Tax Basis of Net Retention

This section discusses how to track standard ITCs separately from retention ITCs. This ensures that retention tax is not expensed until you release and pay the retention amount.

To withhold retention from the tax basis, you must first select the Tax basis is net of retention check box in the AP Company Parameters form. When selected, the system calculates the tax basis as the line amount minus retention for transactions with an associated Value Added Tax (VAT) code.

When setting up tax codes for withholding retention from the tax basis (in the HQ Tax Codes form), you need to specify a GL account for tracking standard ITCs; tracking retention ITC payables; and a contra GL account to hold the ITC retention amount until retention is released and paid. For more information on creating tax codes, see About the HQ Tax Codes Form.

As you create AP transactions associated with the tax code (in AP Transaction Entry, AP Unapproved Invoice Entry, and AP Recurring Invoices), the system will track the ITCs in the appropriate accounts. The system will not expense the retention ITC amount until you release and pay retention. Once you Release Retainage for an AP Invoice (using the AP Release Retainage), the system moves the retention ITC amount from the ITC retention account to the standard ITC account.

Tables 1, 2, and 3 display how the system process a $1,000 AP transaction with a retention amount of $100 and a 5% tax rate when the tax basis is net of retention.

Including Retention in Tax Basis

When you include the retention in the tax basis, you can either track the retention ITCs in a separate GL account from standard ITCs, or you can track both types of ITCs in the same account.

Tracking ITCs Separately

When setting up VAT tax codes for including retention in the tax basis (in the HQ Tax Codes form), but tracking ITCs separately, you will need to specify a GL account for tracking standard ITCs and one for tracking retention ITC payables. For more information on creating tax codes, see About the HQ Tax Codes Form.

As you create transactions associated with the tax code, the system tracks the ITCs in two accounts. Once you release the retention (using the AP Release Retainage form), the system moves the retention ITC amount from the ITC retention account to the standard ITC account.

Tables 4, 5, and 6 display how the system processes a $1,000 AP transaction with a retention amount of $100 and a 5% tax rate when retention is included in the tax basis.

Tracking ITCs Together

When you include the retention in the tax basis (in HQ Tax Codes) and you are tracking retention and standard ITCs together, you only need to specify a single ITC-tracking GL account. When tracking ITCs together, you can manually exclude retention from the tax basis. When doing so, enter the transaction as normal, but manually decrease the amount in the Basis field by the retention amount and process the transaction.

Table 7 displays how the system processes a $1,000 AP transaction with a retention amount of $100 and a 5% tax rate.

When you manually exclude the retention from the tax basis, you must create an additional transaction for the retention tax amount (after you have released retention). To do this, enter a transaction for the retention amount in the Tax Basis field. Using the scenario from Table 7, you would enter $100 in the Tax Basis field. The system would then automatically calculate $5 as the tax amount, displaying it in the Tax Amt field. Process the transaction as normal and complete any additional steps to complete the transaction. For more information, see Processing VAT Transactions .