2. Value Added Tax (VAT) – that is used in the rest of the world
The VAT was initially introduced in the mid-1970s by the European Economic Community (ECC). With the formation of the European Union and the admission of new countries in the late 1990s and 2000s, a large number of countries have changed (or adjusted) the tax system. We, a company that has been in the business software market since 1995, have been through this transition with our customers without any major problems. Because of back-compatibility, ERPAG supports both systems (from MS-DOS version, over Windows Desktop, to the current cloud-based version), so this gave us global access.
In this text, we will focus on setting up and operating with the VAT system.
First, tax settings are divided into three sections.
1. Tax category
Tax category marks the tax category of an item, to which tax category the item belongs to. If our item is a solar panel, it will belong to “Energy-saving materials” tax category.
2. Tax location This data marks the place where the tax is calculated. In case the buyer of our solar panel is from another EU country, the tax location will be Export (EU). Maybe on the first glance our examples of “Export (EU)” and “Export (non-EU)” give the same result, eg. the tax rate of “0”, but that is a common practice in order to obtain more precise reason of tax exemption. This can also be demanded during the integration with other applications (such as QuickBooks Xero, TaxJar, etc.).
3. Tax rates In this panel you are naming the individual tax rates, in most of the cases it’s “Standard rate” and “Reduced rate”. But in some countries, there are additional tax rates, for example, in Greece, there is also “Super reduced rate”.
The tax rate is calculated as a result of these three parameters.
By entering the tax category, we already mark to which tax location a specific tax rate belongs to.
We can do the same thing when we are entering the tax location.
This Tax type means that the Tax Location is where the customer is (where the items are shipped). Based on this principle, we are assigning a Tax Location to a customer.
When entering a Sales Order, no matter which warehouse we choose, the proposed and automatically setup tax location is the one assigned to a customer.
The data about the Tax Location is changeable, since even though the customer is foreign, in some cases it’s considered as a “domestic trade” (for example, if they purchase items for local representatives).
For the POS part, the tax rate in the mobile APP is always according to Tax Location Warehouse, for now. Due to the simplicity of the process and the reduction of errors, we did not include the possibility to change the Tax Location. If necessary, post it as a Sales Order and change the Tax Location from the main application (desktop application).
There is a separate Input tax section for the purchase orders (identical to utility bills, landed costs, contractor bills).
The amounts entered here are always entered in absolute (total) amounts for the entire document (not as a percentage amount). We opted for this solution because most Sales Orders and Invoices have sub-total + tax = total at the end of the recapitulation. And it would also be quite impractical to enter a specific tax rate or tax amount for each item individually.
When entering, there is a field “Calculation (VAT)”, if it is set to “automatic”, then ERPAG automatically calculates the input tax based on Tax Location and Tax Category.
If set to “Manual entry” then the tax rates must be manually entered.
We included this because sometimes the amounts of VAT we charge differ from those provided by the supplier. This happens with Imported goods because VAT is charged at customs. It also happens when a supplier calculates VAT at a reduced rate while we sell at a standard rate.
Tax location is always suggested by our warehouse.
One of the significant parameters is “Deductible (VAT)”. There are cases in national tax regulations where no matter if the supplier has shown us Input VAT, we do not have the option to deduct it from Output VAT. This would be the case if we are purchasing something that is not directly for business purposes (eg. business entertainment costs).
Input VAT is possible to be deducted from the output VAT.
Deductible: “No – Tax expenses”
The VAT charged by our supplier cannot be deducted from VAT output. The tax amount will be credited to the “Tax expenses” account.
Note: If you have integration with QuickBooks or Xero accounting software, it will be accounted to an appropriate expense in their journal voucher as well.
Deductible – “No – Inventory”
In this case, non-deductible VAT will be added to the stock price as the landed cost (Inventory). And it will become a cost when the Cost of goods sold (COGS) is formed.
Note: In case you have some items for which you can deduct the VAT and for some of them you can’t, you need to split that document into 2 (Deductible: Yes, and Deductible: No).
ERPAG is primarily intended for internal business management, please contact your accountant or tax advisor to calculate taxes and other obligations.
Tax-related reports are for informational purposes only, and serve to ensure that management has some information about tax liabilities.
We do not recommend or have any obligation, warranty or liability for filing tax returns based on reports from ERPAG.
To receive the Standard / Reduced report, you must enter the “Tax Code” at Tax rates (if you do not enter the tax code, the report will be compiled).
The “Tax preparation” report is in the accounting section:
Anyone who is familiar with the VAT tax system, he is already aware that the obligation to pay VAT is the difference between Output VAT (paid from customers) and Input VAT (paid to suppliers or during import).
Accountants usually create the statement through a manual journal voucher. The dynamics depend on local tax regulations but are often done quarterly or monthly. This report shows the data necessary to calculate the liabilities.
The report is initially grouped by warehouse and tax rates, with values in the following columns:
Input VAT – amounts of VAT from Purchase Orders (Supplier Invoices) that are not used in the calculation;
Output VAT – amounts of VAT from the Sales Orders (Invoices) which are also not used in the calculation;
VAT Liabilities – the amount of payables that have been calculated but not paid.
To facilitate this process, there is a “VAT calculation” option in the report.
The VAT calculation is done for a specific period of time, and a journal voucher is formed in accounting.
In our example, there is an only liability for VAT-20, with a VAT-5 Input VAT is greater than the Output VAT, so there is no obligation to pay.
NOTE: The internal accounting system in ERPAG is managed according to the accrual basis method of accounting. In most national accounting regulations, cash basis is not allowed in manufacturing.
Due date is the date when the accrued liability should be paid (the setting is in Administration -> Localization).
We use the “payment” option to record the payment of this accrued liability.
Payment amounts are divided into “overdue” (what we were supposed to pay, the due date has passed or is today) and “Expected” (due date is in the future). The total amount is suggested, however, it’s your choice which amount you will record.