Discount - Tax calculation on discount taken

Question

I'm having trouble with tax calculation on discounts.  Here is what I'm trying to do and what the problem is.
I would like to use Net Method for discount process, meaning the cash discount amount expected is already taken into consideration when the invoice is posted. 
example
Invoice amount      $1,000.00
Tax (VAT)           $175.00
Total           $1,175.00
Discount Amount at 2% = $20.00
Cost object = $980.00
[<b>u]Invoice Document Entry</u></b>
CR Vendor $1,175.00
DR Expense $980.00
DR Tax $175.00
DR Discount Clearing $20.00
<u>Problem</u>
At time of payment the tax amount should be adjusted for the discount amount taken but this is not working for me.  We should reduce our payment to the vendor for the tax amount on the discount taken of $3.50(20*17.5%).  In this example we are overpaying the vendor for the tax portion. 
CR Discount Clearing $20.00
CR Cash $1,155.00
DR Vendor $1,175.00
I found a note on SAP help which outlines what I would like to do.  Here is the link to the note
<u>http://help.sap.com/saphelp_erp2005vp/helpdata/en/47/60f8ba49f011d1894c0000e829fbbd/content.htm</u>
I don't understand why the system is not adjusting the tax amount automatically, i.e. the tax amount for the cash discount is credited to the tax account.
Can anyone please help me?

Answer 1

Hi Ramesh,
Yes I am using document type RN.  I'm happy with what the system is doing at invoice entry.  Please see the entry on my original post.  However, the problem is at payment time.  I would like to reduce the payment for the tax portion on the discount taken at time of payment
The system should post the following entry
DR Vendor $1,175.00
CR Discount Clearing $20.00
CR Tax $3.50
CR cash $1,151.50
What setup is required to have the system post the entry as shown above?