Withholding Tax
Withholding tax in SAP refers to the tax that a company withholds from payments made to vendors, employees, or other entities and then remits the withheld amount to the tax authorities. This is commonly applied in scenarios like paying vendors, interest, rent, or dividends where a portion of the payment must be withheld for tax purposes.
Key Concept:
Withholding Tax Codes:
These codes represent different tax rates and types for withholding, such as corporate income tax, non-resident tax, or service tax.
SAP uses withholding tax codes to determine how much tax to withhold from payments.
Withholding Tax Types:
Vendor Withholding Tax (WHT): This is typically applied when making payments to vendors for goods or services.
Customer Withholding Tax: This applies when customers withhold taxes from the company while making payments.
Importance:
Legal Compliance: Ensures companies meet government tax regulations by deducting and remitting taxes on time.
Revenue Protection: Helps governments secure tax revenue at the source, reducing evasion.
Risk Mitigation: Prevents penalties, fines, or legal consequences for non-compliance.
Financial Discipline: Encourages businesses to maintain accurate records of payments and taxes.
Global Trade Alignment: Essential for cross-border transactions, where withholding tax applies to non-resident vendors.
Benefits of the Withholding Tax:
Automated Tax Deduction in SAP: Reduces manual calculation errors and ensures accuracy.
Simplifies Vendor Settlements: Ensures vendors receive net amounts after tax, avoiding disputes later.
Supports Audit & Transparency: Provides clear records of tax deducted and remitted, useful for statutory audits.
Cash Flow Management: Ensures timely remittance of taxes, which supports smoother financial planning.
Integration with FI & MM Modules: Withholding tax postings automatically flow into accounting and procurement, keeping systems synchronized.
Transaction Codes
Configuration T-Codes (FI – Common for MM & SD)
These are the core FI customizing steps:
Define Withholding Tax Types – OBCW
Define Withholding Tax Codes – OBBW
Assign Withholding Tax Types to Company Code – OBY7
Define Accounts for Withholding Tax (GL assignment) – OBWW
Master Data Maintenance
Where you attach WHT settings to business partners:
Vendor Master (MM side):
XK02 – Change Vendor (Centrally)
FK02 – Change Vendor (Company Code level)
Customer Master (SD side):
XD02 – Change Customer (Centrally)
FD02 – Change Customer (Company Code level)
Transaction Codes for Withholding Tax Execution
MM (Vendor Side)
FB60: Post Vendor Invoice (FI invoice)
MIRO: Logistics Invoice Verification (PO-based vendor invoices)
F-53: Manual Vendor Payment
F110: Automatic Payment Run
SD (Customer Side)
FB70: Post Customer Invoice
F-28: Post Incoming Payment
FI General
FBL1N: Vendor Line-Item Display (check WHT postings)
FBL5N: Customer Line-Item Display (check WHT postings)
Configuration
Step 1: Define Withholding Tax Types
T-Code: OBCW
Path: SPRO → Financial Accounting (New) → Financial Accounting Global Settings (New) → Withholding Tax → Extended Withholding Tax → Calculation → Withholding Tax Types → Define Withholding Tax Types
Purpose: Determines if WHT is calculated at invoice posting, payment, or both.
Applies to:
MM side (Vendor): When posting vendor invoices/payments.
SD side (Customer): When customers deduct WHT while paying you.
Step 2: Define Withholding Tax Codes
T-Code: OBBW
Path: SPRO → Financial Accounting (New) → Withholding Tax → Extended Withholding Tax → Calculation → Withholding Tax Codes
Purpose: Defines tax rate and thresholds for each jurisdiction.
Applies to:
MM side (Vendor): Define codes like "Service Tax 10%" for vendor bills.
SD side (Customer): Define codes like "Customer Retention Tax 5%" for incoming payments.
Step 3: Assign Withholding Tax Types to Company Code
T-Code: OBY7
Path: SPRO → Financial Accounting (New) → Withholding Tax → Extended Withholding Tax → Basic Settings → Assign Withholding Tax Types to Company Codes
Purpose: Links WHT types to your company code.
Applies to:
Both MM & SD: The Same configuration applies; once assigned, the company code can handle WHT for both vendors and customers.
Step 4: Define Withholding Tax Accounts
T-Code: OBWW
Path: SPRO → Financial Accounting (New) → Withholding Tax → Extended Withholding Tax → Postings → Define Accounts for WHT to be Paid Over
Purpose: Determines GL accounts for WHT posting.
Typical Accounts:
Withholding Tax Payable (Liability)
Expense Account (if applicable)
Applies to:
MM side: Vendor payments post tax payable to authorities.
SD side: Customer deductions post receivable adjustments + tax payable.
Step 5: Maintain WHT Codes in Master Data
Vendor Master (MM side): XK02 / FK02 → Company Code Data → Withholding Tax tab.
Customer Master (SD side): XD02 / FD02 → Company Code Data → Withholding Tax tab.
Applies to:
MM side (Vendor): Select WHT type/code for vendors (e.g., professional services vendor).
SD side (Customer): Select WHT type/code for customers who deduct tax before paying you.
Step 6: Configure WHT in Transactions
MM Side (Vendor Invoices & Payments):
FB60 – Enter Vendor Invoice
MIRO – Logistics Invoice Verification
F-53 / F110 – Vendor Payment
SD Side (Customer Invoices & Payments):
FB70 – Customer Invoice
F-28 – Customer Incoming Payment
Result:
MM side → Vendor receives net payment after WHT deduction.
SD side → Customer pays net of WHT; company records tax withheld separately.
Example of WHT Process
If you post an invoice of ₹10,000 for a vendor and withholding tax of 10% applies, SAP will automatically deduct ₹1,000 as withholding tax.
The company later remits the ₹1,000 to the tax authority. The journal entry might look like this:
At Invoice Posting:
Debit: Expense Account (Service) → ₹10,000
Credit: Vendor Account → ₹9,000
Credit: Withholding Tax Payable → ₹1,000
Conclusion
Withholding Tax in SAP is a vital financial control that ensures compliance with statutory requirements while simplifying tax management for businesses. By automating tax deductions during vendor payments, SAP not only reduces errors but also improves transparency and accountability. When properly configured, it strengthens compliance, streamlines processes, and builds trust with stakeholders.
