Witholding Tax

1

the Italian Govenment has produced a new kind of witholding tax (applied on VAT) which is called “VAT Split Payment” in which a client (only institutional ones, ie public offices, banks etc etc) has to pay the VAT of the invoice directly to the TAX authority.

Here comes the problem… this kind of payment can coexist with the traditional witholding tax and has to be in a different line of the invoice.

For example:

Amount 5.200
VAT 22% 1,144
Total 6,344

Split of payments pursuant to art. 17-ter 1,144
Withholding tax (20%) 1,000
Net 4,200

How can I managed this? Any idea?

2

Your example is not clear. VAT of 22% on 5,200 is, indeed, 1,144, making for a total of 6,344. OK so far.

Then you say the client (customer) pays the VAT directly to the tax authority. But your example shows withholding tax of 20%. How do the 22% VAT and 20% withholding relate to one another?

Further, your example suggests that 20% withholding tax equals 1,000. But 1,000 is 20% of 5,000, which does not appear in the explanation anywhere.

Finally, you list a net of 4,200. But 4,200 is the original sale amount of 5,200 less the mysterious 1,000.

So how is this 1,000 figure calculated? And exactly what did you mean by “withholding tax (applied on VAT)?” Do you mean the withholding percentage applies to the sale including VAT. Or do you mean the customer withholds part of the VAT amount itself? Or what?

3

We have two different witholding taxes. One on the whole amount of the VAT 1,144 and one of 20% on the amount of 5.200. So on the total of 6,344 I will receive 4,200 (6,344 - 1,144 - 1,000).

The client will pay 4,200 to my company, 1,144 as VAT to the Tax Authority and 1,000 as “anticipation on taxes on revenues” to the Tax Authority.

Amount 5.200
VAT 22% 1,144
Total 6,344

Split of payments pursuant to art. 17-ter (100% of VAT) 1,144
Withholding tax (20% of Amount) 1,000
Net 4,200

4

I still don’t understand. If the “anticipation on taxes on revenues” is 20% of the Amount, why is it not 1,040 instead of 1,000? That would make your net 4,160.

Assuming the 1,000 was just a typing error, I think there are a couple approaches.

The first is to create the sales invoice normally, indicating IVA 22% tax code on the taxable line items. Then, apply a withholding tax percentage adjusted to reflect the compound rate. If every line item was subject to IVA 22%, the percentage would be 34.4262%. (This is because withholding tax in Manager is calculated on the sum of Sub-total plus tax-code-applied taxes. But you don’t want the split withholding on the full total, only on the underlying base.) Looking at some equations:

Amount + VAT - VATWithholding - SplitWithholding = Net OR
5200 + (.22 * 5200) - (.22 * 5200) - (.20 * 5200) = 4160

(I’m only showing all these interim numbers that cancel out for completeness. Other circumstances might not have them cancelling each other.) Of course, this boils down to:

Amount * (1 - SplitWithholding) = Net OR
5200 * (1 - .20) = 5200 * .8 = 4160

So what withholding percentage is required? Let’s call that variable W. A little algebra yields:

W = 1 - (1 - SplitWitholding) / (1 + VAT) = 1 - (.8 / 1.22) = .344262 = 34.4262%

The resulting sales invoice looks like this:

05 PM

You would probably want to add a note to explain what the withholding tax includes and how it was calculated.

The other way you could do this is to treat the split amount as a zero-tax, negative line item, posted to a suitable asset account. (Since this is not an automatic posting, you cannot use the same Withholding tax receivable account.) The problem with that approach is that you are lowering the Total amount, so you would need to enter an artificially high withholding rate for the VAT. It is probably easier to explain the first approach than the second.

5

All your suppositions were correct. The fact that I wrote 20% was due to the fact that, in the specific real case, 20% was applied only to 5.000 of the 5.200 amount.

Returning to the invoice report the problem is that I have to respect the exact format that I wrote with two different lines after the total and before balance due…

6

Now I am more confused. Why is this?

Manager does not allow this, as I’m sure you realize. I tried several experiments with multi-component custom rates, negative entries, and so forth, but could not figure any way to show multiple withholdings without also distorting the main IVA 22% calculation.

7

Because to total amount is composed by 5000 (consulting services) which is subject to witholding tax and 200 which is a contribution to the pension fund which is not.