Withholding Tax Gross up on fixed Interest rate on borrowing calculation in SAP Treasury

Background

A grossup clause is a provision in a contract which provides that all … The provision will usually indicate that if there is a mandatory withholding or deduction by operation of law (usually with respect to tax), then the paying party shall “gross up” the payment so that the … Contract clauses · Payments · Business terms.

(Source Wikipedia)

A common example is grossing up interest for income tax or withholding tax. Net interest is £100 and the tax rate is 20% (= 0.20). The tax is charged on the gross amount of £125 (x 20% = £25 tax). This is why the calculation is to DIVIDE BY (1 – tax rate) to give the right answer of £100/(1 – 0.20) = £125.

(Source Investopedia)

SAP has standard solution for gross up procedure in withholding tax for vendor and customer. The gross up procedure shifts the tax burden from the vendor to the paying company. It is used in situations where the vendor is not to be penalized.

User Story

Anna is a financial analyst who is responsible to process payments. She has to follow the country specific process when it comes to withholding tax. Withholding tax applicability is on vendor payments, payroll payment and on interest on borrowings.

Anna has a challenge; she must calculate the withholding tax manually (Gross up) when it comes to withholding tax on fixed interest on borrowings. As standard SAP withholding tax calculation procedure is not called when a withholding tax must be calculated in SAP Treasury module.

During filing of withholding tax return, it was observed some of the withholding taxes on few of fixed interest on borrowing were calculated without gross up. To avoid such miscalculation in withholding tax, Anna’s supervisor Patricia wanted to automate the withholding tax calculation on fixed interest on interest on borrowings.

Withholding tax is a derived value based on a condition. Withhold tax is a derived flow based on the condition flow type. In SAP interest is calculated based on condition (standard condition type 1200). Fixed rate interest in entered in the field interest category (fixed/variable), system basically calculates interest as follows

Principal * Tenor * Fixed Rate

Or

Principal * Tenor * (Reference Interest Rate+/-rate)

Interest should be grossed up to the extent of withholding tax the calculation is to, Interest DIVIDE BY (1 – tax rate)

SAP Solution

Apart from fixed interest / variable interest/ amount, SAP has a concept called formula-based calculation of interest. However, standard SAP has a restriction, SAP interest formula will only work with reference interest. Reference interest rate is a mandatory in SAP formula for calculating interest.

This blog explains how to calculate gross up of interest (including WHT) for fixed interest rate using SAP standard formula in Financial Mathematics (CA-FIM-FMA).

Formulas are maintained in table AT30. AT30 table is a maintainable table. For the purpose of the blog we are using formulae “F” stands for Fixed and “V” stands for variable.

Steps

1. Maintain AT30 table (Formula Table for Financial Mathematics) for variable interest

• V1 = Reference Interest Rate
• V2 = Margin
• V3 = Withholding tax %
1. Maintain AT30 table for (Formula Table for Financial Mathematics) for Fixed interest

• F1 = Fixed Rate
• F2 = Withholding tax %
• F3 = Dummy1 reference interest rate
• F4 = = Dummy1 reference interest rate
1. Formulae values (interest rates, WHT rates are maintained) in the transaction

At a transaction user has to update the variable values such as interest rate, withholding tax and nullifier reference interest rates.

In nutshell, as standard SAP needs a variable value (which is a reference interest rate), we need to use a formula which nullifies the impact of reference interest rate in gross up formula.

Note:

When we use formula for grossing the interest rate with a formula, system by default changes the deal as variable interest rate deal.

In SAP, AT30 and AT31 tables are transparent tables. These transparent tables are used internally within SAP. SAP allows adding an entry in the table AT30 and AT31. However, it is not possible to create modification-free formula and variables for the calculation of variable interest using the FIMA formula editor.

Implement the correction mentioned in SAP OSS note 2769672 – changing delivery class of tables AT30 and AT31 from “S” to “E”.

After we implement the oss note 2769672, the tables AT30 and AT31 can be updated using transaction code SM30.

Conclusion

SAP restriction of mandatory reference rate in calculating SAP formula in Financial Mathematics (CA-FIM-FMA) in calculation of interest can be overridden, using a formula (F1)/(1-F2+(F3-F4))which nullifies the impact of reference interest rates [F3 & F4] in the SAP formula.