How to create a tax code on SAP Business One?

First-time users often find it difficult to define tax codes on their ERP system. Though it may seem like an overly complicated process, it isn’t. There are a series of steps involved in defining the tax codes. But before we dive into the details, let us understand what tax codes are and why do we need them.

What are tax codes?

A tax code is a government file that contains thousands of numbered pages that defines the rules that individuals and businesses must follow while settling the taxes to the central or state government. Tax codes are used to calculate tax in domestic procurement.

Tax codes are unique to each country. The rules for tax rate calculation and other important features are stored in a table for each tax code. You should use tax codes with a 0% rate for tax-exempt or non-taxable transactions, if the corresponding transactions are to be displayed in the tax returns. You’ll have to define new tax codes if tax rates are changed by the government during the annual reviews. The old codes with the old tax rates must remain in the system till the open items which use this tax code don’t exist anymore.

According to SAP Business One, tax code refers to the two-digit code that represents the specifications used for calculating and displaying tax.

Here are a few specifications defined under the tax code:

• Tax rate
• Type of tax (input tax or output tax)
• Calculation method (percentage included or percentage separate)

So, you need the tax code to:

• Check whether the associated transaction is related input or output tax
• Check if a tax account with tax type (input or output tax) can be posted to
• Check the tax on revenue amount in the document
• Calculate the amount of tax on sales automatically on request
• Determine the tax account

Creating tax codes on SAP Business One

Here’s a step-by-step procedure to create tax codes on SAP Business One.

Step 1: Define the tax parameter

• From the Main Menu of SAP Business One, select Administration > Setup > Financials > Tax > Tax Engine Configuration > Tax Parameter
• Specify the Rate as the tax parameter code in the Code section and describe it in the Description field
• Select Rate from the Attribute dropdown. Choose Define New to create a new attribute
• Select Tax Amount and Base Amount from the Return Value dropdown list
• Click on the Add button to save the tax parameter

Step 2: Define the type of tax

• Choose from the Main Menu, Administration > Setup > Financials > Tax > Tax Types
• Specify the type of tax in Tax Type Name field
• Select the relevant tax category from Tax Category dropdown list. You can also define a new tax category by choosing the Define New from the Tax Category – Setup window
• Select the relevant parameter from the Tax Parameter dropdown list
• Click on the Update button to save the changes

Step 3: Add the tax formula

• From the Main Menu, choose Administration > Setup > Financials > Tax > Tax Engine Configuration > Tax Formula
• Specify the Code and Description in the respective fields
• Select the tax type formula from the Tax Type dropdown list
• Open the List of Tax Parameters window by choosing Tab in the empty field of the Parameter Code column, and select tax parameters for the tax formula by double-clicking the row or choosing the OK button after selecting the row
• Define the formulas in the formula pan on the right
• Check if the formulas are correct by clicking button before the Formula Validation Message. If you don’t get a message, your formula is correct
• Select Add button to save your formula

Step 4: Define the tax type combination

• From the SAP Business One Main Menu, choose Administration > Setup > Financials > Tax > Tax Engine Configuration > Tax Type Combination
• Specify the Code and Description in the respective fields
• Select tax type from the dropdown list
• Open the List of window by choosing Tab on the Formula Code field and select the corresponding formula code by double-clicking the row
• Click Add to save

Step 5: Define your tax code

• Choose Administration > Setup > Financials > Tax > Tax Codes. Add Code and Description.
• Select the tax type combination from the dropdown list
• Select the List of Sales Tax Authorities window by choosing Tab in the Code field. Select a code for each tax

If you want to define new attributes for the tax type, proceed as follows:

1. From the List of Sales Tax Authorities window, choose the New button to open the <Specific Tax Type> Attributes – Setup window to define attributes for the corresponding tax type
2. In the corresponding fields, specify the name, purchasing tax account, sales tax account, and non-deductible %
3. Open the Valid Period – Setup: <Specific Tax Type> window by selecting a row and performing one of the following operations:
4. Double-click the row you just selected
5. From the menu bar, choose Goto Valid Period.
6. Right-click the row you just selected and choose Valid Period
7. In the Effective From field, specify the effective date, and in the Rate field, specify the rate
8. In the Valid Period – Setup: <Specific Tax Type> window, choose the Update button to save the valid period for the rate
9. To close the Valid Period – Setup: <Specific Tax Type> window, choose the OK or Cancel button
10. In the <Specific Tax Type> Attributes – Setup window, save the attributes for the tax type by choosing the Update button
11. To close the <Specific Tax Type> Attributes – Setup window, choose the OK or Cancel button
12. Finally, select the newly defined attributes by double-clicking the row or choosing the Choose button after selecting the row in the List of Sales Tax Authorities window

• Click on Add to save the changes