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Hidden Tax Calculation

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Hidden tax conditions

Hidden Tax is the amount of VAT that a discount amount has. It will be non-zero when all of these conditions are true:

  • Catalog prices include tax
  • The VAT rate is not zero
  • There is a discount present

Thus, when there is a discount that has tax embedded in it, Magento computes a hidden tax that is added back in order to compute the discounted price.

discountedItemPrice = fullPriceWithOutTax - discountAmountOnFullPriceWithoutTax + vatAmountOnDiscountedPrice + hiddenTax

Example

  1. Full price of item, with tax included: $100
  2. VAT at: 20%
  3. Discount of 10% applied on item price excluding taxes:

Invalid Expected Result

  • Item price after tax without discount=100 USD
  • Item price before tax without discount=100/1.2=83.33 USD
  • Discount=83.33*0.1=8.33 USD
  • Tax=(83.33-8.33)*0.2=15 USD (invalid)
  • Order Total Excluding Tax=83.33-8.33=75 USD (invalid)
  • Order Total Including Tax=75+15=90 USD (invalid)

Valid Actual Result in Cart

Image Hidden Tax Tax Calculation in Cart

Valid Calculations

  1. Full price of item, without taxes is: $100 / 1.2 = $83.33

  2. VAT amount on the full item price is: $100 - $83.33 = $16.67

    Can also be calculated as: $100 * (1 - 1/1.2).

  3. Discount of 10% on $83.33 is: $8.33 (when we don't discount tax)

  4. Discounted price of item with tax is: $100 - $8.33 = $91.67

    This is the customer’s perception of how discounts are applied.

  5. Discounted price of item, without taxes is: $91.67 / 1.2 = $76.39

  6. VAT amount on the discounted price is: $91.67 - $76.39 = $15.28 (valid)

    Can also be calculated as: $91.67 * (1 - 1/1.2).

  7. Hidden tax or Discount Tax Compensation is the difference between the VAT amount of the full price versus discounted price: $16.67 - $15.28 = $1.39

    Another way to look at this: hidden tax is the VAT amount carried within the $8.33 discount: $8.33 * (1 - 1/1.2).

  8. How the customer usually understands the discounted price (Order Total):

    Full price of item including taxes less the discount amount: $100 - $8.33 = $91.67

  9. How Magento calculates the discounted price (see earlier for formula):

    $83.33 - $8.33 + 15.28 + 1.39 = $91.67*

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