In this Document

APPLIES TO:

SYMPTOMS

In Oracle Application R12 ,when an invoice is matched to PO, it is creating the following two additional tax related distribution entries, that is causing confusions to users:
- Nonrecoverable Tax
- Tax Rate Variance

-- Steps To Reproduce:
Create AP invoice and match it to PO.

CAUSE

Intended Functionality / Setup

The TRV is the Tax Rate Variance.
This is an enhanced feature in R12 and it is computed to reflect the tax variance between the invoice and the PO distributions due to difference in tax applicability.  
ie: when tax on PO is not calculated, and tax is there on Invoice, ideally the total amount should go to TRV account.

Creation of TRV distributions accurately reflects that there has been difference in applicability between AP and PO, so that TRV is presented due to change in design done in R12.

Note that the tax rate variance account will be used for the invoice tax, given that the tax on the PO is zero and the entire tax amount is a variance.

Tax Rate Variance is to reflect difference in tax applicability between the invoice and the base document distributions.

e.g. TRV (Tax Rate Variance) is generated when there is no tax in PO but there is in AP.
There is no setup to change this functionality.
Enforce Tax From Reference Document is not directly related.

If the current requirement is to avoid tax rate variance, you should check the reasons of such differences in tax set up (Tax Rules/Configuration Owner Tax Options).

If you are not computing Tax in both PO and Invoice, Tax Rate variance will not be computed.
or
You should have the same tax in PO and AP to avoid TRV

SOLUTION

In order to clarify this behavior

1. Tax Rate Variance is normally computed for the Non recoverable portion of the Tax. Tax Rate Variance is computed in two cases:
a) When there is a difference in the Tax amount of the PO and Invoice
b) When there is a difference in the Taxes computed (for instance an extra tax calculated on Invoice and the same did not exist in PO).

2 This TRV is also based on the flag set in Event class Mappings and if the invoice has a reference  document.
This is on Tax manager:
Defaults and Controls > Configuration Owner Tax Options > query the Configuration Owner and enter
Application Name = Payables
Confirm if this has Enforce Tax from Reference Document checked.

This flag will confirm if the taxes to be applied are to be derived for AP or they are copied from PO

3 Non recoverable tax lines are part of the item cost, and from accounting perspective, are managed same way that item lines.
If you want that tax lines do not hit the variance account neither the accrual account, you may need to setup your taxes as recoverable taxes.

4. Regarding the accounts on that TRV .

TRV line system will take Variance account from Purchase order Distributions / PO accounts definitions.
It is not possible to have the accounts assigned on those TRV based on  the created rules.
In fact,  Ebtax  does not govern the account assignation for those TRV lines,.

5. The account derivation logic for Tax Rate Variance Distributions is as follows.,
5.1 When the  PO Distribution Destination Type: Expense
If Accruing On Receipt,
encumbrances are on,  
allow_flex_override_flag is yes in Financial system options
Then Tax Rate Variance will follow the PO charge account.

5.2 Otherwise , 
if Accrue is N .
encumbrance off, 
TRV will be charged to PO charge account (or the Distribution Account from the Parent Taxable Item Distribution).

Note: When PO Distribution Destination Type is other than Expense.,
Tax Rate Variance will follow the Variance Account on the PO Distribution.

6. TRV distribution account derivation works the same way as TIPV.

The source will be pulled  as
Inventory->Organizations Parameters->
Then select the Specific OU you are working on and 
Select Sub tab Other Account

then enter  a value for the Purchase Price Variance  account you want .

Note: Only the 'other accounts'  is used by PO.
'inter-org information'  tab is only for inter org transactions.

7.As a Note, if you want to avoid the  TRV lines please do:

a) Ensure there is NO Tax in PO and No Tax calculated in AP invoice, No TRV will be calculated.
Or
2.Ensure you have same Tax calculated in both PO and AP Invoice
Or
b).Ensure the Tax calculated in PO is 100% Recoverable. In this case even if you do not calculate in AP invoice, You do not see TRV but only Recoverable tax line.

REFERENCES