Automatic Tax Calculation Overview

If you enable the Automatic Tax Calculation feature, Payables will automatically calculate
invoice sales tax and create Tax type distributions for you. Payables automatically calculates
tax for manually entered invoices and recurring invoices. During Expense Report Import,
Payables also automatically calculates tax for invoices it creates. You enable the Automatic
Tax Calculation feature by enabling the Use Automatic Tax Calculation Payables option.

If you do not enable Automatic Tax Calculation, Payables does no tax calculation, but it will
automatically create a tax distribution during invoice entry if you enter values for Tax Code
and Tax Amount in the Invoices window. Payables copies the invoice tax code and tax
amount values you enter when it creates the tax distribution but it does no tax calculation.
However, it will validate the tax amount during Invoice Validation.

This discussion includes the following topics:

• Automatic Tax Calculation Level

• Calculation of Tax Distributions For Line or Tax Code Automatic Tax

Calculation

• Overriding Tax Calculation Level

• Setting Up Automatic Tax Calculation

• Disabling Automatic Tax Calculation

Automatic Tax Calculation Levels

If you use automatic tax calculation, Payables calculates tax for your invoices at the level you
specify, Header, Line, or Tax Code. The Calculation Level option you select determines
whether Payables calculates tax based on the invoice information (Header), or based on
individual invoice distribution information (Line and Tax Code). The difference between
Line and Tax Code calculation is how Payables groups amounts to calculate tax. The
difference in calculation is generally due to rounding differences. For a complete explanation,
see: Calculation of Tax Distributions For Line or Tax Code Automatic Tax Calculation.

The value of the Calculation Level option defaults in the following order: Payables Options
window -> Suppliers window -> Supplier Sites window -> invoice entry. (Note that you
cannot set a value at the Suppliers window if you use Multi-organization support). You can
override the Calculation Level at any level (supplier, supplier site, invoice entry) if the Allow
Calculation Level Override check box is enabled at the previous level. If you override the
calculation level you can change the calculation level to Header, Line, or Tax Code or you
can disable tax calculation by choosing None.

You choose the automatic tax calculation level in the Calculation Level fields of the Invoice
Tax regions of the Payables Options, Suppliers, and Suppliers Sites windows. If you have
enabled the Allow Calculation Level Override option at the supplier site you have one last
opportunity to change the tax calculation level when you enter the invoice.

You can use Header level calculation only if the tax code is fully recoverable. If the
transaction uses tax codes that are nonrecoverable or partially recoverable, you must choose
Line or Tax Code level calculation. See: Recoverable Tax.

Header

If you automatically calculate tax at the Header Level, then during invoice entry in the
Invoice Workbench, when you enter a tax group or Sales or User-defined type tax code in the
Invoices window, Payables automatically calculates and enters the Tax Amount. Payables
calculates the tax amount based on the gross invoice amount and the tax rate of the tax codes
you use. In the Tax Codes window you assign a tax rate to each tax code.

When you navigate to the Distributions window, Payables automatically creates a tax
distribution with the Tax Amount and Tax Code from the Invoices window. See: Header
Level Automatic Tax Calculation.

Payables does not calculate tax amounts for Use type tax codes.

Note: You cannot use Header level calculation in the Quick Invoices window or Expense
Reports window.

Note: Only fully (100%) recoverable tax codes can be used on the Header level. To define
recoverable tax codes, the Financials option Enable Recoverable Tax must be enabled.

Line

If you automatically calculate tax at the Line level, after you enter non-Tax (Item,
Miscellaneous, or Freight type) distributions in the Distributions window, Payables creates
Tax type distributions. When you enter distributions, you use the Includes Tax check box to
indicate if a distribution line amount is inclusive or exclusive of tax.

Payables calculates the tax amount for distributions based on the distribution amount, the
Includes Tax check box for the distribution, and the tax rate of the applicable tax codes.

If you use Recoverable Tax, the system also calculates tax based on the recovery rate. In the
Tax Codes window you assign a tax rate and recovery rate to each tax code. Payables creates
tax distributions for the appropriate amounts, and assigns the applicable tax code to each
corresponding distribution. If you enter a tax group, the system can calculate multiple taxes
for an invoice that contains both recoverable and nonrecoverable tax amounts and your totals
will reflect the appropriate tax distributions.

When Payables calculates tax for distributions that include tax, it also reduces the amount of
the Item distribution by the calculated tax amount and unchecks the Includes Tax check box.
Payables creates tax distributions automatically either when you choose the Calculate Tax
button in the Distributions window, or when you submit Invoice Validation for the invoice. If
the Enable Recoverable Tax option is enabled in the Financials Options window, then you
can also use the Tax Summary window to view and calculate the tax. Payables calculates tax
the same way for invoices entered via the Quick Invoices window and the Invoice
Workbench. See: Distribution Level (Line and Tax Code) Automatic Tax Calculation, and
Recoverable Tax.

Tax Code

Tax Code level and Line level calculation are the same except for how Payables groups and
rounds tax amounts. In some cases, the tax calculation results are the same. When the results
are different, the difference is usually a very small amount caused by rounding.

The results between Tax Code and Line level calculation will differ if at least the following
conditions are true:

• The Enable Recoverable Tax Financials option is enabled.

• The invoice has more than one Item distribution subject to tax.

• At least one of the Item distributions uses a tax code that is partially
recoverable.

See: Distribution Level (Line and Tax Code) Automatic Tax Calculation, and Recoverable
Tax.

None

If you choose None as the calculation level, Payables disables automatic tax calculation for
associated invoices. In the Suppliers window, the Supplier Sites window, and during invoice
entry, you can choose None as your Calculation Level if you have enabled the Allow
Calculation Level Override option at the previous level. When automatic tax calculation is
disabled, you can create tax distributions by matching to purchase orders, by allocating, by
using Distribution Sets, or by entering tax distributions manually. See: Entering Taxes When
You Do Not Use the Automatic Tax Calculation Feature.

If you enter a tax value and tax amount in the Invoices window and automatic tax calculation
is not enabled for an invoice, Payables will automatically create a tax distribution, but it will
not calculate the tax. It will not verify the tax amount until Invoice Validation. See: Tax
Amount Verification During Invoice Validation.

Overriding Tax Calculation Level

The automatic tax Calculation Level value defaults in the following order: Payables Options -
> Suppliers -> Supplier Site -> Invoices. You can adjust the default calculation level in the
Suppliers, Supplier Sites, and Invoices windows only if the Allow Calculation Level Override
option is currently enabled in the preceding window. You cannot enable the Allow
Calculation Level Override check box in the Suppliers or Supplier Sites window if the Allow
Calculation Level Override check box is not currently enabled in the previous window. If you
adjust an Allow Calculation Level Override check box, it immediately affects your ability to
change the Calculation Level and the Allow Calculation Level Override check box in the
succeeding window for existing and new records.
The value of the Allow Calculation Level Override check box does not default. The Allow
Calculation Level Override check box is always disabled for all new suppliers and supplier
sites.

Calculation of Tax Distributions For Line or Tax Code

Automatic Tax Calculation
If you use Line level or Tax Code level automatic tax calculation, Payables creates tax
distributions with calculated tax amounts, then groups them by unique combination of:

• Tax Code

• Tax Inclusive/Exclusive setting (setting of the Includes Tax check box)

If the Financials option Enable Recoverable Tax is enabled and there are recoverable tax
amounts, then Payables creates one recoverable tax distribution for each of these groups. For
recoverable distributions, Payables does the following:

• Assigns the GL account from the tax code

• Enables the Recoverable check box

Payables also calculates the nonrecoverable tax amounts per taxable distribution and groups
by a unique combination of the following:

• Tax Code

• Tax Inclusive/Exclusive setting (setting of the Includes Tax check box)

• GL account

• project information (if applicable)

• purchase order distribution (if applicable)

If there are nonrecoverable amounts, then one nonrecoverable tax distribution will be created
for each of these groups. The GL account assigned to these distributions will be from the
Item distribution(s) and these amounts become part of the acquisition cost of the item for
Oracle Projects and Oracle Assets.

During this calculation and grouping process, Payables rounds distribution amounts. When
the invoice is calculated at the Line level, the amounts per distribution are rounded to the tax
Precision or Minimum Accountable Unit defined at the supplier site level, and then grouped.
At the Tax Code level, the amounts are grouped first, and then rounded. If there is any
rounding difference between the sum of all the nonrecoverable distributions and the total
nonrecoverable tax amount, it is added to the largest of the nonrecoverable tax distributions.

In addition to instructing the system to favor either the Item distribution or the Tax
distribution during an exclusive tax calculation, the tax rounding rule at the supplier site level
instructs the system whether to favor the nonrecoverable or the recoverable distributions.
This may be mandated by law in some tax regimes. If the Rounding Rule is set to Up, any
partial units (beyond the precision) are included in the nonrecoverable distributions; if it is set
to Down, any partial units are included in to the recoverable distributions. If it is set to
Nearest, any partial amounts.5 or higher are included in the nonrecoverable distributions. For
example, a calculated tax amount of 15.28 is 30% recoverable, thus 70% nonrecoverable.
With a Rounding Rule of Up or Nearest, the nonrecoverable portion would be 15.28 * .7 =
10.696, which rounds to 10.70. The recoverable portion would therefore be 15.28 - 10.70 =
4.58. With a Rounding Rule of Down, however, the nonrecoverable portion of 10.696 would
be rounded to 10.69, and the recoverable portion would be 15.28 - 10.69 = 4.59.

If the Recovery Rate on the Item distribution line is blank, then the tax will be 0%
recoverable.

Setting Up Automatic Tax Calculation

You control invoice tax calculation in the Financials Options window, Payables Options
window, the Suppliers window, the Supplier Sites window, the Invoices window, and the
Distributions window. Tax calculation options default or cascade from either the Financials
Options or Payables Options window to suppliers, and then from suppliers to supplier sites,
and from supplier sites to invoices. You can control tax options and defaults at any level,
including invoice entry. This allows you to set up individual tax calculation methods for each
supplier site. If you allow override options, you can select individual tax calculation methods
for each invoice you enter.

Invoice tax options you select also determine the exact calculated tax amount. At the
Financials option level you select the level of precision in the tax amount or the smallest
monetary unit to which the tax is calculated. You also choose for each supplier site whether
Payables rounds up, down, or nearest. You can agree on these rules with each of your
suppliers so that your accounts will match each of your supplier's accounts.

Prerequisites

Discuss with your supplier what rounding rule you will both use to
calculate tax so that your accounts will match.
If you want to record recoverable and partially recoverable taxes, then
enable Recoverable Tax. See: Setting Up Payables for Recoverable Tax or for
Automatic Tax Calculation for Proration.
Define tax codes or tax groups. See: Tax Codes or Tax Groups.

To set up Automatic Tax Calculation:

1. Enable the Use Automatic Tax Calculation option in the Invoice Tax region of the
Payables Options window.
2. Select tax options in the Tax tabbed region of the Financials Options window. See:
Tax Region of the Financial Options window.
Select any remaining Automatic Tax Calculation options in the Invoice Tax region of
the Payables Options window. See: Invoice Tax Payables Options.
 3. (Only if you do not use Multi-organization support) For each supplier, adjust tax
options in the Invoice Tax region of the Suppliers window. See: Invoice Tax region of
the Suppliers and Supplier Sites windows.
4. For each supplier site, adjust tax options in the Invoice Tax region of the Supplier
Sites window.

Disabling Automatic Tax Calculation

If you have enabled Automatic Tax Calculation, you can disable it throughout the Payables
system, or you can disable it only for specific suppliers, supplier sites, or invoices you select.

To disable Automatic Tax Calculation throughout Payables:

In the Invoice Tax region of the Payables Options window, disable the Use
Automatic Tax Calculation option.

To disable Automatic Tax Calculation for a particular supplier site:

1. Enable the Allow Override option in the Payables Options window and the
Suppliers window.
2. In the Supplier Sites window choose None as the Calculation Level. Do not enable
the Allow Override option.
3. Save your work. Payables will disable automatic tax calculation for all invoices for
this supplier site.

To disable Automatic Tax Calculation for a particular invoice:

1. Enable the Allow Override option in the Payables Options window, the Suppliers
window, and the Supplier Sites window.
2. In the Invoices window, when you enter a new invoice for the supplier site choose
None from the poplist in the Calculation Level field.