[How to] Configure Withholding Tax, processing transactions and reporting to Tax Authority

Dear Dynamics 365 Lovers,

This article will assist to understand the concept of withholding tax concept, step by step configurations and its operation and reporting to Government tax authority.

What is withholding tax?

In many countries specially in European region, on non-inventory items or services, buyer is responsible for paying taxes to government authorities and therefore the buyer is responsible to withhold certain percentage of invoice at the time of payment to supplier/vendor.

The net amount, which is the amount of the invoice minus the withholding tax, is paid to the supplier. The tax that is withheld is posted to a ledger account for withholding tax. This tax is then periodically paid to the tax authorities

 Example- Supplier has sent the invoice of 1000 and applicable for 15% Withholding tax, the payable to the vendor to be 850 and 150 will be deducted from vendor, this amount will be paid to Tax Authority and Supplier will show this deduction to their tax receivable from govt authority. 

Configurations

Create Withholding Tax Code

We shall create a 15%  Withholding Tax in this article

Tax – Indirect Tax- Withholding Tax – Withholding tax code

• Give name and description
• Set Main account- Use a liability account for Withholding tax (this should be same for all Withholding taxes, unless there are some other requirement)
• Currency- This is standard practice to use as accounting currency.
• Calculation Parameters- Payment can be deducted either from gross amount or net amount

Add value to the Code

Create Withholding tax group

Tax – Indirect Tax- Withholding Tax- Withholding tax group

Create 15% Withholding tax group

• Give name and description of the group
• Add Tax code to the group (It is important to add as without this calculation will not work)

Add Withholding tax group to Vendor master

Now the last part of the configuration is to setup the vendor

Accounts Payable- Vendors- All Vendors

Go to Invoice and delivery section and the change followings

Calculate withholding tax= Yes

Withholding tax group= Setup the Withholding tax group w e created as 15% in this case.

The configuration is completed

Processing transactions 

Let’s create one invoice with amount of 1000 with the vendor we have setup 15% Withholding tax

Note- at the time booking invoice, there will no Withholding tax, as this concept is only applicable at the time of payment

Balance 1000

Lets make a payment to the vendor for the above invoice 1000 (Vendor payment journal)

Create payment proposal and mark the invoice- it will show a pop up for withholding tax and once you click ok, the amount will be deducted- lets post then

Even though we have paid only 850 against 1000 as per the Withholding tax, however the System will clear the vendor balance and it will be Zero

This is because the Withholding posting has been posted by system automatically and settled with vendor balance

Lets check the transaction at a glance

 There will be three transactions 

1: Invoice 1000

2: Payment 850

3: Withholding tax transactions 

Reporting and pay to Tax Authority

You can check the posted Withholding tax transaction in the below forms

Tax- Inquiries and reports-Withholding tax inquiries- Posted withholding tax

Tax- Inquires and reports- withholding tax transactions

The full amount of the payable to withheld tax from vendor can be found in the withholding tax transaction reports as addressed above

The payable amount can be paid to Tax Authority by a vendor, in this case business need to create a vendor in the name of Withholding tax authority and pay to that vendor as and when the reporting is done.

This is it, I hope this article will help you to understand the concept nd make the customer requirement as and when required.

Stay tuned for more blogs.