Withholding Tax

Withholding tax is applicable in few countries. Some of the countries which have withholding tax are United Kingdom, Slovakia, Turkey, Argentina, Brazil, Chile, Colombia, Mexico, India, Philippines , Thailand and South Korea. SAP has given an excellent solution to map the withholding tax scenario.

What is a withholding tax?

Withholding tax is an Income tax which is deducted at the source of the revenue. The party that is subject to tax does not remit the withholding tax to the tax authorities himself. In any business  transaction there are 2 parties involved. One is the customer and another is the vendor. A customer is authorized to deduct withholding tax for services rendered by the vendor. When the vendor raises the invoice on the customer, the customer deducts the withholding tax as per the rates specified by the tax authorities and pays the balance money to the vendor. The tax deducted by the vendor is remitted to the tax authorities on specified due dates. The vendor gives a Withholding tax certificate to the customer for the withholding tax deducted.

The customer can claim this withholding tax (as advance income tax paid) in his annual returns to Income tax authorities. In some countries (like India) the withholding tax is deducted on Invoice or payment whichever is earlier. Thus when an advance is paid to the vendor the customer is required to deduct withholding tax o n the advance payment. When the Vendor submits an Invoice the customer is now required to deduct tax on the Invoice amount reduced by the advance amount.

To calculate pay and report the withholding tax, the SAP system provides two functions:

  • Classic Withholding tax
  • Extended Withholding tax

Extended Withholding tax includes all the functions of classic withholding tax; SAP therefore recommends the use of extended withholding tax.

With Extended Withholding tax, we can process withholding tax from both the vendor and customer view. From the Accounts Payable perspective, the vendor is the person subject to tax and the company code is obligated to deduct withholding tax and pay to tax authorities. From the Accounts Receivable perspective the company code itself is subject to tax and the customers that do business with the company deduct withholding tax and pay to the tax authorities.

Generally the Accounts Payable perspective is used by majority of the implementing companies.

How to Check Withholding Tax Countries

IMG –> Financial Accounting–>  Financial Accounting Global Settings –> Withholding Tax –>  Extended Withholding Tax –> Basic Settings –> Check –> Withholding Tax Countries

Define Official Withholding Tax Codes

IMG –> Financial Accounting –> Financial Accounting Global Settings –> Withholding Tax –>  Extended Withholding Tax –>  Basic Settings –> Define Official Withholding Tax Codes

Define Reasons for Exemption

IMG –>  Financial Accounting –> Financial Accounting Global Settings –> Withholding Tax –> Extended Withholding Tax –> Basic Settings –> Define Reasons for Exemption

Check Recipient Types

IMG –> Financial Accounting –> Financial Accounting Global Settings –> Withholding Tax –> Extended Withholding Tax –> Basic Settings –> Check Recipient Types

Define Business Places

IMG –> Financial Accounting –> Financial Accounting Global Settings –> Withholding Tax –> Extended Withholding Tax –> Basic Settings –> “Country”  –> Define Business Places

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