Withholding Tax

Table of content:
1
Background …………………………………………………………………………………………………………
  2
1.1
Definition ………………………………………………………………………………………………………
2
1.2
Purpose …………………………………………………………………………………………………………
2
1.3
How does WHT works ……………………………………………………………………………………..
3
1.4
Drivers for WHT ……………………………………………………………………………………………..
3
1.5
Gross up ………………………………………………………………………………………………………..
3
2
Oracle Set up ……………………………………………………………………………………………………….
4
2.1
Oracle Payables Set up ………………………………………………………………………………..
4
2.2
Withholding Tax calendar……………………………………………………………………………
7
2.3
Tax Authority as Supplier …………………………………………………………………………..
17
2.4         Tax code setup  ………………………………………………………………………………………..
17
2.5         Tax Group ………………………………………………………………………………………….
2.6         Normal Supplier ………………………………………………………………………………….
14
16

3
Testing case   ……………………………………………………………………………………………………
17
3.1
At Payment time………………………………………………………………………………………
17
3.2
At Invoice validation  Time………………………………………………………………………..
22
4
  Withholding Tax Inquiry and Reports ………………………………………………………………….
26

Global Withholding Tax


1 BACKGROUND


This document describes the solution for a company that is subject to withholding tax (WHT). WHT is a common solution supported by Oracle. In some cases however the solution cannot be used (in case of gross up, meaning the company has to take the tax amount to its own cost instead of the supplier) and modifications to the process and to the Oracle system has to be made.


In this document you?ll find a description and possible solutions to overcome gross up.


  1. Definition


Withholding tax (WHT) is the amount withheld by the party making a payment to another (payee)and paid to the taxation authorities.


The amount the payer deducts may vary, depending on:


  • The nature of the product or service being paid for (supply of goods, equipment, rental of services)


  • The status of the payer and the status of the payee (supplier) in the related country (PE, certificate Y/N, country of residence etc.)


  • The location where the service are performed or made (in- or outside the country)

  1. Purpose


The purpose of WHT is to counteract tax evasion and tax avoidance by domestic or international taxpayers. In some jurisdictions, the purpose of deduction is also to facilitate or accelerate tax collection.


  1. How does WHT works


To comply for WHT the company has to:


  • Withhold tax from the payment to the supplier/subcontractor (when there is no exemption certificate)
  • Obtain an exemption certificate from the supplier before any payment is made


  • Take the WHT on our account. The supplier is paid the full amount of the invoice, even if there is no exemption certificate. The WHT is an additional operating cost that we agree to pay for the goods or services purchased (Gross up)


When no exemption certificate is granted to the supplier, the company needs to withhold, declare and pay the WHT-amount to the tax authorities. A certificate confirming the remitted amounts may be provided or arranged by the payer and sent to the supplier. The supplier can declare its activities, pay taxes and reclaim the amount of WHT already paid by the company.


Generally, a payment is subject to WHT if:


  • The supplier/subcontractor is a non-resident of the project-country


  • The services/goods are provided within the project-country (on site)


  1. Drivers for WHT


The main drivers for WHT are;


  • Country of the project


  • Residence of the supplier/subcontractor


  • Source of the income – the place where the services are performed


  • Product or service


Examples:


    1. A non US-resident subcontractor performs dredging activities in the US waters. Payments to this subcontractor are subject to WHT


    1. Equipment is rented by the company in e.g. Ireland from a non-resident company. The rental payment is subject to WHT


  1. Gross up


When the purchasing department decides to gross-up costs for a supplier (because there is no alternative supplier accepting the withholding tax/lack of experience in the country etc.), the following rules apply:


  1. this is an exceptional purchasing decision by supplier that needs to be validated by management


  1. the existing PO must be updated by adding an item „Gross up? linked to the appropriate GL-account


  1. Project control needs to include these costs (when third party costs) from the outset of the project.


2 ORACLE SET UP


This section describes the set up in Oracle for WHT.


  1. Oracle Payables Set up


To enable Withholding Tax within a company the Payables options have to be setup


Oracle Payables>>Setup>>Options>>Payables>>[TAB] Withholding Tax


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Use Withholding Tax: This option needs to be enabled


Allow Manual Withholding: This option needs to be enabled to allow manual creation andadjustments of WHT Type distributions for the invoices.


Tax Group: This field is optional. Used for defaulting the WHT Group for new suppliers entered.My preference would be to leave this field blank.


Withholding Amount Basis


Include Discount Amount: The invoice discount amount is also included when the WHTamount is calculated.


Include Tax Amount: The tax amount (not WHT!!!) is also included in the WHT-calculation.



Apply Withholding Tax


Later in this document you will find a more detailed description (with screenshots) what happens once a WHT-code is linked to a supplier and a Tax Authority. Basically what happens is that on invoice line-level an extra line is created with the WHT-code and a negative amount to reduce the payment to the supplier. Equally it creates (based on the settings for the option CreateWithholding Tax Invoices) a WHT-invoice for the Tax Authority with the amount that wasdeducted on the supplier invoice.


To explain the other two settings: At Payment Time means the WHT is applied (as an extra line on the invoice) once the invoice is selected for payment.


Be aware that these methods are applicable only for the standard setup of WHT and is not applicable for Gross-up which is discussed later in this document.


The option Never will not create a WHT invoice line.


Create Withholding Tax Invoices


Oracle Payables will automatically create invoices based on these setting (except for the option Never). Basically the same happens as described in the previous section, but now it will createan invoice for the Tax authority that is linked to the WHT-code.


Include Income tax Type on Withholding Distributions


This option is specific for 1099 Reporting in the U.S. and don?t need to be set up.


  1. Calendar setup
Create a Calendar type as Withholding Tax
Oracle Payables>>Setup>>Calendar>>Special Calendar



2.3 SUPPLIER SETUP


Using Withholding Tax requires some extra setup on the suppliers as well. This chapter describes the setup that has to be done on the suppliers.


2.3.1 Tax Authority Setup


The Tax Authority has to be setup as a supplier with a supplier type Tax Authority. A supplier site for the Tax Authority needs to be setup as well.


Optional Components for the Tax Authority setup are:


  • A unique Pay Group (so you can separate the payments to the Tax Authorities from the other payments)


  • A payment format that uses the Tax Authority Remittance Advice as its Separate remittance Advice






Withholding Tax


2.4 Tax Code setup

Oracle Payables>>Setup>>Tax>>Codes


  • Give the Tax code name
  • Assign  the GL account


  • Assign the Tax authority name and site name


  • Assign the Withholding Tax Calendar created earlier



2.3.4  Rate Structure


  • Period Limit is used to limit the amount of tax withheld during a withholding tax calendar period.After you paid the amount of WHT specified the system stops creating WHT-invoices. Payables will not withhold more than the specified amount for the specified period(s).


If you choose this option it is also obligatory to fill in the fields: Tax Authority, Site, Calendar and Period Limit.


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  • Flat Rate is used when you have no amount or period limits

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  • Amount Ranges is used when your WHT rate depends on what you already have paid during a time period. For the amount basis you can choose between Gross Amount and Withheld Amount. The time period is either per withholding tax calendar period or per invoice.


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    1. Tax Groups


In the Withholding Tax Groups window you can combine multiple Withholding Tax Codes. WHT codes can be assigned to more than one group.


If this is used Payables calculates invoice withholding tax based on every tax code in the withholding tax group (Based on the ranking).


Because you can only apply Withholding Tax Groups to an invoice (and not an individual Withholding Tax Code) you have to create a Withholding Tax Group even if it only applies to one Withholding Tax Code. You can enforce this by clicking the Create Tax Group field in the Withholding Tax Details form.


Payables>>Setup>>Tax>>Withholding>>Groups


Global Withholding Tax


    1. Normal Supplier Setup


When we know upfront the supplier is subject to WHT and the WHT-percentage is known, a specific site for the supplier needs to be setup. The recommended naming convention for this site is WHT-


<<country abbreviation where supplier is subject to WHT>>-<<WHT percentage>>



To automate the calculation of WHT, besides the usual setup, two extra steps in the supplier site setup are required:


  1. Fill the Withholding Tax Group-field under the Withholding Tax TAB with the correct WHT-code/percentage



  1. Make sure the Allow Withholding Tax field is enabled


  1. Prevent payment of the WHT-supplier site automatically by enabling the Hold All Payment field under the Control-TAB.



3.  TESTING:


3.1 Scenario-1: Apply and Create Withholding tax at Payment time


Process description:
  1. Book the invoice



2.  Validation of the invoice


3.  Pay the Invoice
Save the information


As soon as you save the Payment, System will throw the below Caution message.
Click OK to Continue


Now We can Check the Invoice


Navigate to Payables Super User/Payables Manager->Invoices->Inquiry->Withheld Amounts and enter the OU,Taxcode,supplier& Site and click on Find button to see the withheld amount details


Now Check the Withholding Invoice



3.2  Scenario-2: Apply and Create Withholding tax at Invoice Validation Time


Go to Payable option and select the radio button “At Invoice Validation Time” as per below screen under Withholding Tax


Also enable “Allow Tax Withholding” and enter the newly created Tax Group under “Invoice  Withholding Tax Group” against the site.(Since we have set create Withholding Tax invoice at Invoice Validation Time).


1.Create an Invoice
2.  Validate the Invoice



The moment you validate the Invoice, Withholding Tax will be calculated based on the rate attached to tax group.


Also System will generate a negative distribution line of withheld amount item type as Withholding Tax


6.  WITHHOLDING TAX INQUIRY AND REPORTS


Oracle Payables has a number of reports on Tax Authority and Supplier for Withholding Tax. These reports are standard reports:
  1. Withholding Tax by Invoice Report


  1. Withholding Tax by Payment Report
  2. Withholding Tax by Supplier Report


  1. Withholding Tax by Tax Authority report


It is also possible to search for Withholding Tax via the application:


Oracle Payables>>Invoices>>Inquiry>>Withheld Amounts

Thank You,


||Sangramjeet||

  • April 17, 2015 | 33 views