Changes to the operation of Relevant Contract Tax (RCT) scheme took place in 2012. The legal change as of January 1, 2012 was a major change with respect to Ireland’s withholding tax procedure and reporting.
The tax calculation and reporting procedure is divided into three processes:
- Contract Registration
- Payment Notification
This process is the first and foremost step in the RCT scheme. All subcontractors associated to a principal contractor need to be registered for RCT. The main point to be noted here is that the unique number called “Contract ID” is not specific to a subcontractor. Between the principal contractor and the subcontractor, there can be “n” number of "contract ID"s based on type, location, duration and the estimated value of contract. As a response to the registration and based on these different parameters, the Contract ID will be unique to the principal contractor and is used for all future communication with the Revenue (the tax authority) on tax related topics.
Due to the fact that during the contract registration process additional information needs to be captured, SAP has provided a new screen in the vendor master. An additional button is provided at the top of the screen, where the user can maintain the details of a given contract. New contracts can be added. For the modification of any contracts, the Location of Work, Estimated Value of Contract and End Date of Contract are the only editable fields. Deletion of contract is possible only if the “Contract ID” is empty and it will only be empty when a new contract is created and saved in SAP system and not yet registered with the Revenue.
Contract details can be captured by clicking the button on top of the vendor master screen.
A new program (J_1IE_RCT_UPDATE) is created in the SAP system that enables creation of an XML file for contract registration. The system will consolidate the subcontractor details and generate the XML in a format that is in accordance with RCT scheme. This file can be uploaded on the Revenue Online System (ROS) website to register the contracts.
As soon as you upload the file, the contract data will be available on the ROS website inbox only as a list. Since this process is very inconvenient for customers to update the Contract ID from the ROS inbox to the SAP system, we have provided a spreadsheet where the customer can maintain the data and the spreadsheet can be uploaded back to SAP system. (Refer Additional Information section)
If any of the vendors are not registered with the Revenue (in this case, the Contract ID will be empty), the system will withhold tax at a higher rate.
The contract registration has three statuses: NEW, AMEND* and CANCEL.
*AMEND: You can only change the period of contract or value of contract and location of work.
The second step in Ireland’s RCT scheme is payment notification. This process sends a XML file with the base amount information/ transaction figures to the Revenue. Based on the subcontractor's status with the Revenue, the RCT web service will send a response XML file back with the tax rate. Use this to calculate tax for each and every subcontractor. This process will happen as an additional step between running the payment proposal and the actual payment run.
Once the payment notification XML file is sent to the tax authority, the Revenue will respond with a XML file that will contain the deduction authorization ID known as “Payment Notification ID” and the tax rate to be used. This tax rate is the one that should be used to deduct tax for each subcontractor at the latest rate. Note that this rate can be different from your last payment to subcontractor. The applicable RCT rates are 0%, 20%, and 35% based on the credit history of each subcontractor with the Revenue.
In the SAP system, withholding tax code is by default configured at the highest rate of 35%.
The payment notification can be done in multiple ways.
a) Invoices, Credit Memos: The invoices can be selected using the selection parameters such as company code, vendors, document numbers, posting dates, and fiscal year. The posted invoices will be selected and reconciled based on subcontractor and contract ID.
b) Down-payments: Before making any down payments, the system gives an option to enter the details in the table control. The selected data will be consolidated in the XML file, that is sent to the Revenue as payment notification, to get the latest tax rate before making the actual down payment.
c) Payment Proposal: The payment proposal created by transaction F110 will be filtered by the Accounting Clerk or the respective contact in an organization. They will spend considerable time in identifying the invoices to be paid based on the contract between the company and the vendor. Since the payment notification process needs to be completed after creating the payment proposal but before executing the payment run, an option has been provided to capture the payment proposal id and the date in the payment notification selection screen. The program will then create the XML file based on the documents selected in the payment proposal.
In all the above cases, a payment notification XML file will be generated by the system and when this document is uploaded to ROS, a response XML file will be created. Please note that the communication to ROS is synchronous. The response XML file can be uploaded to SAP system using program J_1IE_RCT_UPD_RESPONSE. The new rate will be saved to an Ireland-specific table and payment notification ID will be copied to the Exemption Number field.
While making the payment, the standard rate (35% as mentioned above) will be over-written by the Ireland-specific tax rate maintained in the table through the country specific BAdI. The tax will be calculated at the new rate. In case the payment notification id is empty, the system will set a payment block to the subcontractor to stop the payment to that specific vendor. While making the payment, the payment notification ID will be copied to the tax lines to WITH_ITEM in the Exemption Number field and this number will be considered while reporting the payment documents. Once the payment is made, payment notification ID will be cleared from the Exemption Number field in the vendor master.
The payment notification has three statuses: NEW, AMEND and CANCEL. However, in the SAP system, we support only the NEW and CANCEL options.
RCT returns has the following two options/An RCT return has the following two options:
- Deduction Summary
With regards to the RCT returns, a principal contractor reports the whole tax deducted as a XML file. Ideally, if all the payments are already notified to the Revenue, then only a return is needed.
If any more payments are to be notified along with the return, a deduction summary file and the payment notification nodes will be attached in the return XML file.
The returns and deduction summary also have the statuses NEW, AMEND, and CANCEL.
The return files are generated in SAP system using the Generic withholding tax reporting framework (RFIDYYWT) report.
You may refer to OSS Note number 1680757 as the starting point for implementing this legal change. This OSS note contains other related OSS note numbers that need to be considered and implemented.
As mentioned earlier, in order to capture the additional information for Ireland’s RCT reporting for existing vendors, we have provided a utility program to update the data directly to Ireland specific additional table. For more information, refer to OSS note 1667570.