a rule to retrieve the VAT rate from the from/to country in 'VAT Rate Rule. Open' (TXS031).

Model of sales scenario

This model illustrates the steps M3 Business Engine performs to retrieve the correct VAT rates and calculate the VAT in a sales scenario.

Model of purchase scenario

These models illustrate the steps M3 Business Engine performs to retrieve the correct VAT rates and calculate the VAT in a purchase scenario.

Creating purchase order

Recording invoice

Summary

After a positive VAT decision, M3 Business Engine retrieves the VAT code from one of the following sources, depending on the business transaction: 'Item. Connect Warehouse' (MMS002), 'Item. Open' (MMS001) and 'Customer. Open' (CRS610/J) or 'Supplier. Define Purchase & Financial' (CRS624/F). If the company has defined division-specific exceptions for customers and suppliers, the VAT codes there will override the ones in (CRS610) and (CRS624) as usual.

M3 Business Engine then matches the VAT code and the specific conditions of the business transaction against a set of company-defined tables in 'VAT Exception. Open' (TXS020), one for external sales, one for internal sales, one for purchases, one for VAT exemption texts, one for issued VAT exemption agreements, and one for received VAT exemption agreements. Such a table defines that the VAT code is to be replaced by another VAT code. M3 Business Engine then automatically substitutes the default VAT code proposed for the order line with the replacement VAT code.

See VAT Exemptions.

When the company creates customer invoices based on sales customer orders, the VAT amounts are automatically calculated and recorded based on the VAT codes. If an order line refers to a good or service that is zero-rated or VAT exempt, a VAT exemption text retrieved from (TXS020) is automatically printed on the invoice.

For purchases, M3 Business Engine checks for a replacement VAT code in (TXS020) when you enter a purchase order line only, not when matching supplier invoices to goods receipts or purchase orders.

Quick reference tables

Cheat sheet – Sales

Cheat sheet – Purchases