Non Deductible Sales Tax Concept and Setup (MSDynamics 365 FO)

Dear Dynamics 365 Lovers

In this blog I have tried to explain about the Non Deductible sales tax concept and it's step by step setup, I hope you will enjoy this.

Lets explore

What is Non deductible tax?

In short, It is Tax deductions you cannot claim to tax authority due to particular country rules.

We shall look into two scenarios in a best possible way to understand and learn.

1. For example, in ITALY, when the 21% VAT is related to an invoice older than 1 year, in this case tax is 100% non-deductible, which means the whole tax amount will be booked in the expense account, rather than sales tax receivable account and cant claim to tax authority.

2. When you post an invoice related to the company's car expenses with 21% VAT (tool, fuel, rent) - in this case the 60% of the total of the VAT will be non-deductible, which means 60% of the VAT amount will be booked into expense account, only 40% of the total VAT will be booked in Sales tax receivable account. 

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Step by step configurations

Create two sales tax codes for above two scenarios mentioned (Tax- Indirect Taxes-Sales Tax -Sales tax Codes)

Add the value 21%, both the sales tax codes are 21% VAT value.

Now comes the main setup of this topic.

In the sales tax code values option, we need to add the Non-deductible percentage as per the requirement

Create or update Sales tax group and item sales tax group and assign the newly created sales tax codes.

I have added two codes to one sales tax group

I have created two separate Item sales tax group for two codes

The configurations are done

Lets book two transactions to see how this works

Scenario 1 bookings

I shall book one invoice with the Sales Tax 100% ND

Now the transaction is posted, lets check the bookings

As you can see, as per the expectation, the sales tax was moved to cost account and 173.55 EUR which was for Sales tax has been booked with expense account.

Scenario 2 bookings

Booking with same amount which was used in scenario 1

Now we can see, as per the expectation, the 60% of the sales tax amount will be booked to expense account and rest 40% of the sales tax amount will be booked to sales tax and can be reported to sales tax authority.

173.55= Total sales tax (21% of expense)

104.13= 60% of VAT 173.55 (posted to expense account)

69.42= 40% of VAT 173.55 (posted to sales tax account and to be reported to sales tax auth)

Scenario 1 Accounting entry

Expense Account Dr 826.45

Expense Account Dr 173.55 (Moved from sales tax to expense, due to 100% ND)

Vendor Account Cr 1000

Scenario 2 Accounting Entry

Expense Account Dr 826.45

Expense Account Dr 104.13 (60% of VAT 173.55)

VAT Receivable Account Dr 69.42(40% of VAT 173.55 )

Vendor Account Cr 1000

This is it, I hope this will be useful for you, stay tuned for more blog like this.