Governments require buyers to withhold a portion of the amount they pay to sellers or service providers, and to remit this withheld amount to the local tax agency. Withholding tax ensures that the government is able to collect the income tax due from those transactions. We can record the effect of withholding tax on both sales and purchases, either at the time of accrual or at the time of payment, depending on the country’s taxation rules.
If we are going to create a withholding tax code for a new nexuses, we have to follow below mentioned steps. Otherwise skip the first two steps.
- Set up withholding tax preferences
a. Set up> Withholding Tax > Set up withholding tax
b. Select the preferred Nexus
c. Available on purchase- check this field to WH tax available on purchase transactions
i) Check disable withholding tax in purchase order box.
ii) Select tax point as On Accrual
iii) Specify Applies to whether it applies to the total amount of the transaction, or should be individual line item.
d. Available on sales- Check this box to make withholding tax codes available on sales transaction.
i) Check disable withholding tax in sales order box.
ii) Select tax point as On Accrual
iii) Specify Applies to whether it applies to the total amount of the transaction, or should be individual line item.
e. Click save. - Create a withholding tax type for Nexus
a. Setup > Withholding Tax > Tax Types.
b. Click New.
c. Enter a name for the withholding tax type
d. Enter a description for the withholding tax type
e. Select the nexus that this withholding tax type applies.
f. Select the WH tax base. Specify whether the withholding tax applies to the line item net amount, gross amount, or tax amount (VAT/GST or sales tax).
g. Liability/ Purchase tax Account: Select the account to posts tax withheld on purchase transactions.
h. Asset/ Sales tax Account : Select the account to posts tax withheld on sales transactions.
i. Click save. - Creating Withholding Tax Codes
a. Setup > Withholding Tax > Tax Codes.
b. Click New.
c. Click the nexus that you are creating a tax code for.
d. Enter a Name for the tax code.
e. Enter a description for the tax code.
f. Enter the withholding tax rate as a percentage.
g. If the withholding tax should be applied to a percentage of the tax base, specify the percentage.
h. Select the tax agency
i. Select the tax type of this withholding tax code.
j. Select the type of transactions this withholding tax code can be applied to.
k. Select the subsidiary
l. Click Save.