An Introduction to eTax – Part 1 Why is eTax important? Before Oracle released R12, tax handling in Oracle was a fairly simple affair. Define a few rates, set a priority hierarchy, set some exemptions but not much functionality beyond that. The result was that for the most part, organisations relied on employees selecting the correct VAT rate, and consequently mistakes were made, potentially leading to financial loss, poor compliance and loss of goodwill from customers and suppliers. With the release of R12 came eBusiness Tax, or eTax for short. eTax centralises all your tax handling and gives you extensive control over automating your tax calculations, thus reducing the chances of errors. eTax is not a module in its own right, rather it is a rules based engine providing tax calculation services to other modules such as Payables and Receivables. When a transaction is performed in one of the subledger modules, the details are passed to the eTax engine which then determines the applicable tax rate, calculates the tax amount and returns it to the sub-ledger. In addition to servicing the sub-ledgers, eTax also records all the tax transactions in a central repository to facilitate tax reporting and reconciliation requirements. Sounds complicated, do I actually need to use it? eTax is as simple or complex as you need it to be and how you use it will depend on your company and the nature of your business and your transactions. Some companies will not need anything beyond defining some default rates; others may simply need to accommodate Intra EU transactions whilst others may have more complex requirements. Let’s consider a scenario where your company has a head office located in the UK, but also a number of globally distributed offices supplying both within their own countries and also to other countries (for example a regional office in Germany providing goods or services to Poland). You supply various product types, some of which are subject VAT and some of which are zero rated or exempt, depending on localised tax laws. Now if your invoicing operation is centralised in the UK, for every sales invoice you raise you would have to consider where the office proving the goods or service was registered, where they were selling to, the registration status of the company they were selling to and whether or not the goods or services where subject to VAT. With so many variables it is not surprising if mistakes are made. eTax can cater for complex scenarios like these and eliminate manual errors, but it does require some configuration to leverage these benefits. An Introduction to eTax – Part 2 Regime to Rate Flow Regardless of how simple or complex your tax requirements are, you will need to define a tax structure to define relationships between the tax collection authority, taxes, tax statuses and rates, in eTax this is known as the ‘Regime to Rate Flow’. A Tax Regime is a system of regulations for the determination and administration of one or more taxes, typically this will equate to a country or group of countries (e.g. United Kingdom, France etc). In the United Kingdom the Tax Regime is HMRC (Her Majesty’s Revenue and Customs), where HMRC is responsible for the collection of taxes on transactions, known as Value Added Tax (VAT). Within the VAT system there are be multiple Tax Statuses, such as ‘Standard’, ‘Exempt’, ‘Reduced Rate’ etc, depending on the nature of the transaction, the parties involved and/or the goods/services provided. Each Tax Status is assigned a Tax Rate which is used to calculate the actual tax amount on the transaction. Oracle allows you to expand and view on your Regime to Rate Flow: Note from the screen shot above that the VAT Standard Rate has three entries reflecting rate changes over recent years which are controlled by effective date ranges. This will be explained in more detail below. So how do you create a ‘Regime to Rate Flow’ within Oracle E-Business Tax? 1. Create a Tax Regime eTAx configuration is performed using the Tax Manager responsibility and is based in HTML forms. The first step is to define a Tax Regime. Navigation: Tax Configuration > Tax Regimes Add controls and defaults, as usual with Oracle these can be overridden at a more detailed level such as Tax or Tax Status: 2. Create a Tax Once you have created the Regime, you can create one or more taxes; in the UK this would simply be VAT: Navigation: Tax Configuration > Taxes Note that the ‘Make Tax Available for Transactions’ box has not been ticked yet. This should be done after completing the remaining configuration, particularly if adding a new tax in a production environment. 3. Create Tax Statuses For each transaction eTax needs to be able to determine and assign a Tax Status, even if the amount due is zero. In the UK the following statuses are applicable: Standard, Zero, Exempt, Reduced and Intra EU Zero. Navigation: Tax Configuration > Tax Status Note that in this example ‘Set as Default Tax Status’ has been ticked since most transactions are subject to Standard VAT at the prevailing standard rate. 4. Create Tax Rates For each Tax Status that you have defined you will need to create a Tax Rate. This is the rate actually used to calculate the tax amount on the transaction (e.g. 20% on Standard, 5% on Reduced, 0% on Zero etc). Navigation: Tax Configuration > Tax Rates Tax rates change of over time. The example above shows a new rate of 20% added. Note that when changing the rate you also need to click on the Rate Details icon and amend the default flag on both the previous rate (un-tick and end date) and the new rate (tick and add start date), ensuring that they do not overlap: 5. Tax Jurisdictions A Tax Jurisdiction defines the geographical boundary that is subject to a specific tax and typically falls within boundaries of a country. For example, in the US each state has its own tax jurisdiction, as do counties and cities. A transaction in the US is therefore subject to taxes in three jurisdictions, all of which fall within the US tax regime. In the United Kingdom there is a single tax authority (HMRC) and a single tax (VAT) that applies to the entire regime so there is no actual requirement to define a jurisdiction. It is best practise to define a Jurisdiction regardless, even though it equates to the same scope as the Tax Regime. Navigation: Tax Configuration > Tax Jurisdictions Note that the Jurisdiction must be assigned to a Tax Regime (in this example GB-Tax) and Tax (GB-VAT). Also note that the Geography Type selected is ‘Country’ (if creating jurisdictions in the US this would be State, County or City depending on the jurisdiction being defined). 6. Recovery Rates Finally, if you have ticked ‘Allow Tax Recovery’ in your Regime controls, you should set up the appropriate recovery rates. If your VAT is fully recoverable then you will need a 100% rate as shown below, but other rates should be added depending on your requirements. Conclusion The Regime to Rate Flow is fundamental when defining and setting up eTax. Once defined little maintenance should be required except for updating Tax Rates. This has been an overview of the basic steps required to configure Regime to Rate flow, for more detailed information regarding this and other aspects of eTax configuration please contact us and we will be happy to help. This is the second in a series of blogs in which I will be covering some of the eTax fundamentals, from defining the Tax Regime and Rates through to defining Tax Rules and how to make them work for your business. I hope you found it useful.
