Handle Partially Reclaimable VAT with Pro-Rata VAT Functionality in Your SAP System
- by Kees van Westerop, Senior SAP Consultant, Kwest Consulting
- October 27, 2009
Many organizations in the EU use Value Added Tax (VAT) on certain sales. However, not all sales allow VAT charges. If you’re a company providing products that are both VAT-eligible and VAT-ineligible, how do you account for this in your system? See how to set up and customize pro-rata VAT in your SAP system.
Pro-rata VAT is used by EU companies that are partly VAT relevant and partly VAT irrelevant. The pro-rata VAT functionality in SAP systems splits the VAT of incoming invoices in a deductible part and a non-deductible part. During the period the splitting is based on an estimated percentage. At the end of the period the definitive percentage will be known and you can make a correction for the difference between the estimated amounts and the definitive amounts. Within customizing the same distinction is made. The first settings are relevant for the estimated amounts and the other settings are relevant for the adjustment posting.
Value Added Tax (VAT) is a common tax system in the European Union (EU) applicable for almost all sales and purchase transactions in the EU. However, some organizations are legally not allowed to charge VAT. These include non-profit organizations such as governments and hospitals, but also some commercial organizations such as banks and airlines. When an organization isn’t allowed to charge VAT, it is also not allowed to reclaim VAT.
Pro-rata VAT is used to fulfill the legal tax reporting requirements for companies that are partly VAT exempt and partly liable for VAT. An example of such a company is an agricultural enterprise that breeds cattle and cuts lumber. The cattle business is relevant for VAT, but forest exploitation is not. When this company buys a computer, the company can reclaim the purchase VAT related to this computer for the cattle business, but for forest exploitation it is just a cost and cannot be reclaimed.
Of course, the issue now is how much is deductible and how much is not deductible. At the beginning of the period (e.g., year, month, or quarter), an estimate is made as to how much will be deductible and how much will not. This is based on local legislation, but is often done based on turnover. For example, for the agricultural enterprise it could be that 50% is deductible and 50% is not. At the end of the period, the real percentage is determined. It could turn out that 45% is deductible and 55% is not deductible. This requires a correction for the VAT that has been posted as being deductible, but shouldn’t have been deducted.
You can split pro-rata VAT into two parts. The first part applies to a specific period. In this period, the VAT is not deductible for an estimated percentage. The second part of pro-rata VAT is the correction that has to be made at the end of the period when the definitive percentage is known.
I first explain the two parts of the business process and then how these two parts need to be customized in your SAP system. The pro-rata solution is available since SAP R/3 4.6, but my screenprints are from SAP ERP Central Component (SAP ECC) 6.0.
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