Extended withholding tax

Tax deducted at source

Withholding tax is applicable in few countries. Some of the countries which

have withholding tax are United Kingdom, Slovakia, Turkey, Argentina, Brazil,

Chile, Colombia, Mexico, India, Philippines , Thailand and South Korea. SAP

has given an excellent solution to map the withholding tax scenario.

What is a withholding tax?

Withholding tax is an Income tax which is deducted at the source of the

revenue. The party that is subject to tax does not remit the withholding tax to

the tax authorities himself.

In any business transaction there are 2 parties involved. One is the customer

and another is the vendor. A customer is authorized to deduct withholding tax

for services rendered by the vendor. When the vendor raises the invoice on

the customer, the customer deducts the withholding tax as per the rates

specified by the tax authorities and pays the balance money to the vendor.

The tax deducted by the vendor is remitted to the tax authorities on specified

due dates. The vendor gives a Withholding tax certificate to the customer fo r

the withholding tax deducted.

The customer can claim this withholding tax (as advance income tax paid) in

his annual returns to Income tax authorities.

In some countries (like India) the withholding tax is deducted on Invoice or

payment whichever is earlier. Thus when an advance is paid to the vendor the

customer is required to deduct withholding tax o n the advance payment.

When the Vendor submits an Invoice the customer is now required to deduct

tax on the Invoice amount reduced by the advance amount.

To calculate pay and report the withholding tax, the SAP system provides two

functions:-

Classic Withholding tax

Extended Withholding tax

Extended Withholding tax includes all the functions of classic withholding

tax; SAP therefore recommends the use of extended withholding tax.

We will cover the Extended withholding tax functionality in this e-book.

We will try to cover the broad configuration aspects of extended withholding

tax, without getting into each country specifics. Since each country has its

own forms and different reporting requirements.