Value Added Tax (VAT) is a common tax system in the European Union (EU) applicable for almost all sales and purchase transactions in the EU. However, some organizations are legally not allowed to charge VAT. These include non-profit organizations such as governments and hospitals, but also some commercial organizations such as banks and airlines. When an organization isn’t allowed to charge VAT, it is also not allowed to reclaim VAT.

Pro-rata VAT is used to fulfill the legal tax reporting requirements for companies that are partly VAT exempt and partly liable for VAT. An example of such a company is an agricultural enterprise that breeds cattle and cuts lumber. The cattle business is relevant for VAT, but forest exploitation is not. When this company buys a computer, the company can reclaim the purchase VAT related to this computer for the cattle business, but for forest exploitation it is just a cost and cannot be reclaimed.

Of course, the issue now is how much is deductible and how much is not deductible. At the beginning of the period (e.g., year, month, or quarter), an estimate is made as to how much will be deductible and how much will not. This is based on local legislation, but is often done based on turnover. For example, for the agricultural enterprise it could be that 50% is deductible and 50% is not. At the end of the period, the real percentage is determined. It could turn out that 45% is deductible and 55% is not deductible. This requires a correction for the VAT that has been posted as being deductible, but shouldn’t have been deducted.

You can split pro-rata VAT into two parts. The first part applies to a specific period. In this period, the VAT is not deductible for an estimated percentage. The second part of pro-rata VAT is the correction that has to be made at the end of the period when the definitive percentage is known.

I first explain the two parts of the business process and then how these two parts need to be customized in your SAP system. The pro-rata solution is available since SAP R/3 4.6, but my screenprints are from SAP ERP Central Component (SAP ECC) 6.0.

Pro-Rata Process During the Reporting Period

I have prepared an example for France to explain the way pro-rata VAT works. The reason I’m using France is that this is the most complex example. For all other countries, the pro-rata VAT is based on a fixed percentage, but for France the percentage depends on the type of cost. As it would be a lot of work to define a pro-rata percentage per cost account, a simpler solution is to define several VAT codes and let the percentage depend on the VAT code. Now the only thing you need to do when making a posting is to allocate the correct VAT code to the cost accounts.

The VAT codes themselves are set up the same way as in situations in which there is no pro-rata VAT. As this is standard, it is not further explained.

The first thing to do is define how much VAT is deductible for a specific period. For France, the period is always a calendar year. The pro-rata percentages are defined using condition records. These are similar to the condition records used for sales pricing and purchase pricing. The transactions to create, maintain, and display the conditions are FV11, FV12, and FV13, respectively. These transactions are not in the standard user menu of SAP.

Figure 1 shows transaction FV12. It also shows that a special pro-rata condition called ZPR2 has been used. I’ll explain how to set up this condition type later. Figure 1 shows the French input VAT codes that have been set up for this SAP system. You can see that there are VAT codes with a percentage of 100% and others with a percentage less than that. The VAT codes with 100% are completely deductible, while the others are only deductible for the percentage shown. VAT code X2, for example, is 80% deductible.

Figure 1

Pro-rata condition records

Let’s look at what happens when you register an incoming invoice with pro-rata VAT. In my example, I use the tax code X2, which is 80% deductible. Therefore, you need to register 20% of the VAT as costs. The VAT percentage is 19.6%, which is the standard high VAT rate in France.

Figure 2 shows a vendor invoice of €1196, of which €196 is VAT. As 20% of the VAT amount is not deductible, €39.20 (20% of €196) is added to the costs. In daily business, using pro-rata VAT mainly involves selecting the correct VAT code.

Figure 2

Example of a pro-rata financial document

Pro-Rata Process During Period-End Reporting

At the end of a period, which is normally a year, you know the definitive pro-rata percentages. Let’s assume that in my example the definitive percentage is 70%. This means that in Figure 2 the deductible VAT part is too high and the costs are too low. A correction must be made, with €19.60 being the difference between the estimated pro-rata percentage of 80% and the definitive pro-rata percentage of 70% of the total VAT amount of €196.

To make this correction you first need to record the definitive percentages in the system and then you can post the correction. To register the actual pro-rata percentage in the system, use transaction S_RFIDPTDPR or follow menu path Accounting > Financial Accounting > General Ledger > Reporting > Tax Reports > General > Tax on Sales/Purchases: Pro-Rata Corrections > Pro-Rata Coefficients (Figure 3).

Figure 3

Definitive pro-rata percentages

Figure 3 shows how the definitive percentage is being recorded. You have to enter the country (FR for France), the period (in this case, the year 2009), the Pro-Rata Calculation Entity, and the definitive pro-rata percentage (DPR), which in the case of VAT code X2 is 70%. The Pro-Rata Calculation Entity is a combination of company code (e.g., FR90) and VAT code (e.g., X2). I’ll discuss the way pro-rata calculation entities are set up in the description of the customizing settings.

On the left side of Figure 3, you can also see that you can enter Periodic Pro-Rata coefficients. However, this is only relevant if the validity period is less than a year.

Once the definitive percentages have been recorded in the system, you can create the adjustment posting using transaction S_RFID_PTVPRADPRC00 or by following menu path Accounting > Financial Accounting > General Ledger > Reporting > Tax Reports > General > Tax on Sales/Purchases: Pro-Rata Corrections > Corrections: Coefficient Calculation > Pro-Rata Corrections Due to Pro-Rata Calculation (Figure 4).

Figure 4

Selection screen for transaction S_RFID_PTVPRADPRC00

Normally you select all documents for a specific period, but for my example I only select the document FR90X2, as shown in Figure 2.

Next, I discuss the main parameters for this transaction S_RFID_PTVPRADPRC00. On the Period tab you have to indicate whether the period is a year or shorter. The setting in Figure 4 shows it is for a year.

On the Adjustment Options tab of the same screen (Figure 5) you find the following parameters:

• Pro-Rata Percentage: This is a required entry, but only relevant if you don’t maintain the definitive pro-rata coefficients within customizing
• Compare Coefficients: When this indicator is set, no posting is made if the estimated pro-rata coefficient is the same as the definitive coefficient
• Valid MM Transaction Keys: Specifies the MM transaction keys that are relevant for pro-rata VAT
• Exclude Invalid TK: Excludes invalid MM transaction keys

Figure 5

Adjustment options in transaction S_RFID_PTVPRADPRC00

On the Customizing Options tab (Figure 6) you can see only fields relevant for assets under construction. They are always required for this program even if you don’t use assets under construction. You’ll find the following parameters:

• Depreciation area: The first real depreciation area
• Assets Under Construction: The balance sheet account related to assets under construction
• Trans. type AUC: The transaction type for retirement of assets under construction

Figure 6

Customizing options in transaction S_RFID_PTVPRADPRC00

On the Posting Parameters tab (Figure 7) you’ll find the posting parameters for the correction posting. All settings are required, but most of them are only used if the original cost account is not used. The use of the original cost account is a customizing setting and normally it is used.

Figure 7

Posting parameters in transaction S_RFID_PTVPRADPRC00

Here are explanations of the fields that are used in all cases (except Adjustment Document Type and Posting Date, which are self-explanatory):

• VAT Account: This account is used for the posting of the tax adjustment
• Taxable Tax Code: This VAT code is used for the adjustment posting. The first code (D2) is used when the definitive pro-rata execution coefficient is higher than the applied coefficient and therefore adjustments have to be made in favor of the company (i.e., debit). The second code (C2) is used when the definitive pro-rata execution coefficient is lower than the applied coefficient and therefore adjustments have to be made in favor of the state (i.e., credit).

On the Posting Options tab, you can indicate whether you want to make a test run or a production run. On the Posting Aggregation tab, you can indicate how you want to aggregate data. Only standard options are available.

After running the transaction, you have to create adjustment documents. Transaction S_RFIDPTDCAD gives an overview of the documents created. Figure 8 shows the adjustment posting for the financial document of Figure 2. It shows that the costs have been increased.

Figure 8

Adjustment posting for definitive pro-rata calculation

Once the period-end adjustment has been made, the whole pro-rata VAT business process is completed. In the rest of this article, I will discuss the settings required for pro-rata VAT. As with the business process, the customizing settings can also be split into two parts: day-to-day business and period-end process.

Settings for the Day-to-Day Pro-Rata Process

The settings for the day-to-day process are required to come to a correct VAT calculation and VAT posting. You need to extend the VAT procedure used by a country with an additional step with a new condition type for the calculation of the pro-rata VAT. For the French tax procedure, you must first define a new condition table. This condition table is required so you can record the preliminary pro-rata rate based on the company code/VAT code combination. For all other countries, you can use standard available condition table 085.

Create Condition Table

Use transaction V/05 or follow menu path Sales and Distribution > Basic Functions > Pricing > Pricing Control > Define Condition Tables: Create Condition Tables to define a new condition table. You can copy table 085 to the new table 985. In this table you add the field for the VAT code (technical name MWSKZ). Figure 9 shows the settings for this new table.

Figure 9

Condition table 985

Check Calculation Procedure for the Tax 

Next you need to update the tax procedure for the VAT calculation. The first step is to define a new access sequence. The access sequence determines the rules for how the system searches for a specific condition type. You can define it by following menu path Financial Accounting > Financial Accounting Global Settings (New) > Tax on Sales/Purchases > Basic Settings > Check Calculation Procedure: Access Sequences (Figure 10).

Figure 10

Settings for the new access sequence ZPR2

In this example, the name of the new access sequence is set to ZPR2, but you can choose whatever you need. The access sequence contains the fields for company code and tax code, which come from table 985.

Attach the access sequence to a new condition type. Then define the new condition type in the IMG by following the path Financial Accounting > Financial Accounting Global Settings (New) > Tax on Sales/Purchases > Basic Settings > Check Calculation Procedure: Define Condition Types (Figure 11). Not all fields for the condition type are shown; those not shown are empty. At the top of the screen, you can see the link between the condition type and the access sequence.

Figure 11

Condition type 985

Define Formulas

Before you can update the tax procedure, you need to define two formulas. The first formula is to calculate the base amount to calculate the pro-rata VAT over and the second formula is for the calculation of the correction for existing VAT values.

You can maintain formulas using transaction VOFM. In this transaction, for the base formula, follow the path Formulas > Condition base value. Figure 12 shows an example for the coding of the base amount calculation. It is 100% of the posting amount. You can find the coding for the condition value in SAP Note 867942.

Figure 12

Formula for the condition type base amount

Adjust Tax Procedure

Once the formulas have been set up, you can adjust the tax procedure. In this example, the additional condition type ZPR2 has been included in the tax procedure for France. An alternative solution is to copy the standard tax procedure and adjust the copied tax procedure.

You can modify the tax procedure by following the IMG menu path Financial Accounting > Financial Accounting Global Settings (New) > Tax on Sales/Purchases > Basic Settings > Check Calculation Procedure: Define Procedures (Figure 13). You can see that step 105 has been added. This step is a statistical calculation (because of the indicator), meaning it is not posted, but only used for calculation purposes. The condition subtotal is set to D, meaning that the value is copied to field XWORKD and this field is then used in formula 902. In the BasTy (base value) column, you can see that the formula 901 is being used. The other condition types have been assigned to formula 902 to make sure that the pro-rata rate is being taken into consideration when calculating the VAT.

Figure 13

Adjusted tax procedure TAXF

The last step in the settings for the day-to-day business is the adjustment of all the VAT codes for France that are relevant for pro-rata calculation. To maintain the VAT codes, use transaction FTXP or follow menu path Financial Accounting > Financial Accounting Global Settings > Tax on Sales/Purchases > Calculation > Define Tax codes for Sales and Purchases (Figure 14).

Figure 14

VAT code relevant for pro-rata

Figure 14 shows the settings for VAT code X2, which I have used in the example. Standard for input tax only, the line with account key VST is activated, meaning it has a percentage assigned to it. For pro-rata VAT, you need to activate the line with account key NVV. The percentage must be 0%. The actual percentage will be calculated when posting a financial document and it is based on the percentage maintained in the condition record. (See Figure 1 for the condition records.)

Settings for the Period End Pro-Rata Process

You need to make additional settings for the period-end process. As previously mentioned, for France the period is year.

Define Pro-Rata Calculation Entity

The first setting is necessary to indicate which fields are determining the pro-rata calculation. These are the company code and the VAT code. Basically, it concerns the settings necessary for the maintenance of the pro-rata coefficients as shown in Figure 3. You can start the customizing transaction following the IMG pathFinancial Accounting > General Ledger Accounting (New) > Periodic Processing > Report > Tax on Sales/Purchases: Pro-Rata Corrections > Pro-Rata Coefficient > Define Pro-Rata Calculation Entity (Figure 15).

Figure 15

Define Pro-Rata Calculation Entity

In principle, you only need to fill the fields Country, Table Name, Field Name, and active indicator (not shown). A disadvantage of these limited settings is that when you define the pro-rata coefficients, you cannot check which values are allowed. Additional fields are available to check the data and allow you to use search help (formerly called matchcode) to find company codes and VAT codes.

For these fields, you can use standard available values, which SAP’s help function can assist you in finding. Table 1 shows the settings I used for France.

Define Pro-Rata Period Type

The setting is required to indicate whether the pro-rata is to be corrected per year or per other period. You can start the customizing transaction by following IMG menu path Financial Accounting > General Ledger Accounting (New) > Periodic Processing > Report > Tax on Sales/Purchases: Pro-Rata Corrections > Pro-Rata Coefficient > Define Pro-Rata Period Type (Figure 16).

Figure 16

Define the Pro-Rata Period Type

Define Additional Tax Codes for Pro-Rata Adjustment

You should create additional VAT codes for the adjustment posting at period end. These are the codes that you enter as parameters in the adjustment program, as shown in Figure 7. You can maintain the new VAT codes by using transaction FTXP or by following IMG menu path Financial Accounting > Financial Accounting Global Settings > Tax on Sales/Purchases > Calculation > Define Tax codes for Sales and Purchases.

As you can see in Figure 7 there are four new codes required. They are all set up the same way. Figure 17 shows an example of such a VAT code.

Figure 17

Example additional VAT code for pro-rata adjustments

Define the Pro-Rata Validation Entity

It is possible to define certain criteria to select only specific financial documents for which a pro-rata adjustment is to be made. For this example, I used the same criteria as for the calculation — the company code and the VAT code. You can also select only documents with an amount larger than a specific value. The screen is the same as the one shown in Figure 17 and the settings I used are the same as in Table 1. You reach this transaction by following IMG path Financial Accounting > General Ledger Accounting > Periodic Processing > Report > Tax on Sales/Purchases > Pro-Rata Corrections > Pro-Rata Validation Entity > Define Pro-Rata Validation Entity.

Define the Pro-Rata Validation Entity Values

You need to specify the permitted values for the validation entities. In this example, you must specify for which company code/VAT code combination the adjustment is to be calculated and posted. Follow IMG menu path Financial Accounting > General Ledger Accounting > Periodic Processing > Report > Tax on Sales/Purchases > Pro-Rata Corrections > Pro-Rata Validation Entity > Define Pro-Rata Validation Entity Values (Figure 18).

Figure 18

Define the Pro-Rata Validation Entity Values

The screen shows the combinations of company code and VAT code for which the adjustment is to be made. It is also possible to deactivate a value and to make it valid again for a later period. In Figure 18, you can see that the combination of company code FR90 and VAT code X2 is to be included in the adjustment process.

Define Field Catalog Entries

The final part of customizing is settings for aggregation. To prevent individual adjustment postings (i.e., an adjustment posting per pro-rata VAT posting), you can specify that aggregation is required. This is done in two steps. First you define which fields can be used for aggregation, and in a following step you can define the actual aggregation. Figure 19 shows an overview of the field that you can use for aggregation.

Figure 19

Fields that you can use for aggregation

Define Pro-Rata Posting Aggregation Key

After you define the fields that can be used for aggregation, you can define how you want to aggregate. Within transaction S_RFID_PTVPRADPRC00 you can use an aggregation key for materials and one for services. This is optional — you can use the same key for both. Figure 20 shows the situation in which two different keys are being used. Per aggregation key you can indicate whether you want to use the original cost element for the adjustment posting. Figure 21 shows the details behind the aggregation key for materials.

Figure 20

Overview of aggregation keys

Figure 21

Details of the pro-rata aggregation key for materials

Kees van Westerop

Kees van Westerop has been working as an SAP consultant for more than 25 years. He has an MBA degree in mathematics and a degree in finance. Kees has been concentrating on the financial modules, especially in general ledger accounting, cost center accounting, and consolidation. He also has a great deal of experience with rollouts of kernel systems and integrating finance and logistics.

You may contact the author at keesvanwesterop@hotmail.com.

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