Withholding tax

What is Withholding tax?

Withholding tax also is called retention tax. Sometimes the payer has to deduct tax from the payment and pay that tax to the government. That is the withholding tax.

For example, the payer deducts from the employment income the tax and then he pay to the government that retained tax.

The withholding tax applies to several business transactions and SAP gives the possibility of configure them.

Also you have the possibility in SAP of using EWT (Extended Withholding tax) instead of classic withholding tax. It is recommended using EWT.

Configuration of withholding tax. 

To configure the withholding tax you have to navigate to following path:

IMG->Financial Accounting (New)->Financial Accounting Global Settings (New)->Withholding tax->Extended Withholding task->Basic Settings

• Check Withholding tax countries: It’s defined a key for each country.
• Define Withholding tax keys: To identify the different withholding tax types and names.
• Define reasons for exemption: In this point of customizing the reasons for possible exemptions are defined. Later in master data of Vendor or Countries, those reasons are used in the corresponding information about Withholding tax.
• Check Recipient types.
• Check Income types.

In Vendor Master Data (Transaction FK01) is where you have to enter the Withholding tax information for a specific vendor.

After that, if you create a Vendor Invoice for that vendor using SAP transaction FB60 and select checkbox “calculate tax”, the system automatically will calculate the withholding tax amount of the invoice. In the simulation of the posting you'll have all the details.

Calculation of the withholding tax. 

The calculation is configured in following path:

IMG->Financial Accounting (New)->Financial Accounting Global Settings (New)->Withholding tax->Extended Withholding tax->Calculation 

In this point of customizing is configured the withholding tax type, withholding tax code (where rates are defined), max/min amounts for withholding tax are defined, etc.

Activation of the withholding tax. 

Following the below path, extended withholding tax is activated:

IMG->Financial Accounting (New)->Financial Accounting Global Settings (New)->Withholding tax->Extended Withholding tax->Company Code->Activate extended withholding tax 

Account determination. 

In the below path is configured the account determination of withholding tax. The account determination is done at tax type level.