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Group VAT

The term Group VAT refers to the operation of transferring the intercompany VAT balance entered in the subsidiary entity to the parent entity (holding or sub-holding entity) which will book a variation of the amount payable to/receivable from the tax authority and, simultaneously, the creation of the intercompany amount receivable/payable for group VAT. In fact, under the Group VAT policy the holding entity acts as the “withholding agent” in relations with the subsidiary entity, which registers its own VAT receivables/payables on an intercompany account, which translates – for the parent entity when the transfer is made – into an amount receivable from/payable to the tax authority.

With regard to the transfer of the subsidiary’s tax position to the parent entity, the system simply transfers the VAT billing variation account; therefore, once transferred to the holding entity, the new balance is subject to the VAT policy defined for the parent entity.

The journal entries that the system enters for the parent company, starting , for example, with an intercompany VAT position for the subsidiary entity (IC VAT payable) equal to a -10, are:

It should be noted that the intercompany VAT account (IC VAT receivable/payable) very often coincides with the Credit/Debit account for VAT precisely due to the fact that no intercompany VAT account formally exists. Typically, the VAT account only acts as such in relation to payments to the tax authorities; however, during the Group VAT phase, the VAT account entered at subsidiary entities behaves like a real VAT account, even if it only in fact represents a credit or debit position vis-à-vis the holding entity, which is the only party with relations with the tax authority and is therefore the only party to transact on the actual VAT w./Tax authorities account.

The following need to be defined in order to set up Group VAT:

Accounts sensitive to Group VAT

As stated previously, the concept of Group VAT involves the transfer of intercompany VAT balances from one entity to another; therefore, it is necessary for at least these accounts to be “intercompany option” accounts.

The following accounts must allow intercompany transfers:

  • IC VAT receivable
  • IC VAT payable
  • IC receivable for Group VAT
  • IC payable for Group VAT

An account is defined as “intercompany option ” if, in the chart of accounts list (accessible from the administrator-user’s web interface by following the path: Setup & Admin > Dimensions > Account > List) Navigation panel> Dimensions > Account > List), it has the IC Management option active

If that option has not been enabled, the system will display a blocking error during data processing.

VAT policy subject to Group VAT

The transfer of the intercompany VAT balance to the holding entity is defined within the VAT policy for the subsidiary entities.

In fact, groups which manage Group VAT have two different policies:

  • one to manage the holding entity
  • one to manage the subsidiary entities

Only the latter can be enabled for the group indirect taxes calculation and it is therefore the only one which needs the definition of the specific accounts involved in the transfer operation.

The management of the above information can be accessed from the administrator-user’s web interface, by following the path Setup & Admin > Data Processing > Cash Flow Planning > Financial rules > Indirect Tax Policy Navbar > Data Processing > Cash Flow Planning > Financial rules > Indirect Tax Policy and selecting the Group VAT tab.

Every indirect tax policy sensitive to Group VAT is identified by:

  • an IC VAT debit variation account. This is the variation account on which, during the transfer, the parent entity bills the subsidiary’s intercompany VAT receivable/payable. Once the value is moved to this account, it follows the VAT rule defined for the Holding entity.
  • a Group VAT debit/credit variation account. The variation balance sheet which, during the transfer, is defined in the Holding entity as the counterparty of the VAT Tax authorities account that was fed previously.

That balance becomes zero when the subsidiary pays the tax to the holding entity.

  • an IC VAT collection / payment account. This is the variation balance sheet of the settlement on which, during the transfer, the holding entity receives the tax settlement from the subsidiary entity.

The Group VAT setup logic is that of the parent entity; therefore, the accounts indicated are those which will be subject to entries deriving from the transfer of the subsidiary’s VAT balance.

Entities which fall within the scope of Group VAT

Once the accounts sensitive to Group VAT have been defined as intercompany transferrable and the VAT policy has been defined as subject to Group VAT, it is necessary to indicate:

  • the pooler entity, or the entity to which the VAT balances are transferred, typically the Holding or Sub-Holding entity
  • the subsidiary entities, i.e. the entities that are transferring the VAT balances to the pooler entity, specifying the parent entity to which they are transferring their own VAT position

Pooler entity setup

In order for an entity to be defined as a pooler”, it is necessary, in the area dedicated to managing the execution plan’s Indirect taxes, to set the Group calculation to “Yes”.

If the pooler entity is represented by a sub-holding entity it is necessary to set the “Group calculation” to “On other entity” and enter the Reference Holding field, indicating the company code of the parent entity. In fact, the sub-holding entity is the group’s parent company and a subsidiary at the same time; it receives the bank balance of the subsidiaries and, in turn, transfers this to the holding entity.

Subsidiary entities setup

Subsequently, to place a subsidiary entity within the cash pooling scope it is necessary, in the area dedicated to managing the execution plan’s Indirect taxes, to set:

  • the Entity Calculation to “Yes”
  • the Group calculation to “On other entity”, specifying the parent entity to which to transfer the bank balance and interest in the Reference Holding field

Tagetik allows the user to customise the parent entity to which to transfer the VAT balance by section