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Last week, we examined how to prepare for rolling out SAP in Brazil. In this complex regulatory environment, a SAP implementation is much more detailed and distinctive than in other countries. Special considerations must be taken into account to ensure compliance and avoid the hefty fines, penalties and business disruptions associated with e-invoicing and reporting errors and omissions.

Once you have mapped out your SAP template for Brazil, it’s time to move to the implementation stage. The first step is to assemble a team with the right skill set for smooth, seamless execution. Any disruptions to your compliance processes can result in severe tax penalties – up to $200 USD for each XML error and 75-150% of the incorrect tax values – in addition to shipping and receiving delays. A team that understands these implications and eliminates potential issues is required. Critical team members include not only a project manager and SAP functional experts, but a local subject matter expert (who is fluent in both Portuguese and English). This subject matter expert is crucial to fully understand the local requirements and translate them into corporate SAP requirements.

Even with a knowledgeable, experienced team, the project timeline for a SAP implementation in Brazil is often vastly different than in the rest of the world. It’s not uncommon for the implementation phase to stretch to six months, or even a year, as companies address the issues and complexities associated with compliance in Brazil.

Companies often underestimate these compliance challenges, and also overlook the constant changes in Brazilian regulations. Frequently, as soon as a need is realized and addressed in SAP, the government regulation changes and requires an update, prolonging implementation further.

Although these challenges to implementing SAP in Brazil are significant, the risks of managing compliance outside of your ERP are enormous. Using a third-party system for compliance increases the risk of errors, manipulation, and ultimately, government audits and penalties, making overcoming the SAP implementation challenge crucial.

While Brazil is the most complex corporate regulatory environment in the world, it’s also a very attractive country in which to do business. The emerging market’s GDP is expected to grow 22.3% between 2013 to 2017. With access to raw materials and proximity to a booming population of both talent and consumers, global businesses are opening up in Brazil en masse.

At the same time, many of these global companies are placing an increased focus on corporate governance, making significant investments into standardizing their ERPinto a single, global instance. With its complex laws and regulations, implementing and maintaining SAP in Brazil can be quite a challenge. In this three part blog series, we’ll examine the challenges and best practices of implementing SAP in Brazil.

As with any SAP implementation project, the first step to executing SAP in Brazil is preparation. Unlike implementation in other countries, the SAP template in Brazil will look vastly different because of the country’s complex regulations and reporting requirements. Matching the global instance of SAP with Brazil’s unique laws is a complex process. The following are some of the considerations that must be taken into account

  • Fiscal calendar: Brazil mandates the use of fiscal calendar K4: Gregorian calendar (January to December), which may not conform to a company’s traditional fiscal year.
  • Payables/receivables: Electronic banking is the norm in Brazil, so the ERP must be configured using specific payment methods (boleto, TED - same-day electronic transfers, DOC - next-day low value transfers) to link with banks.
  • Nota Fiscal: This required document is the only way to invoice in Brazil, and must be submitted to and authorized by the Brazilian tax authority before it can be issued or paid. The SAP template must integrate the required fields, some of which aren’t included on typical invoice templates.
  • Revenue recognition: Revenue that can be recognized in Brazil varies from other parts of the world, and is based on the Nota Fiscal and receipt of goods.
  • SPED: Brazil’s e-accounting regulations require companies to submit detailed ledgers and reporting documents, so SAP must be configured to report the required numbers accurately.
  • Fixed Assets: Specific fixed asset reporting based on the Nota Fiscal database must be submitted along with other SPED reports, and needs to be documented in SAP accordingly.
  • Tax Filings: The motivation behind Brazil’s strict regulation is ensuring the country receives accurate, maximum tax payments from companies operating there. As such, it’s critical that filings match the SPED reports submitted and are backed up by government approved Nota Fiscal XML documentation.

Despite these challenges, it is imperative that companies maintain Brazilian compliance within their ERP – not using external third-party solutions and plug ins that leave them vulnerable to discrepancies, inaccuracies, manipulation and ultimately millions of dollars in fines and penalties.  In the coming weeks, we’ll explore considerations for implementing and maintaining SAP in Brazil.

In the latest iteration of Latin American countries following the example set by Brazil’s e-invoicing regulations, Colombia is expected to introduce its own version of the legislation this year.

The Dirección de Impuestos y Aduanas Nacionales (DIAN), Colombia’s version of the Internal Revenue Service, cites several benefits of making such a move, including:

1) Strengthening the country’s competitiveness in the region
2) Helping small- and medium-sized businesses gain access to improved financing mechanisms and increased liquidity
3) Allowing companies to achieve reductions in the costs associated with internal invoicing processes

However, it’s important to keep in mind that the main reason Colombia is passing this legislation is to improve its own tax and fiscal status, not to help individual business. As we’ve seen through our years of managing compliance for the world’s largest corporations, many corporations are just now beginning to realize the financing and processing improvements that government standardization presents.

In coordination with the Ministerio de Hacienda y Credito Publico (treasury department) and the Ministerio de industria, comercio y turismo (department of travel, commerce and tourism), the DIAN is expected to introduce its e-invoicing law - Decreto de masificacion de la facture electronica –this year.

We expect to see draft legislation at the end of May and testing and adjustments for the next six months. The goal 2015 goal set by the DIAN is to mandate at least 830 companies with the new electronic invoicing model.

Although the exact date and details are still unknown and will depend on the success of the government’s program testing, it’s important plan ahead for Colombia’s impending enactment.

Latin American governments aren’t introducing and expanding e-invoicing mandates at a rapid rate simply to create more data. These invoices are used to support and verify tax deductions, ensuring that the government receives an accurate (and the maximum) amount of tax revenue. Remember, mandated e-invoicing covers all sales and in-country purchased via XML, so the government can have visibility into every single transaction. Now, Latin American governments are introducing accounting mandates that provide even more visibility into tax deductions.

Specific tax reporting requirements vary by country, but be sure that even those countries that don’t currently have strict tax reporting processes are using e-invoices to verify your tax deductions, and will look to the invoices to completely match tax reports in the case of an audit.

Brazil mandates the most complex reporting. Using the Public Digital Bookkeeping System (SPED), all companies operating in Brazil must submit their accounting records through a series of federal, city and municipality reports throughout the year.  Under the new ECF regulations, a company must submit a new series of reports to determine profitability at the end of each September. Using this report, the government will analyze net income to ensure tax accuracy. Due for the first time in 2015, penalties range from $500 per month for delayed or incomplete transmissions to up to 3% of sales for inaccurate submissions.

In 2016, these SPED mandates will extend even further when Block K is added to the reporting process. Using this requirement, the government is no longer just looking at sales and purchases, but evaluating inventory (and anything that may be hiding there) as well. Each month, corporations have to provide detailed information on manufacturing, production and inventory control for each individual facility. This data will be used to cross check all payables and receivables with production to look for inconsistencies.

 

Mexico’s requirements also go beyond sales and purchases, requiring journal entries as proof of IVA tax credits under the eContabilidad regulation. IVA remittances are owed based on the value-added tax (VAT) you charge to customers minus the VAT you pay your suppliers. By forcing you to link the XML to every single deduction, the government can easily check that each deduction is backed by a verified transaction. Penalties can be as high as $3,000 for every journal entry that doesn’t exactly match a valid XML.

In addition to e-invoices, companies operating in Chile, Argentina and Peru must also file Libros reports detailing accounting records at regular intervals, which of course, must match the validated XML invoices for all sales and purchases. These consolidated reports makes it easier for governments to verify the tax owed.

Is your tax reporting automatically linked to your e-invoices and payables inside of your ERP system, or are you creating tax reports outside of your ERP system, risking errors and therefore fines and penalties?

E-invoicing has become a requirement for companies operating in Latin America. What started in Brazil in 2007 has quickly expanded across the region, with Peru, Uruguay and Ecuador beginning to enforce mandates this year. In part one of this four part series, we explored the commonalities between these regulations, including their purpose – increasing tax revenues by enforcing compliance. In part three of this series, we’ll take a closer look at the requirements specific to Uruguay.

This year, Uruguay has added 1,000 new companies to its list of those required to submit invoices electronically. These companies join 1,687 others already operating under the government system or in the midst of the testing and approval process.

Key requirements in Uruguay include:

    • Accounts receivable: Invoices must be sent to the Dirección General Impositiva (DGI), Uruguay’s tax authority, and must be approved with an acknowledgement of receipt (Acuse de Recibo).
    • Accounts payable: When receiving invoices, you must check the validation of all of the fields with the DGI.
    • Certification process: Each company’s compliance process, including invoice submissions and approvals, must be tested and certified before beginning e-invoicing.
    • Contingency: Contingency processes are required to report and submit all documents during system outages.
    • Storage: Files must be archived for 2-5 years, depending of the type of document.

Your compliance solution in Uruguay should not only meet the requirements in this country, but should integrate seamlessly within your existing systems. Here are the top five questions to consider as you evaluate solutions.

1) Since these regulations change frequently, does the solution support change management at a single fixed fee? Or, will each change require a significant investment?

2) Does the solution offer both online and offline contingency processes?

3) Does the system work within your existing ERP processes? Or, does it require external systems that ultimately risk data manipulation and visibility gaps?

4) Does the solution offer one end-to-end platform for all of the requirements in Uruguay, including e-invoicing, receivables, payables, transit and reporting? Or, are you maintaining multiple systems?

5) Does your solution offer 24/7 local and English language support?

Managing compliance in Latin America is no easy task, and only continues to get more challenging as the regulations spread throughout the region. It’s important that your compliance partner is proactive, ensuring that you are making the most of your solution and staying ahead of new mandates.