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Handling Withholding Tax in SAP

Withholding tax is the tax that is charged during payment flow in some countries. It is calculated and posted to accounts at payment step, invoice step or whichever is earlier, based on Country law.

Standard (Classic) Withholding tax vs Extended Withholding tax

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.

The additional functionalities in extended withholding tax are:

  • Withholding tax on incoming payment (vs only on outgoing payment in Classic Withholding).

  • Use of Withholding tax as Customer (vs only as vendor in Classic Withholding).

  • Withholding tax at the time of payment (vs only at the time of invoice in Classic Withholding).

  • Withholding tax on partial payment (vs only on Full payment in Classic Withholding).

  • Many withholding tax items on one line item (vs only one withholding tax item in Classic Withholding).

  • Use of Tax amount as tax base (vs only at Net amount or Gross amount as tax base Classic Withholding).

  • Setting up rounding rules

  • Setting up accumulation frequency (e.g. Monthly, Quarterly)

  • Considering Cash discount for withholding tax calculation

  • Setting up minimum and maximum amount of withholding tax

Everything that was possible in Classic Withholding is still possible in Extended Withholding tax

Withholding Tax Type vs Tax Code

Use of tax type is the main difference between Classic Withholding tax and Extended Classic Withholding tax.

Withholding tax type defines the different withholding tax categories that exist in a country. Tax type controls all the options for withholding taxes such as Base amount (Net, Gross etc), Rounding rules etc., accumulation type (monthly, quarterly etc); while Tax code controls the 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. Multiple tax codes cannot be assigned to same tax type in a business transactions (such as in vendor master). Multiple tax types must be created for such scenarios.


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