Originally, SAP developed what is now called classic withholding tax. The functionality was very basic and only suitable for accounts payable. Since SAP R/3 release 4.0 SAP has made available a functionality that is called extended withholding tax.
In classic withholding tax you cannot use customer withholding tax and partial payments, whereas in extended withholding tax you can. Be aware that you cannot easily switch from classic withholding tax to extended withholding tax as it involves migration of master data and transactional data. SAP Note 337267 (Converting from Simple to Extended Withholding Tax) describes how to migrate from the classic to extended withholding tax.
In December 2011 SAP released an improvement of the withholding tax calculation. Until then in SAP ERP an invoice was always completely relevant for withholding tax, although that is not always correct. For example, certain services are not relevant for withholding tax and other services are. Without this additional functionality, manual corrections had to be made.
The functionality becomes available by implementing SAP Note 1640876 (Line Item Exclusions for Extended Withholding Taxes). Although this functionality has been available for five years, it is not used much because it is rather unknown.
Activate Business Function FIN_EWHT_EXCL
After you implement SAP Note 1640876, the first step to set up the functionality is to activate business function FIN_EWHT_EXCL. A business function is a piece of SAP functionality that is not activated in the standard SAP system, but that can be activated depending on your requirements.
You can activate business functions in the IMG. You find activation of business functions directly at the top of the IMG structure. You can also start this using transaction code SFW5.
After executing transaction code SFW5, you see two folders as shown in Figure 1. Expand the second folder by clicking the black triangle in front of it.
The initial screen for switching on business functions
You need to scroll down to the function FIN_EWHT_EXCL. Set an indicator in the field under the Planned Status column and click the Activate Changes button found at the top of screen as shown in Figure 2. This action activates the exclusion functionality.
A list of business functions
The burning light bulb shown in Figure 3 in front of the function name indicates that the functionality has been activated.
The activated business function
Set Up Exclusion Logic
You can maintain the settings to exclude withholding taxes using transaction code OBW_EXCL. You can find the transaction in the customizing menu by following menu path Financial Accounting (new) > Financial Accounting Global Settings (new) > Withholding Tax > Extended Withholding Tax > Calculation > Exclusions > Define Exclusions. In the pop-up screen (not shown) that the system opens when you start this transaction, you must enter the country for which you want to maintain the exclusion strategies.
After you press the Enter key, the screen shown in Figure 4 appears.
The initial screen for exclusions
At the top of the screen in Figure 4, click the New Entries button to create a new exclusion strategy. This action opens the screen in Figure 5. In my example I demonstrate how to exclude a general ledger (G/L) account from withholding tax calculation for a specific document type. In Figure 5 I entered KVW in the field under the Environment strat. column and a description (Sample wht exclusion) under the Text column. After clicking the save icon (not shown) to save the new entry, you can enter the details.
Create a new exclusion strategy
To enter the details, select the entry and click the detail icon (the magnifying glass) at the top of the screen in Figure 5. This action displays the screen in Figure 6. However, it is in display mode. Click the display-change icon to go to the change mode.
Details of the exclusion strategy
Click the create icon at the top of the screen in Figure 6. A strategy may exist of several steps. Whenever you create a new step, the system asks you what kind of step you want to create. Figure 7 shows you the options you can choose from:
- Derivation rule – A logic to determine whether withholding tax should be excluded. This will be used in this article to demonstrate.
- Assignment – Very similar to the derivation rule logic. The main difference is that the Attributes tab is not shown.
- Initialization – Resets the exclusion indicator. Logic is very similar to derivation rule.
- Enhancement – Use an enhancement to exclude withholding tax
- Function module – Use a function module to exclude withholding tax
Types of steps
Select Derivation Rule and click the enter icon to display the screen in Figure 8. First, you need to indicate what the source fields and the target fields are. The source fields are the fields that are used as selection criteria and the target fields are the fields that will get a new value. The target fields are simple: There is only one and that is the exclusion indicator. This indicator will be set to X, meaning to be excluded for withholding tax.
For the source fields you have many choices. In Figure 8 you can see what the choices are. I have highlighted the field that will be used as the source, HKONT (General Ledger Account), and the target field, EXCLUDE.
Although I only selected one source field you can use multiple fields—for example, the Cost Center or Transaction Key fields.
Selection of source and target fields
After you select the source and target field, the screen looks like Figure 9. You can now indicate which accounts you want to exclude. If no additional conditions are required, you can click the rule values icon found at the top of the screen. Otherwise, go to the tab called Condition.
Source and target fields have been defined
In this case an additional condition is required. In Figure 10 you enter the condition that the document type used for the posting must be equal to SA or RE. The field name of the document type is BLART.
The Condition tab has several columns:
- Link – This column makes it possible to link several step conditions. It can have the values AND and OR. In this example the document type equals SA or the document type equals RE.
- Name – In this column you enter the field name of the condition. There is a search function (hidden by the magnifying glass button but you can press F4 as well) to see which fields are available.
- Op. – In this column you enter the operation value like =, >=, <= etc.
- Value – In this column you enter the condition value, like in this case it contains the document type.
After entering the conditions to be fulfilled to exclude the withholding tax, you can complete the step by clicking the rule values icon found at the top of the screen. You can also first go to the Attributes tab shown in Figure 11.
The main reason to go to the Attributes tab is that you can indicate that a condition is only valid after a certain date. The other selectable indicators are less important. They are self-explanatory.
Conditions for the exclusion step
Attributes of the exclusion step
In the Attributes tab you can complete the step by clicking the rule values icon found at the top of the screen. After you click this icon, the system opens the screen shown in Figure 12.
In the screen with rule values you see the fields selected in the Condition tab and in the Attributes tab.
Exclusion step rule values
In this screen you enter which G/L accounts and from which date onward the withholding tax should be excluded. Here you enter the G/L account number for which the withholding tax should be excluded.
You can enter a range of accounts by clicking the multiple selection (active) icon .
Once the rules have been completed, you save the settings by clicking the save icon at the top of the screen. You then click the back icon (the green arrow to the right of the save icon) to return to Figure 5.
The exclusion strategy is now ready, but it still needs to be allocated to a withholding tax type. The withholding tax type determines when the withholding tax is posted (invoice receipt or payment) and what the base amount is.
In Figure 5 double-click the entry Assignment to WT Type. You then see an overview of the assignment of exclusion strategies as shown in Figure 13. Click the New Entries button to insert a new assignment.
Overview assignment of exclusion strategies
In Figure 14 I entered the new entry whereby I assigned the exclusion strategy to withholding tax type 30 and also activated the assignment by setting the Active indicator. Save the entry by clicking the save icon at the top of the screen and leave the transaction.
New assignment of exclusion strategy to withholding tax type
An Example of the Exclusion Strategy
To demonstrate the use of the exclusion strategy, I created two incoming invoices (not shown in this article) using different document types. For both documents, I used the same G/L accounts. G/L account 6690310 is to be excluded from the withholding tax if the document type used is SA. (SA is the standard document type in the SAP system for G/L postings.) The vendor in the invoices is assigned to withholding tax type 30. The percentage of the withholding tax is 30, which is to be posted at invoice receipt.
Figure 15 shows the posting of the invoice using the standard vendor posting document type KA. (KA is the standard document type in the SAP system for vendor postings.) The total amount of the invoice is 9,000 Peruvian new sol (PEN). As nothing is to be excluded from withholding tax, the withholding tax amount is 30 percent of 9,000 PEN, which is 2,700 PEN. This amount is shown at the fourth line of the posting.
Document 1: Using document type KA
Figure 16 shows the posting of the invoice using document type SA. The total amount of the invoice is 9,000 PEN. This time 5,000 PEN is to be excluded from withholding tax as the document type is SA and the G/L account used is 6690310. Therefore, the withholding tax amount is 30 percent of 4,000 PEN, which is 1,200 PEN. This amount is shown at the fourth line of the posting.
Document 2: Using document type SA
Figure 17 shows the details of the withholding tax. To display this screen, double-click the vendor item in the posting (third line). Then click the Withholding Tax Data button at the top of the screen. This action opens a pop-up screen called Display Withholding Tax Information. After you click the icon highlighted under the Detail column, another pop-up screen appears showing the line items for calculation of withholding tax basis. Because of the activation of the business function, as described in the beginning of this article, an additional column is shown with an exclusion indicator. As you can see the indicator is set for the first line.
Withholding tax details
(Note: In some cases for automatic down payment transfer functionality, the withholding tax exclusion does not work. This is described extensively in SAP Note 1640876.)