Disabling Salary Proration in Tax Calculation (Mid-Month Hiring and Termination)

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Have contributed to this article abdullahchougle and senthilnathan.kuppusamy with their technical expertise.

In Egypt, when it comes to employee’s income tax calculation, the common practice is to prorate the employee’s monthly salary in certain situations, for example, if the person is hired or terminated in the middle of the month. That scenario is covered by the HCM localization for Egypt.

Some businesses may, however, approach this from a different perspective, requiring that the entire monthly salary be taken for income tax purposes, regardless of the day of the month that the employee joins or leaves the company.

This post attempts to show one of the ways to enable the latter scenario in the system.

Note: Keep in mind that it may not meet all the business requirements.

Standard Processing in the Taxation Solution for Egypt

Before we get started with the configuration for nonprorated taxation, here’s a short summary about the standard taxation solution:

• The monthly salary (for example, M020) and tax-exempted special increase (M3SI) are maintained in IT0008.


• In general, the basic wage types go through factoring in payroll, which prorates the amounts based on various parameters such as working days, unpaid absences, etc. For that purpose, the solution can use the factoring wage type /801 (PCL 10, specification 01) for example.


• For the monthly salary to be considered for taxation, the following cumulation classes are selected for the corresponding wage types:
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  

  Cumulation class	Purpose
  11	Taxation
  13	Tax exemption

  
  


• In the case of mid-month hiring/termination, the wage types are prorated in payroll and subsequently taken for taxation.

Important Assumptions

The solution and descriptions below are based in some assumptions. Before an implementation, keep in mind the following:

• Knowledge about the localized Egypt payroll tax solution is a pre-requisite.


• The examples shown below are based on the standard Egypt payroll schema EG00 and standard factoring logic.


• The latest WPBP split is considered for the whole period if the employee is hired/terminated in the middle of that period. In all other payroll periods, proration is used as per the standard taxation solution.


• For the purpose of nonproration, the concept explained in this blog can be analyzed for other salary components that are part of taxation.

Configuration for Nonprorated Processing

To take the entire monthly salary instead of a prorated salary for income tax calculation, you can follow the steps below in your system:

1. Copy wage types M020 and M3SI into custom wage types. Let’s assume the copied wage types are 9001 and 9002, respectively.


2. Create a new processing class 91 and add specifications to copy wage type M020 to 9001 and M3SI to 9002:
   
   
   
   
   1. Unmark the monthly salary wage types (like M020) from cumulation class 11 and M3SI from cumulation class 13. Also, set the PCL 91 as 01 for M020 and 02 for M3SI:
      
      
   
   
   2. Mark wage type 9001 with cumulation class 11 and wage type 9002 with the cumulation class 13. Also, change the factoring of these wage types to 03 in processing class 10:
      
      
   
   
   
   


3. Create a payroll operation that checks if an employee has been hired/terminated mid-month. You may want to check if the standard payroll operation PPPAR, with its various parameters, can be used for this purpose. Here, let’s assume that a made-up, custom operation _HITR checks this and returns Y if employee is hired/terminated mid-month and N if otherwise.
   

   Note: The code for the payroll operation _HITR  needs to be written according to your business requirements and the return values are Y and N.

   
   


4. Write a PCR as shown below to copy the wage types according to the created processing class. The system takes the wage types corresponding to the last active WPBP split  for the whole payroll period if a mid-month hiring/termination has happened.
   
   
   

   Note that payroll operation _HITR returns Y or N as mentioned in the step above.

   
   


5. Write the following logic for factoring wage type /803, which is configured to subtract the amounts in wage types 9001 and 9002.The PCR ZEGF is a copy of XPPF, enhanced to avoid proration in the case of mid-month hiring/termination. For all other payroll periods, the system does the proration similar to /801.
   


6. Create the following PCRs:
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   

   PCR	By copying…
   ZEGP	XPP0
   ZEG1	XPP1
   ZEG3	XPPP

   
   


7. Enhance the copied PCRs for factoring wage type /803 as shown below. These PCRs can have different logic based on business requirements.
   
   
   


8. Position the created PCRs in your Egypt Payroll Schema. Here, the schema is ZEGN.
   
   

Business Process

Then, with the settings in place, let’s take a look at different scenarios:

Scenario 1

Employee hired on January 15th 2017.



Basic Salary

Payroll Run for January

1. PCR ZE91 generates 9001 based on PCL 91. Here, M020 is maintained with PCL 91/01.
   


2. PCR ZEGF has generated factor /803. Since it is a hiring month, its value is 1.
   


3. Factor /803 is applied on 9001. In our scenario, the factor is 1. Therefore, the amount in 9001 is nonprorated.
   


4. Tax calculated based on the complete monthly salary of EGP 12000.
   


5. Final RT:
   

Scenario 2

The employee salary is increased to EGP 18000 effective from 10.02.2017. This creates a WPBP split in payroll.

Payroll Run for Period 02

1. Wage type 9001 is generated for each WPBP split.
   
   


2. PCR ZEGF generates factor /803 similar to /801. The same is applied to wage type 9001 in PCR XVAL.
   
   
   


3. The prorated monthly salary is considered for taxation.
   


4. Final result:
   

Scenario 3

The employee salary is increased to EGP 25000 effective from 09.03.2017. This creates a WPBP split in payroll.



Employee leaves on March 15th 2017. This also creates a WPBP split in payroll.

Payroll Run for Period 03

1. Wage type 9001 is generated only for the last active WPBP split, as this is the employee’s termination payroll period (mid-month).
   
   


2. PCR ZEGF has generated factor /803. Since it is a termination month, its value is 1.
   


3. Factor /803 is applied on 9001. In our scenario, the factor is 1. Therefore, the amount in 9001 is nonprorated.
   


4. Tax calculated based on the last active WPBP salary of EGP 25000.
   


5. Final RT: