ERP 2.50:Withholding Setup

Withholding tax creation and process

Withholding tax is an amount withheld by the party making payment to another (payee) and paid to the taxation authorities. The amount the payer deducts may vary, depending on the nature of the product or service being paid for. The payee is assessed on the gross amount, and the tax to be withheld (the withholding tax) is computed in that assessment.

The purpose of withholding tax is to facilitate or accelerate collection, by collecting tax from payers rather than a much greater number of payees, and by collecting tax from payers within the jurisdiction rather than payees who may be outside the jurisdiction. It may also be used to counteract tax evasion and tax avoidance.

Withholding tax creation and application process

• Withholding types creation.
• Withholding selection to a vendor.
• Creating a purchase invoice with withholding tax.
• Payment of an invoice with withholding tax.
• Withholding settlement.

Withholding types creation

In master data management, under business partner setup, there is a window called Withholding. A new entry must be created with an identificative name and a rate for the withholding. This rate will apply to the amount of the invoice without taxes.

In the same way an account must be selected to keep the withheld taxes. The application chooses the account number 47511 by default.

Withholding selection to a vendor

In business partner window there is a new tab called "Withholding" where different withholdings can be assigned to a vendor. In this case we will choose the withholding created in the previous step.

Creating a purchase invoice with withholding tax

When creating a purchase invoice, you will be able to choose among the different withholdings assigned to the vendor of the invoice. The chosen withholding will be the one which applies to the invoice, and not all the others assigned to the business partner.

The payment created when completing the invoice will specify the amount of the withheld and the rest to be paid. The withheld amount will be in this case a 10% of the amount of the invoice without taxes.

In the example, the invoice amount is 42€; and with taxes (16%) it is 48,72€. As you can see, the withheld amount will be a 10% of 42€; hence 4.2€.

Payment of an invoice with withholding tax

When doing the bank statement for paying the invoice, the payment of the invoice wont be 48,72€ but 44,2€, as the withheld amount must not be paid.

Withholding settlement

For instance, the journal entries automatically created in this process might look like this:

Journal entry for the invoice

Journal entry for the payment

Journal entry for the settlement

Note that in this last entry the 4,2€ that have not been paid in the bank statement have been moved to the 47511 account; left to be paid to tax collector institutions.