Withholding Tax

1 Aug

DEFINITION

Withholding tax in SAP refers to the tax that a company withholds from payments made to vendors, employees, or other entities and then remits the withheld amount to the tax authorities.
This is commonly applied in scenarios like paying vendors, interest, rent, or dividends where a portion of the payment must be withheld for tax purposes.

Withholding Tax Type:

Defines the nature of the transaction or legal section for payment.
Taxes on salary (India: section 192) will be different as that of Rental income (India: section 194I)
Vendor Withholding Tax (WHT): This is typically applied when making payments to vendors for goods or services.
Customer Withholding Tax: This applies when customers withhold taxes from the company while making payments.

Withholding Tax Codes:

Within the tax types, the tax percentage would vary based on nature of work or payment.
Example: Within India, Section 194I: Rental income has 2 different tax rates (2% for plants and machinery and 10% for land and buildings). Each tax rate is differentiated by tax code.
These codes represent different tax rates and types for withholding, such as corporate income tax, non-resident tax, or service tax.
SAP uses withholding tax codes to determine how much tax to withhold from payments.

If you post an invoice of ₹10,000 for a vendor and withholding tax of 10% applies, SAP will automatically deduct ₹1,000 as withholding tax.
The company later remits the ₹1,000 to the tax authority. The journal entry might look below:
Invoice Posting:

Step 1: Define Withholding Tax Types

Transaction Code: OBCW
Navigate to SPRO > Financial Accounting (New) > Financial Accounting Global Settings (New) > Withholding Tax > Extended Withholding Tax > Calculation > Withholding Tax Types > Define Withholding Tax Types.
Create a new withholding tax type that determines if the tax is applicable on invoice posting, payment, or both.
Required fields to fill out: Tax Type, Description, Accumulation, and Relevant at (Invoice posting or payment).

Step 2: Define Withholding Tax Codes

Transaction Code: OBBW
Navigate to SPRO > Financial Accounting (New) > Financial Accounting Global Settings (New) > Withholding Tax > Extended Withholding Tax > Calculation > Withholding Tax Codes > Define Withholding Tax Codes.
Create withholding tax codes that correspond to the rates and types for each jurisdiction.
Fields to fill in: WHT Code, Tax Type, Description, Tax Rate, Minimum Base Amount

Step 3: Assign Withholding Tax Types to Company Code

Transaction Code: OBY7
Navigate to SPRO > Financial Accounting (New) > Financial Accounting Global Settings (New) > Withholding Tax > Extended Withholding Tax > Basic Settings > Assign Withholding Tax Types to Company Codes.
Assign the withholding tax types (created in Step) to your company code.

Step 4: Define Withholding Tax Accounts

Transaction Code: OBWW
Navigate to SPRO > Financial Accounting (New) > Financial Accounting Global Settings (New) > Withholding Tax > Extended Withholding Tax > Postings > Define Accounts for Withholding Tax to be Paid Over.
Assign the GL accounts to which the amounts of withheld taxes will be posted by the system. Usually, you'll designate:
Withholding Tax Payable Account: A liability account to record the amount withheld.
Expense Account: If applicable, where the tax will be booked as an expense.

Maintain Withholding Tax Codes in Vendor Master

Transaction Code: XK02 or FK02 or BP
To apply withholding tax to a vendor, you need to update the vendor master data.
Go to the vendor master in transaction XK02 (centrally) or FK02 (specific to the company code) and:
In the Company Code Data tab, go to Withholding Tax.
Select the appropriate Withholding Tax Type and Withholding Tax Code.
Specify the exemption status if any (e.g., if the vendor has tax exemption status).

Invoice posting (FB60 or MIRO) check for withholding tax type & tax code
Vendor payment (F-53)
When posting vendor invoices or making payments, SAP will automatically calculate and deduct the withholding tax based on the settings.