Whitepaper. EB Tax Regime switchover- Post Upgrade in Oracle E-Business Suite R12. : Narayan Abhyankar : Presented by Id

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1 Whitepaper EB Tax Regime switchover- Post Upgrade in Oracle E-Business Suite R12 Presented by Id : Narayan Abhyankar : NarayanA@hexaware.com Hexaware Technologies. All rights reserved.

2 Table of Contents Abstract A Basic Understanding A High Level Integration with EBS Key Concepts Why Change the Regime Way Ahead Design Overview In-Transit Transactions Tax Rules Suggested Approach Hexaware Technologies. All rights reserved. 2

3 Abstract Post upgrade to R12, there is NO NEED to setup EB tax upfront. Upgrade process, creates a regime (called as Upgraded Regime) based on the 11i tax setup. Customers can continue using this Upgraded Regime, just like they used to work upon taxes in 11i. However there are limitations to this upgraded Regime. Many new functions are not available in this Upgraded Regime. Functions like creating a new tax, tax jurisdiction, tax formulas etc. are not possible. Similarly, if the E-Business Suite Solution is rolled out to different geographies post upgrade, the new regime needs to be setup. As more and more customers are doing an upgrade to R12, there would be a need to switchover to the new regime going forward. Hexaware Technologies has made an attempt to document the stages involved and come up with a solution to handle such a switchover. This whitepaper will help you to understand: Understand the Business Requirement High Level Integration with EBS General Concept of EB Tax Upgrade Key Assumptions Proposed Solution and the overall design Details of In-Transit Transactions Tax Rule setup suggested Post Upgrade A Basic Understanding E-Business Tax (Tax Manager) is a dedicated tax engine, introduced in Release 12, as a central tax repository. Unlike in 11i, the tax information is owned by E-Business Tax in R12 and not by individual modules. All the setups are also centralized and no more part of individual modules As the tax rules are introduced, it supports scientific and more realistic tax calculations A High Level Integration with EBS All the sub-ledgers e.g. AP, AR, PO, OM etc. interact with E-Business Tax for tax calculation. Every module which does a tax calculation depends on E-Business Tax and is tightly integrated with EB-Tax. As all the setups and functions are owned by EB-Tax, it passes info to various sub-ledgers for the tax calculation purposes. Following modules are integrated with EB-Tax. Oracle Purchasing Oracle Internet Procurement Consigned Inventory Oracle Internet Expenses Oracle Payables Oracle Order Capture/ istore/ Quoting Oracle Order Management Oracle Trade Management Oracle Services Contracts Oracle Project Accounting Oracle Receivables Hexaware Technologies. All rights reserved. 3

4 Key Concepts E-Business Tax uses the Regime to Rate flow for the purpose of Tax Calculations. This is explained below: Tax Regime: Navigation: Tax Manager Responsibility Tax Configuration Tax Regimes. Regime is broadly a set of tax regulations that determine the treatment of one or more taxes administered by a tax authority. Typically the tax regime is defined at the country level. However there is no such explicit restriction. Tax: Navigation: Tax Manager Responsibility Tax Configuration Taxes. Tax is nothing but a distinct charge applied to a transaction imposed by a fiscal/tax authority. E.g.- Sales Tax, VAT Tax Status: Navigation: Tax Manager Responsibility Tax Configuration Tax Status A Tax status is the taxable nature of the product in the context of the transaction. For every Tax we have, we should have a Tax Status defined. Tax Jurisdiction: Navigation: Tax Manager Responsibility Tax Configuration Tax Jurisdictions Jurisdiction is the geographical borders/area where the tax is levied by the tax authority. In US, for example, a jurisdiction should be defined at the State/County/City level. While in the UK jurisdiction is at the country level. Tax Recovery Rates: Navigation: Tax Manager Responsibility Tax Configuration Tax Recovery Rates This is the rate of the input tax which is allowed to be recovered or offset against the output tax. Example: if my recovery rate is 80%, this means that of the tax amount paid, 80% is the recoverable tax which can be used as tax credit for set off. Tax Rates: Navigation: Tax Manager Responsibility Tax Configuration Tax Rates Rate of tax specified for a given period of time. If there is a change in the rate, simply end date the old tax rate and create a new one. Every tax rate should have a default. Party Tax Profiles: Navigation: Tax Manager Responsibility Parties Party Tax Profiles This essentially is the link between the party and the regime which should be used to calculate the tax. Profiles can be configured for the first Party or the Operating Unit and the Third parties (Supplier etc.) involved in the transaction. Tax Rules: Navigation:Tax Manager Responsibility Tax Configuration Tax Rules This is the heart of tax calculation in E-Business Tax Tax Rules should be designed cautiously to aid the correct tax calculation. A default should be specified for every rule which will be used in case a specific rule is not found for any transaction. Hexaware Technologies. All rights reserved. 4

5 Why Change the Regime Once an upgrade is performed, by default the upgrade regime of E- Business Tax is used for tax calculation purposes. This regime is also known as STCC (Standard Tax Classification Code) regime. So post upgrade no major setup changes/modifications are needed to continue the business functions as it was in the Release 11i environment. Then question arises, why there is a need to change the Regime at all? There are quite a few limitations to this regime. The upgraded regime doesn t allow the flexibility or future proofing for new features and configuration options. Major limitations include: Creation of new Tax Rules is not possible Creation of new Tax Jurisdictions is not possible Creation of new Taxes is not possible Modification/Creation of new Tax Formulas is not possible Because of these limitations there is a need to switch from the Upgrades STCC Regime to the new Regime. Way Ahead The following diagram explains the process to be followed to switch the tax regime. Upgrade Regime New Regime Setup Applying the new Regime Lot of limitations on the usage of enhanced features New Tax Regime New Taxes Update the configuration owner tax options Tax profiles which are being used in the Upgrade regime needs to be end dated New Tax Statuses Tax Jurisdiction Tax Rates Tax Profiles Update the tax determination criteria to use Regime Determination Method Tax Rules Making tax available for transactions Design Overview 1. Update and End date the tax profile - Navigation - Tax Manager Responsibility Parties Party Tax Profiles Tax Profiles is the link between an entity and the Tax Regime. End date the upgraded Tax Profile. Make sure the dates of end-dating the profile are correct. EB Tax will calculate as per the 11i rules till this date. Hexaware Technologies. All rights reserved. 5

6 2. Setup New Regime to Rate Flow - Define new Regime. Define new Tax. Define new Tax Status. Define Tax Jurisdiction. Define Tax Recovery Rates. Define Tax Rules. 3. Update the Tax Profile with the new Regime - Navigation - Tax Manager Responsibility Parties Party Tax Profiles We end dated the party tax profile with the old regime. We will now assign the new regime created above to the tax profile. Make sure the start date of the profile should be the next day of the last date of the old profile. 4. Configuration Owner Tax Option Update - Navigation - Tax Manager Responsibility Defaults and Controls Configuration Owner Tax Options This option determines how the system should calculate taxes, whether based on the upgrade regime or using E-Business Tax Regime Determination Method. Make sure that the end date of the STCC and the start date of the Determine Applicable Regime are in sync. 5. Test Extensively - All the business flows involving tax calculations should be tested thoroughly End to end business flow testing should happen Major flows include creation of Purchase Orders, AP Invoices, AR Transactions, etc. Check the tax calculated by the invoice workbench and see if that is as expected. In-Transit Transactions What are In-Transit Transactions? In-Transit Transactions are such transactions which are not complete as far as tax processing is concerned at the time the regime switchover is in progress. How are these Transactions handled during switchover? In all such cases, the TRANSACTION DATE will be used as the factor to determine which regime would be used. However, as we are defining tax rules in such a way, that it should calculate tax similar to the old regime, the tax amount calculated should not be impacted. Once we click the tax details tab on the invoice work bench, we can see whether the old TAX is used or the new TAX RATE is used. Hexaware Technologies. All rights reserved. 6

7 Tax Rules E Business Tax depends on the Tax rules for the tax calculations. Hence Tax Rules setup is very important in EB-Tax. Navigation - Tax Manager Responsibility Tax Configurations Tax Rules As the Upgraded regime is already end dated, the new regime will require configuration of tax rules to assist the sub-ledgers calculate tax. A Tax Rule can be at various levels like Tax Classification Code (Tax Code in 11i) Intended Use Line Class Ship to Location, etc. These various factors are available on the transaction workbench to be used to calculate taxes based on the rules. Suggested Approach In case in the new Regime, if you have defined two tax statuses for the input and output transactions, define two simple rules. 1. One rule at the tax status level, to determine which tax status should be used. Whether input status should be used or the output will be determined by this rule. For this purpose, we can make use of the line class for the Transaction Input factor. These are nothing but the options available at the time of tax rule definition. We can capture the rule as below- TIf the Line Class is P2P-Invoice, Use the status- Input TIf the Line Class is O2C-Invoice, Use the status- Output (This is just an example) 2. One rule at the tax rate level, to determine which tax rate should be used. For this purpose, we can make use of the Tax Classification Code for the Transaction Input factor. We can capture it as below- TIf the Tax Classification Code is Standard Rate, Use the rate- TAX- 20% (TAX-20% is the tax rate) TIf the Tax Classification Code is Exempt, Use the rate- TAX- 0% Please note, here we will make use of the tax defaulted at the supplier site level. Post upgrade, all the suppliers will anyways have the tax code defaulted. We need to capture it judiciously in the rules so that if it finds same old tax Standard Rate it should apply the new Rate- TAX-20%. Please note this is only a suggestion. This is a proposed way of handling it. There can be other ways of doing it as well. Hence the actual solution will be based on the discussions with the business users. If we go for this solution, going forward Tax Manager has to perform the following- > If a new supplier is setup, make sure that the tax code is associated to the supplier site. Else, the tax rule will not find any tax code and will associate a default tax. > If a new tax rate is needed, entry should be done in the regime to rate flow. Also, the rule should be appended with one more rate so that it understands which rate to use. If the rule is not appended with this new entry, the tax rule will fetch the new code from the supplier site, but will not be able to figure out which tax rate to be used and will calculate based on the default. Hexaware Technologies. All rights reserved. 7

8 To learn more, visit Cranbury South River Road, Suite 10, Jamesburg, NJ Main: Fax: Disclaimer Contents of this whitepaper are the exclusive property of Hexaware Technologies and may not be reproduced in any form without the prior written consent of Hexaware Technologies.