Introduction

In the SAP SD module, accurate tax determination and posting during sales transactions is essential for both compliance and financial reporting. The key factors that influence tax calculation are:

The country and region of the delivering plant (plant address),
The destination country and region of the ship-to party,
Customer tax classification in the business partner master data,
Material tax classification in the material master.

Due to significant differences in tax regulations and rates across countries, it is crucial to define country-specific tax requirements clearly during the Business Blueprint phase, in close coordination with the Finance team.

In SAP, tax determination follows the condition technique, just like pricing. Taxes are represented by condition types (e.g., MWST) that are included in the pricing procedure. Each condition type is linked to an account key (e.g., MWS), which determines the G/L account for tax postings (configured via transaction OB40).

To ensure proper tax determination, the following master data must be maintained accurately:

Business Partner (Customer Master): Tax classification is defined under the “Billing” tab at sales area level.
Material Master: Tax classification is assigned in the “Sales: Sales Org. 1” view.
Plant Address: Defined via transaction OX10, with complete address information including country and region.

When a sales document (e.g., via VA01) is created, the system performs the following:

Reads the country and region from the delivering plant,
Reads the ship-to party’s address details,
Retrieves tax classifications from customer and material master data,
Determines the appropriate tax code based on condition records maintained via VK11,
Applies the relevant tax percentage through the pricing procedure.

During billing (via VF01), the system re-determines tax based on pricing in the sales document and the Post Goods Issue (PGI) date from the delivery. Upon posting the FI document, the tax code and account key ensure the tax amount is posted to the correct G/L account.

Configuring Tax Determination (Example: Germany)

In this section, we outline the standard configuration steps for tax determination within the SAP SD module, using Germany as a practical example. The tax setup may vary slightly by country, but the core principles remain consistent across VAT-based regions.

Step 1: Define Tax Determination Rules

Menu Path: IMG ➝ Sales and Distribution ➝ Basic Functions ➝ Taxes ➝ Define Tax Determination Rules

Transaction Code: OVK1

In this step, you assign a tax category per country. This category corresponds to a condition type used for taxes in the pricing procedure. Only condition types with condition class = D (Taxes) are permitted here.

Note: Some countries may require multiple tax categories (e.g., for differentiated regional or reduced taxes). In such cases, use the sequence number to prioritize.

If your country is not listed, use New Entries to add it along with the required tax category and access sequence.

Step 2: Define Regional Codes

In countries with regional tax structures (e.g., Germany or the US), you may need to define county or city codes to support jurisdiction-based taxation.

Menu Paths:

IMG ➝ Sales and Distribution ➝ Basic Functions ➝ Taxes ➝ Define Regional Codes ➝ Define County Codes

IMG ➝ Sales and Distribution ➝ Basic Functions ➝ Taxes ➝ Define Regional Codes ➝ Define City Codes (if needed)

While this step is not mandatory for VAT-based systems like Germany, it becomes relevant for countries using tax jurisdiction codes (e.g., USA).

Step 3: Assign Delivering Plants for Tax Determination

Since tax determination depends on the source plant address, it’s critical to ensure that all plants have complete and correct address data (country, region, postal code, etc.).

Menu Path: IMG ➝ Sales and Distribution ➝ Basic Functions ➝ Taxes ➝ Assign Delivering Plants for Tax Determination

Transaction Code: OX10

Open the relevant plant and complete all address fields, especially country and region. In some scenarios (like the US), jurisdiction codes must also be entered.

Step 4: Master Data Tax Classification

Tax determination in SD relies heavily on the tax classification values maintained in both the Business Partner and Material Master.

For Customer (Business Partner): IMG ➝ Sales and Distribution ➝ Basic Functions ➝ Taxes ➝ Define Tax Relevancy of Master Records ➝ Customer Taxes

Transaction Code: OVK3

For Material Master: IMG ➝ Sales and Distribution ➝ Basic Functions ➝ Taxes ➝ Define Tax Relevancy of Master Records ➝ Material Taxes

Transaction Code: OVK4

In each case, specify the applicable tax category (e.g., MWST for VAT), and define relevant classification codes.

Example (Germany): 0 = Tax-exempt (e.g., exports) 1 = Standard rate (19%) 2 = Reduced rate (7%, e.g., food, books)

These values must be maintained:

In the Sales Area Data > Billing tab of the customer master.
In the Sales: Sales Org. 1 view of the material master

Step 5: Maintain VAT Registration Number Determination

This step defines the logic SAP uses to derive the VAT ID number in sales and billing documents.

Menu Path: IMG ➝ Sales and Distribution ➝ Basic Functions ➝ Taxes ➝ Maintain Sales Tax Identification Number Determination

If left blank, the system applies a default priority. Alternatively, you can specify:

A: Use Sold-To Party
B: Use Payer
Or custom rules based on partner functions.

Step 6: Define Tax Codes (FTXP)

This part of the configuration is handled under FI settings, and should be coordinated with the Finance team.

Menu Path: IMG ➝ Financial Accounting ➝ Financial Accounting Global Settings ➝ Tax on Sales/Purchases ➝ Calculation ➝ Define Tax Codes for Sales and Purchases

Transaction Code: FTXP

Define the tax code, country, and (if required) jurisdiction. Then assign the applicable tax percentage to each tax type.

Example for Germany: Tax Code A1 = 19% (Standard) Tax Code A2 = 7% (Reduced) Tax Code A0 = 0% (Exempt)

Step 7: Maintain Condition Records (VK11)

Once the tax code is created, you must maintain condition records using VK11. This links the tax code with the appropriate customer and material classifications.

Condition Type: MWST (standard for VAT)

Key Combination: Country / Customer Tax Class / Material Tax Class