Tax Computed on Top Another Tax

In some regions like Canada, multiple tax rates are required to be computed on top of the other. For 2 level tax scheme, the initial tax has to be computed first, then the 2nd tax is computed based on the principle amount plus the 1st tax.

While Imonggo does not directly support 2nd tax computation based on the initial result, there is work around for this. The solution is to combine multiple tax rates into a single effective tax rate. You can use this formula:

  effective_tax_rate = t1 + (1 + t1) x t2

  where:
     t1 is the 1st tax rate, 
     t2 is the 2nd tax rate

Example:

I am from montreal quebec and we have 2 tax rates. first one is 5% and the second is 8.5 %. The way its calculated is tax on top of tax. for example a 20.00 charge would be 1.00 federal and then you take 21.00 and add 8.5% provincial tax rate, final price is 22.79. what rate do i put on the immongo tax rate so i can get accurate final prices?

Answer:

The effective tax rate is computed as follows

 0.05 + (1 + 0.05) x 0.085 = .13925 or 13.925%

How is this formula derived?

A = amount
t1 = tax 1
t2 = tax 2
t3 = effective tax rate
tax = A x t1 + (A + A x t1) x t2
      = A x t1 + A x (1 + t1) x t2
      = A x [ t1 + (1 + t1) x t2 ] 
tax = A x t3
t3 = [ t1 + (1 + t1) x t2 ] 

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