Withholding tax is calculated and posted to accounts at payment step, invoice step or whichever is earlier, based on Country law. Extended withholding tax was later introduced by SAP to overcome limitations of Classic withholding tax. Extended withholding tax includes everything from Standard withholding tax and more. It is advisable to use Extended withholding tax.
Primary difference is the use of tax type. Tax type is used for defining all the calculations including Base amount, Rounding, Accumulations rules etc, whereas Tax codes are used for defining percentage subject to tax, and percentage for tax calculation. By using Tax types it is possible to include multiple line items in vendor master as compared to only one line item in Classic withholding tax.
Classic withholding can only be used for Vendors whereas Extended can be used by both vendors and customers.
