Oracle eBTax: Reverse charge taxes, do you use Offset taxes or the Self Assess solution?
What is reverse charge VAT?
“Reverse Charge” is a part of the VAT law in a growing number of European countries. It states that the VAT (Value Added Tax) for Goods and Services delivered inside the country by a foreign company is owed by the recipient of the goods and not by the foreign service provider/supplier.
VAT must not be charged on invoices to the recipient. By law, a clear statement must appear on each of these invoices indicating that the liability for the payment of VAT is reversed to the recipient. The recipient has to calculate, report and pay the VAT (it may be recoverable if the recipient is VAT registered). The foreign service provider/supplier may be entitled to a VAT refund claim for all VAT charges by local suppliers.
So, in Oracle do we use Offset or Self Assessed tax?
In Oracle R12, we have the option of using either an Offset or Self Assessed tax in order to successfully allow us to determine a reverse charge (VAT, GST) or a USE Tax Accrual (US). The following link gives an example between the setup of an offset tax and a self assessed tax
But what should you use? Offset or Self Assessed?
The simple answer is Offset for Europe and Self Assessed for the US.
For the US, the only time that you need to accrue you tax is if your supplier has either undercharged or not charged any sales tax, you then need to accrue the difference and this is done by applying a USE tax. The problem with this of course is that by applying a tax line to an invoice that has no tax would result in a lines variance mismatch because the original invoice amount entered in the header has now had an additional tax amount added to it. So to get around this, Oracle uses the Self Assessed tax to create a tax line and distribution but not adding this tax line to the invoice lines! This means that the invoice amount is unchanged but the invoice distributions is.
So why don’t we use this solution in Europe for VAT?
– The main reason is that no line is visable on the invoice lines form, so when a user uses the ‘calculate tax button’, there is no visibility to know if the tax has been calculated or not! The user has to then manually check the tax details which will be time consuming.
– In Europe, users are used to using offset taxes, it is an established and accepted practice, so moving to a Self Assessed tax solution would mean educating users of the new process.
– Offset taxes also make it easier to assign the correct accounting, as you have a tax account (usually assigned via the recovery rate) where as the self assessed tax only has the one tax account and a liability account (that you will need to modify if you want to post your offset value to a different account).
– Self Assessed taxes also require rules making it harder to use self assessed taxes if keeping an 11i STCC tax solution after an upgrade.
Can you use Self assessed taxes to setup EU reverse taxes?
Yes you can, but you would not have an as effective solution as using offset and is something we would never recommend to do.