Get Started with Tax Calculation in Dynamics 365 Finance

This article covers how to get started with the Tax Calculation service in Dynamics 365 Finance and Supply Chain Management, including the high-level design, configuration steps, and legal entity setup.

Runtime Design

The Tax Calculation runtime follows this flow:

1. A transaction (e.g. sales order or purchase order) is created in Finance.
2. Finance automatically applies default values for the sales tax group and item sales tax group.
3. When the Sales tax button is selected, Finance sends the transaction information to Tax Calculation.
4. Tax Calculation matches the transaction information against predefined rules in the tax feature to find a more accurate sales tax group and item sales tax group. If the Tax Group Applicability matrix matches, it overrides the default; otherwise, it continues with the transaction defaults. The same logic applies for the Item Tax Group Applicability matrix.
5. Tax Calculation determines the final tax codes using the intersection of the sales tax group and the item sales tax group.
6. Tax is calculated based on the final tax codes.
7. The result is returned and displayed on the Sales tax page.

High-Level Configuration Overview

1. In the Globalization Studio workspace, create a Tax Calculation feature.
2. Set up the feature: select the tax configuration version, create tax codes, create tax groups and item tax groups, and optionally create applicability rules.
3. Complete the feature.
4. In Tax calculation parameters, select the feature for your legal entity.

Once completed, sales tax codes, sales tax groups, and item sales tax groups are automatically synced to Finance.

Configure the Tax Calculation Feature

This setup is not legal-entity-specific and only needs to be completed once, in any legal entity via the Globalization Studio workspace (version 10.0.39 or later).

Import and Create the Feature

1. Import the correct tax configuration version based on your Finance version, following the steps in Import ER configurations from Dataverse.
2. Open the Globalization Studio workspace, select the Tax Calculation tile, then select Add. Choose New feature (blank content) or Based on existing feature (copy from an existing feature).
3. Enter a name and description, then select Create feature. A draft version is automatically created.
4. Select the draft version and select Edit to open the Tax Calculation setup page.
5. Select the Configuration version imported earlier. Microsoft provides a default tax configuration covering most requirements. To extend it, see How to build extension in tax service.

Mandatory Setup Tabs

Tax codes — Create and maintain tax code master data. All codes are automatically synchronised to Finance when the version is enabled. For each tax code, select a Calculation origin (By net amount, By gross amount, By quantity, By margin, or Tax on tax). Additional options include Is exempt, Is use tax, Is reverse charge, and Exclude from base amount calculation. Maintain tax rates and tax amount limits per code.

Tax group — Define tax group master data and the tax codes under each group. For example: DEU_Dom containing DEU_VAT19 and DEU_VAT7; DEU_EU containing DEU_Exempt.

Item tax group — Define item tax group master data and the tax codes under each group. For example: Full containing DEU_VAT19, BEL_VAT21, DEU_Exempt, BEL_Exempt; Reduced containing DEU_VAT7, BEL_VAT6, DEU_Exempt, BEL_Exempt.

Optional Setup Tabs

Tax group applicability — Define a matrix to determine the tax group based on transaction attributes (e.g. business process, ship from, ship to). If no rules match, the default sales tax group on the transaction line is used. Leave blank if defaults are always correct.

Item tax group applicability — Define a matrix to determine the item tax group (e.g. by item code). If no rules match, the default item sales tax group on the transaction line is used.

Customer tax registration number applicability — For customers with multiple tax registration numbers, define rules for automatic determination. Otherwise, the default tax registration number on the taxable document is used.

Vendor tax registration number applicability — Same as above, for vendors on purchase transactions.

List code applicability — Define rules to automatically determine the List code field value on taxable documents.

For more information on how tax codes are determined, see Sales tax group and item sales tax group determination logic.

Complete and Publish

Select Save, close the page, then select Change status > Complete. Once completed, the version can no longer be edited and becomes visible to each legal entity on the Tax calculation parameters page.

Set Up Tax Calculation per Legal Entity

This setup must be configured for each legal entity where Tax Calculation should be enabled.

1. In Finance, go to Tax > Setup > Tax configuration > Tax calculation parameters.
2. On the General tab:
   • Select Enable advanced tax calculation to enable the service for the legal entity. If not enabled, the existing tax engine continues to be used.
   • In Feature name, select the completed tax feature setup and version.
   • Select the Business processes to enable.
3. Configure the Sales tax rounding rule fields for the legal entity. See Tax calculation rounding rules for details.
4. On the Error handling tab, define the error handling method (No, Warning, or Error) per result code.
5. On the Multiple VAT registration tab, enable VAT declaration, EU Sales List, and Intrastat separately for multiple VAT registration scenarios. See Reporting for multiple VAT registrations for details.
6. Save and repeat for each additional legal entity. When a new version of the Tax Calculation feature is completed, update the Feature name field on the General tab.

Source: Get started with Tax Calculation – Microsoft Learn