Triangulation

tax in Oracle R12 eBTax and Oracle Fusion Tax

There is often a look of distress on someones face when you want to discuss triangulation tax for
indirect taxation but its not difficult to grasp the basic concepts. There is a slight difference between
triangulation in its legal terms compared to setting up a triangulation tax rate in an Oracle ERP
system with the rules to go with it. Technically, triangulation is considered as a zero rate tax but in
Oracle we want to give it a unique name, something like EU sales triangulation in order for us to
clearly see the tax on the invoice and easily identify it on the reports.

Triangulation is used to describe the process when more than two entities are involved in the supply
of goods that cross international borders. The ABC flow of transactions will involve three different
parties where goods are shipped directly from party A to party C but party B is the selling
organisation and never physically receives the goods or handles them during the shipping process.

A typical example is when an international organisation sells from one location (B) but has a factory
or warehouse in another European country (A) and the goods are being sold to a VAT registered
entity in a third European country (C).

Selling Organisation (UK)

Order placed B
Invoice sent

Invoice sent

A C
Goods Shipped
Intercompany Warehouse (France) Customer (Germany)

1. The process starts with the UK entity (B) making a sale to the German customer (C).
2. An order is placed in the UK system (B) and the warehouse in France (A) is selected as the
location to ship the goods from.

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3. Because the French location (A) is a separate legal entity (whether intercompany or third
party supplier) the UK Oracle system (B) will automatically trigger a purchase order to the
French entity (A) for the goods but will have a delivery address of the end customer in
Germany (C). The tax is based on the ship from (A) and ship to (C) locations of the
transaction.
4. The French entity (A) then ships the goods to the end customer in Germany (C) but sends its
invoice with EU sales goods rate to the UK entity (B) as that is who it has the relationship
with.
5. The UK entity (B) then sends their invoice to the German customer (C) with the EU sales
triangulation rate.

The UK entity is the intermediary company with a relationship with both the end customer in
Germany and the shipping supplier in France. The French and German companies never
communicate and as far as the latter is concerned, they assume the goods came from the UK entity.
The UK entity is the French suppliers customer so as far as the French supplier is concerned the UK
entity is the only customer.

Why triangulation?

Look at this from another angle: if we first exclude B and just look at a direct sale between A and C
selling goods then we would charge an intra EU sales of goods but if it was for a service then we
would use something like intra EU sales of services. We need to split between goods and services,
primarily for intrastat reporting that is tied in with the European sales listing report. A simplistic
reason for this is to track the movement of goods between EU countries. So when we split between
goods and services the intra EU sales of goods should match to the intrastat report of the movement
of goods.

Lets return to the ABC triangulation process: if party B is shipping to C but invoicing A its no longer a
clear cut sale of goods from one country to another; the intrastat would show country B moving
goods to C but the European sales listing report would show A moving goods to C and B moving
goods to C which is wrong as the movement of goods from B to C never happened. By introducing
the triangulation tax we can record the sale of goods between B and C but exclude it from EU sales
of goods. Now we can easily differentiate between the actual sale of goods and services that are
linked to the physical movement of those goods and the sales of goods where another party is
making the shipment for us. Of course the process is a little more complex than that but hopefully
the above example will make sense.

EU VAT Directive triangulation requirements

The following EU VAT Directive explains the requirements for triangulation tax to be applied:
http://www.hmrc.gov.uk/manuals/vatsmanual/vatsm5220.htm

Below is an extract from the website with a simpler explanation shown in blue type:

(a) the acquisition of goods is made by a taxable person who is not established in the Member State
concerned but is identified for VAT purposes in another Member State; the selling party (B), shipping
party (A) and customer (C) must all be located in the EU but in different countries.

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(b) the acquisition of goods is made for the purposes of the subsequent supply of those goods in the
Member State concerned by the taxable person referred to in point (a); the goods must go directly
from shipping party (A) to customer (C) without ever going to selling party (B).
(c) the goods thus acquired by the taxable person referred to in point (a) are directly dispatched or
transported, from a Member State other than that in which he is identified for VAT purposes, to the
person for whom he is to carry out the subsequent supply; the customer (C) is ordering the goods
from the seller (B) without necessarily knowing that the goods are coming from another EU country
or being drop shipped by another party (A).
(d) the person to whom the subsequent supply is to be made is another taxable person or a non-
taxable legal person who is identified for VAT purposes in the Member State concerned; the
customer (C) must be VAT registered in the EU but does not have a registration in the country of the
selling entity (B).
(e) the person referred to in point (d) has been designated in accordance with Article 197 as liable
for payment of the VAT due on the supply carried out by the taxable person who is not established
in the Member State in which the tax is due; the customer and selling entities are both registered for
VAT but in different EU countries.

How to handle triangulation tax in Oracle

When we generate an invoice we should have all the determining factors needed to calculate the
correct tax automatically and without error. Providing that we have a bill from location (B), a ship
from location (A) and ship to location (C) triangulation tax is very simple and straightforward to set
up in Oracle R12 eBTax or Oracle Fusion Tax with just one tax condition.

It is slightly more difficult in AP as the ship from and bill from locations are always the same as
that of the supplier site used. It is not really possible (unless it is an intercompany drop shipment) to
know where the supplier ships their products from and so it is not possible to build into the rules
because even if we know the location of the supply and create a site for that, using that site means
both the ship from and bill from will still be the same location.

So while we cannot set up AP triangulation tax to be fully automated we can still capture 90% of AP
triangulation transactions by using the bill from location (A), the ship to (C) and our own bill to
(B).

Further to simply calculating the tax in Oracle we need to make it clear on any invoices sent to
customers that we are charging triangulation tax with the appropriate reference to the EU VAT
directive.

At eBiz Answers we can set up this solution for you using standard Oracle functionality.

eBiz Answers Ltd. Whitepaper: Triangulation tax in Oracle R12 eBTax and Oracle Fusion Tax. Copyright 2014. www.ebizanswers.net