Tax trap @ its best: How it is easy to fall into the trap of sales tax
Sales tax issues are complex and often unpopular with auditors – unless they come from the tax office itself that is! So, it’s better to be aware of the pitfalls. Sales tax credit notes are invoice documents that are issued by the company itself and are used to invoice an incoming service. In a sense, you are issuing a vendor invoice to yourself and sending it to your vendor – the vendor then does not issue the invoice itself. In this post, we explain in what cases this occurs and what problems it can cause. Of course, we will also give you some hints on how to detect possible problems in your SAP data.
Who uses sales tax credits?
Sales tax credits are ultimately a process-related matter. Whenever it becomes very time-consuming for the recipient of a service to process a vendor’s invoices, it makes sense for the service recipient to create the invoice as a credit note. The effort involved in the process comes from the need to verify invoices on a regular basis and for some form of fairly comprehensive coordination with the supplier, because the correctness of the invoice is difficult to assess. Here are a few specific situations where sales tax credits are used:
Energy sector: Energy companies have armies of electricity suppliers. These include thousands of private individuals who have solar cells on their roofs and feed electricity into the grid. They all receive money for the electricity fed into the grid and have to settle accounts with an energy company. Since they often lack the expertise for invoicing, the energy company takes over invoicing in the form of a sales tax credit. In other words, the energy company issues itself a credit note, sends it to the electricity supplier for information purposes and transfers the money to the supplier.
Automotive: In industries where there is a very extensive and technical integration of the supply chain and the balance of power is very one-sided, the service recipient often controls the purchasing process unilaterally, i.e. draws up the vendor invoices itself. In this way, the process of checking invoices is outsourced to the vendor.
High purchasing volumes: Wherever there is a high volume of purchasing transactions with many suppliers, sales tax credits can also be relevant, e.g. in the retail sector.
What has to be taken into account for sales tax credits?
Now we need to delve into the law to understand the specifics of sales tax credits. First of all, it should be noted that the invoice may be issued by the service recipient (Section 14 (2) sentence 2 of the German VAT Act (Umsatzsteuergesetz – UStG)):
“Notwithstanding the obligations under Sentence 1 No. 1 and 2 Sentence 2, an invoice may be issued by a service recipient designated in Sentence 1 No. 2 for a delivery or other service of the Contractor, provided this has been agreed in advance (credit note). The credit note loses its effect as soon as the recipient of the credit note objects to the document sent to it. An invoice may be issued by a third party in the name and for the account of the Company or of a service recipient specified in Sentence 1 No. 2.”.
As part of the creation of a regular billing document, Section 14 Subsection 3 No. 10 now says:
“(4) An invoice must contain the following information:
- in cases where the invoice is issued by the service recipient or by a third party appointed by it in accordance with Subsection 2 Sentence 2, the indication ‘credit note’.”
So, always print “credit note” on the invoice. Anyone who does not meet the formal requirements for invoice documents must expect to run into problems when it comes to tax audits. In case of doubt, there can be problems with the deduction of input tax for a participant – this can cost time and effort and plenty of nerves to resolve.
Otherwise, the same formal requirements apply as for normal invoices.
But be careful, because, as so often is the case, the devil is in the detail! The service provider must write its tax number on his invoice, otherwise there is no proper invoice. If the service recipient draws up its own A/P invoice, it must know its vendor’s tax number or VAT ID. If the supplier issues the invoice itself – as usual – then it of course draws up the invoice entering its own tax number. This means that, from a procedural point of view, there are also increased demands on the management of vendor master data in the case of sales tax credit notes. Things can become even more problematic if something goes wrong and sales tax credits are automatically created a thousand times over!
How to analyze your sales tax credits in SAP?
At this point, let’s look at the fact that you have to know the tax number or the VAT ID of your suppliers for sales tax credits.
First of all, it would be interesting to find out which documents were issued using the sales tax credit procedure. The following two transactions are available in SAP for automatic billing of incoming services:
MRRS – Automatic GR accounting
These can be identified very quickly and easily with SQL in SAP. To do this, use the “DBACOCKPIT” transaction and then navigate to the SQL Editor via “Diagnostics” in the menu on the left-hand side and perform the following SQL query:
Now, we can extend the query and check whether there are sales tax credit notes for which neither a vendor’s VAT ID nor a tax number can be found in the vendor’s master data:
First, select the fields of interest for the purpose of this analysis. These include the client, the company code, the fiscal year, the document number, the vendor and the corresponding amount:
As already seen in the “Select” part of the query, all information comes from the document segment (BSEG). However, the transaction codes mentioned are in the document headers (BKPF), which is why a classic join of the two tables has to be executed first:
The necessary information about a VAT ID or tax number can be found in the vendor master data in SAP table “LFA1”. Therefore we need another join on LFA1:
Once the necessary tables and data have been identified, we have to filter the result set. First, we take the transaction codes already mentioned:
followed by the vendor account type (KOART=’K’), the debit/credit indicator, because it is a payable in credit (SHKZG=’H’) and we exclude payments:
There must also be at least one posting item with input tax:
and neither a VAT ID nor a tax number can be found in the document or vendor master data:
If you do not get a result set, then you at least you know are “clean” based on the criteria described.
But remember: it is always the end result that counts. Therefore, when you create sales tax credit notes, inspect the completed credit note documents carefully and check that they correctly feature all the characteristics required by tax law.
(The SQL snippets presented are part of one SQL statement which is split into pieces in order to be described more precisely.)
If you are affected by the problems described above and need our help to run a diagnosis, do not hesitate to get in touch!