Tax code and SAP SD

Tax code
Tax Code: It represents a tax category which must be taken into consideration when making a tax
return to the tax authorities. Tax codes are unique per country. The tax rate calculation rules and
further features are stored in a table for each tax code. For tax-exempt or non-taxable
transactions, you should use tax codes with a 0 percentage rate if the corresponding transactions
are to be displayed in the tax returns. You must define new tax codes if tax rates are changed by
the state. The old codes with the old tax rates must remain in the system until no more open
items which use this tax code exist.
As per SAP Help, tax code two-digit code that represents the specifications used for calculating
and displaying tax.
Examples of the specifications defined under the tax code are:
 Tax rate
 Type of tax (input tax or output tax)
 Calculation method (percentage included or percentage separate)

So, Tax code is specified to:

 Check 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

How to define Tax code

Step 1.
Use TCode FTXP for creating TAX Code.
Step 2.
Select the country for which you need to create a tax code.
This country is automatically linked to the Tax Procedure

Step 3.
Enter in the field tax code. This must be a 2-digit alphanumeric code i.e. A5, 55, BB, etc.

Step 4.
Provide description of the tax code: please give a clear description

Step 5.
Define the tax type: define whether the tax code is relevant for input or output tax
Indicator which determines that an error message should be issued if the tax amount is not
correct. It it recommended to flag this.

Step 6. (optional)
Eu code: One of the most forgotten parameter. If you do not set this parameter at “1? then all
transactions with this code will be not picked up in the ESL listing of that specific country. This
code “1? represents all the Sales from one EU country to another EU country.

Step 7. (optional)
Target tax code: This fields are used in case of deferred taxes. This is applicable for example in
France. The VAT needs to be paid for example not when the invoice is issued but when the
customer pays the VAT. There are here again special programs available in SAP for deferred
taxes.

Step 8. (optional)
Reporting country: this field needs to be completed when you are using the plants abroad
functionality. This means that when you as a German company have a Belgian VAT number and
you have sales in Belgium (+ you need to submit a VAT return in Belgium) , then of course these
invoices need to be booked in SAP with a Belgian tax code.
Tax Acoount: This will have all account keys relevant for output tax. Here you can maintain
account key with relevant Tax G/L account.

Feature of Tax code in Sales and Distribution

Tax Codes are mainly used in SD for following:
1. Determine the Tax GL Accounts when Posting the Invoice to Accounts. (say in Domestic, all
revenues goes to General Sales account, but Taxes need to be posted to different Accounts like
VAT / CST / Service Tax Etc...) Thus to differenciate between GL Accounts while posting, Tax
Codes are used in OB40 - GL Account assignment.
2. While creating Tax Codes in FTXP you mention Tax Codes as Input or Output. Thus while
entering Tax Codes in VK11, system will accept only Output Tax (so leaving no room for
mistake)
3. Tax Codes can also be used to generate Reports. Say your client needs State-Wise details of
VAT or CST amounts for a quarter. Here you can easily generate a report based on Tax Codes.

Tax code & Tax Procedure

Tax code are integral part of tax determination, whether you go for Condition or Formula based
excise or even you are not using tax procedure in sales for tax, still taxcode are required.
Therefore, for condition based excise determination, i.e, TAXINN, you need to specify condition
record by using TCode FV11 for condition type. There also, you have to specify tax code in
condition records (VK11) for SD.
Whereas, for formula based excise determination, i.e., TAXINJ, you need to specify tax
percentage in TCode FTXP itself.
Further, if you compare the way tax percentage section in maintain in FTXP is maintained
similar to the tax procedure maintained for the country.
Click on the thumbnail to see the observation.