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Mexico will be putting your tax deductions under a microscope when new eContabilidad (eAccounting) requirements go into effect this September. The SAT, Mexico’s tax authority, will now have the ability to examine accounting reports and subsequent line item tax deductions, requiring added diligence in inbound procurement processes to ensure compliance. This scrutiny demands complete accuracy on invoice payments by buyer’s in Mexico.  And the only way to ensure that your tax deductions are ultimately correct is to automate your three-way match which guarantees that your purchase order, goods receipt and supplier’s invoice are identical. Any deviations can trigger audits and result in fines, penalties and lost tax deductions.

Companies managing over 500 procurement invoices per month should consider full automation as the only way to ensure tax accuracy. Currently companies are approach the problem in three ways:

1) Manual entry: Almost a quarter of companies are having accounting clerks hand-enter the 30+ digit, case sensitive, alphanumeric unique identifier codes (UUIDs). These UUIDs, assigned to each individual XML, are the government’s tracking codes. If the UUID on the XML isn’t entered correctly into your ERP, the resulting reports required under Mexico’s eContabilidad will be inaccurate. Any discrepancy will trigger government scrutiny – for example, a single “I” instead of a “1” or an “A” instead of an “a” can trigger a hefty fine. In fact, we’ve found an approximately 7 percent error rate in codes entered manually! Clearly, these mistakes will add up quickly. Despite this risk, this process is SAP’s recommended solution – another reason why SAP is insufficient to manage Latin American compliance.

2) PDF format: Many companies also rely on PDF invoices instead of XMLs for accounts payable. However, when it comes to government compliance, the XML is the only invoice that matters. If you request an update from a supplier, return goods or don’t receive the correct order, the XML must be updated. Still, many suppliers will only update the PDF, and accounting will use that as the invoice of record. As many as 10% of XML invoices don’t match the PDF and are at risk of government penalties.

3) Automation: The final option is to automate the process, bringing the XML invoice into your ERP so that it links back to the government-approved document. Collection, validation and processing of invoices should all be automated, and journal entries and required reporting should all be linked from the ERP. This is the only way to ensure a three-way match and eliminate the chance of inconsistencies.

Option three is the only one that decreases your risk of an audit. The first two scenarios make companies employing these methods a prime target for government audits, as any errors will trigger the government’s automated checks. The SAT doesn’t care if it’s just a typo – any inaccuracy equals the inability to take tax deductions on the effected invoice coupled with a fine.

If your company is using one of the first two methods, an audit is virtually inevitable.

In the past few weeks, we’ve discussed the challenges associated with implementing a global instance of SAP ERP within the complex regulatory environment of Brazil. With the strictest mandated business requirements in the world, fully leveraging SAP in this country requires thorough planning, an expert team and patience during the implementation phase.

If you’ve made it through these phases, you’re likely breathing a sigh of relief. The challenges of integrating your global SAP template with Brazil’s strict e-invoicing, accounting and reporting requirements have been conquered. But not so fast. The work is far from over. In fact, it’s really just beginning.

The requirements to do business in Brazil are constantly evolving. In fact, earlier this year, companies operating in Brazil were forced to transition to Nota Fiscal version 3.1 – the largest change in requirements since 2010. Companies managing compliance internally had to make significant changes and upgrades to their SAP system and processes in order to maintain compliance and avoid costly penalties and operational disruptions.

It’s because of these constant changes and expansions in legislation that the process of implementing SAP in Brazil is never truly over. To ensure that your company maintains compliance, you need to:

  • Regularly conduct system audits to ensure compliance.
  • Constantly monitor legislation changes.
  • Translate any change in requirements into your custom SAP set up.

 

Though corporate SAP teams typically have a specific plan for rolling out SAP upgrades, Brazil doesn’t time its legislation changes with these corporate strategies. As a result, SAP systems require major updates and faster response times that interrupt the COE calendar - and can affect the entire global operation.

Compliance is difficult throughout Latin America, but nowhere is it more so than Brazil. As the emerging market continues to expand its business requirements into finance, accounting, logistics and human resources, integrating these mandates within the SAP infrastructure will only get more challenging. Plus, as other Latin American countries look to Brazil as a model, you can expect these issues to expand throughout the region. That’s why it’s important to select the right partner – one with a proactive, regional approach to compliance that handles the constant changes and requirements seamlessly.

On September 3rd, multinationals will be required to submit their first journal entry (polizas) reports as required under Mexico eContabilidad legislation. These journal entries must date back to July 1, 2015, meaning now is the time to evaluate your processes to ensure accurate reports. Yes – processes. Simply relying on your technology (SAP, ERP or OSS notes) to extract the report isn’t enough. Ultimately, the challenges presented by the polizas requirement are fundamentally related to your internal processes – how data is input and how it’s connected to the correct internal and external reports. Once those processes are in place, the data extraction to produce the actual report should be seamless.

First, let’s examine the function on the polizas report. Consider this the teeth of the eContabilidad legislation. This is where the SAT, Mexico’s tax authority, will determine the need for fines and penalties. This report must match your XML e-invoices (every. single. one.), and is required to support VAT tax deductions.

The SAT will start audits on September 3rd, so it’s imperative to uncover and address potential hidden issues in these polizas reports, including:

  • Inbound procurement: Many companies are still paying invoices off of a PDF – not the XML. This opens the door for inaccuracies on eContabilidad-required reports. Often, if a supplier has to make an adjustment to the invoice, they only do so on the PDF. In fact, we’ve found that upwards of 10 percent of PDF invoices don’t match the XMLs. However, when it comes to reporting and tax deductions, XML is the only invoice that matters. As a result, companies still using PDFs for accounts payable and tax reporting need to update their processes to eliminate this practice. Otherwise, they will face audits when their reporting fails automated government checks.
  • Travel and expenses: One key area of focus for the SAT is fraud within travel and expenses. Typically, journal entries are done at the expense report level. For polizas reporting, however, it’s critical that each XML that contributes the expense report – for hotels, cars, flights, meals, taxis, etc. – is linked to the journal entry.
  • Payroll: Common practice is that journal entries for payroll reports on each cost center (marketing, accounting, operations, etc.). Much like expense reports though, there are multiple – often hundreds – of individual XMLs that contribute to this line item. Each employee’s pay stub is associated with a unique XML, and each must be linked to the journal entry.

 

With fines for inaccurate and incomplete information costing $3,000 per XML, you must get your processes in order now to avoid such penalties when the SAT begins enforcing polizas reports in September. Consider, for example, that an expense report for a single trip could have 10 corresponding XMLs, and you’re looking at the potential of a $30,000 fine – for just one expense report.

It’s understandable that multinational companies operating in Latin America’s complex regulatory environment first look to their ERP for compliance solutions. After making significant financial, IT and operational investments in SAP, managing compliance within this existing infrastructure is no doubt desirable. However, there are several factors that need to be considered when planning out your compliance strategy, especially across Latin America.

1)    SAP’s Latin American compliance solutions are both limited in scope and country specific, requiring resource knowledge in several systems.Key factors need to be considered when planning compliance strategy in Latin America.

  • In Mexico, it’s a combination of OSS notes, IDOC outputs, PI and 3rd party pack;
  • in Argentina, it’s OSS notes, PI and typically a set of customizations;
  • in Brazil, it’s OSS notes, PI, GRC plus an additional 3rd party for integrated statutory reports called SPED, and
  • in Chile and Peru, it’s AIF plus internal management of Libros and an additional separate solution for the Accounts Payable requirements.

Each of these solutions requires different implementation processes and separate trainings and management to use. These separate solutions also limit corporate visibility into local compliance, leaving room for errors and even external data manipulation. Imagine: in just five countries, you could be required to implement, monitor and maintain eight separate solutions with over 20 functional modules that need to be upgraded annually.

2)    Solutions are delivered as support packs that require SAP updates and could require complete regression testing, often with little time to spare prior to deadlines.
Compliance in Latin America requires constant monitoring of the changing requirements and significant planning to meet compliance deadlines. Staying current with the latest SAP release is not enough. Hundreds of OSS notes are not uncommon after the initial release to address issues, leaving companies vulnerable to e-invoicing and reporting discrepancies in the meantime that can result in fines and penalties. More importantly, as these country changes require an expected baseline of configuration – it is not uncommon to have to regression test all countries on a global template. This is a significant cost and one that is often underestimated by the COE.

3)    Leveraging SAP for compliance requires significant internal management.

Internal COE teams should be focused on innovation and business excellence; however, trying to maintain SAP for compliance takes valuable time away from this mission. Not only can the initial implementation and manual configuration take weeks, but constant maintenance and updates are required to ensure uninterrupted compliance – demanding a disproportionate amount of the COE’s valuable time and efforts.

These limitations aside, it’s important that your compliance solution work within your existing ERP. That’s where Invoiceware comes in. Our end-to-end compliance platform eliminates the inefficiencies and inadequacies of SAP’s solutions while managing mandated e-invoicing and reporting within SAP – requiring no back and forth with additional systems and ensuring that fiscal reporting and legal compliance are always in sync.

Ecuador is among several countries in Latin America enacting and expanding e-invoicing legislation in 2015. The mandates in each country share similarities in purpose (boosting government revenues by decreasing tax inaccuracies and increasing fines and penalties) and scope (impacting accounts payable, accounts receivable, logistics, tax reporting and IT infrastructure). However, their differences are significant enough to require a dedicated focus

Ecuador’s tax authority, Servicio de Rentas Internas (SRI), designated special taxpayers that had to begin complying with e-invoicing regulations for any invoice totaling $4 USD or more at the beginning of 2015. The SRI is expected to continue to expand the list of companies covered under this legislation over the next 18 months.to ensuring proper compliance in every Latin American country in which you operate.

Ecuador_2-2Key requirements in Ecuador include:

 

  • Accounts Receivable: Invoices greater than or equal to $4 USD must be approved by the SRI before transmission.
  • Shipping: The SRI-approved invoice must physically accompany all shipments.
  • Accounts Payable: When receiving invoices from suppliers, it’s mandatory that you validate the invoice via the SRI Web Portal.
  • Certification: Mandated companies must go through a testing and production process to ensure compliance.
  • Contingency: Companies must have contingency systems in place to manage compli
    ance when the online systems are unavailable due to updates and maintenance.
  • Storage: Required documents must be archived for 7 years.

As more countries in Latin America expand regulations to affect more businesses, it’s important that you consider compliance strategically from a regional perspective. Below are five questions to discuss as you evaluate compliance solutions for Ecuador.

1) Are ERP adjustments required, or does your solution provide all of the data extraction and extensions needed?
2) Does your solution provide corporate visibility into transactions, or is there room for data manipulation?
3) Does your system automatically archive required documents, or is manual storage required?
4) Does your compliance partner upgrade its system to comply with each new government mandate automatically, or will you require a separate solution (and investment) for each change?
5) How will you identify system errors? Is there one key point of contact, or do you have to conduct search and rescue missions among your IT team, software and middleware providers, your ERP, etc.?

Compliance in Ecuador, just like in the rest of Latin America, has serious business implications that go beyond the transmission of e-invoices. It’s important that your Latin American e-invoicing partner realize that any issues can shut down your business and severely affect your bottom line and work with you to ensure seamless compliance. Here are 5 questions to ask yourself if you are prepared for Latin American mandates. 

Proactively managing compliance in Latin America doesn’t just mean avoiding the significant fines and penalties associated with e-invoicing and reporting errors. It can also help your company free up cash flow and streamline business operations.

It’s no secret that the risk of non-compliance with Latin America’s strict business regulations is severe. Errors can mean fines of up to 150% of the tax value on invoices in violation, which can equate to millions in penalties. We know of one company that was fined $100,000 for four missing XML invoices – that’s $25,000 for a single error!

 

The good news is that there are hidden benefits to the streamlined operations made possible by compliance requirements throughout Latin America. By automating internal processes, companies can eliminate three of the top audit risks in Latin America, and free up cash flow at the same time:

1) AP validation - Since approved XML invoices are required before a payment can be processed,automatically pulling the inbound AP validation from these XML eliminates the risks associated with manual data entry. When you consider that typing in invoices manually results in an average of 3 percent data errors, it’s clear that a manual AP process is risky. If your books don’t match the government approved XML, you will be fined. Plus, automating this process frees up valuable internal resources.

2) Inbound receiving - If the goods you receive from suppliers don’t match the XML they sent – whether damaged in transit, lost, etc. – you are responsible for the tax obligation and having the supplier adjust the XML in the government servers. As PDF versions of the invoice must accompany your suppliers’ shipments in many countries, your inbound receiving team can use these documents to eliminate data entry at the unloading dock while automating the 3-way (Purchase Order – Invoice – Goods Receipt) match with a single click on a scanner, meaning invoices are marked “okay to pay” as soon as goods arrive, ultimately speeding up the AP process.

3) Accounting and tax reports - Reporting on data that is different from what is submitted to the government via XML, or manually re-entering that same data, results in increased risk for audits and severe penalties. Automating the reporting process eliminates this risk and makes these processes seamless for AP and accounting personnel.

Once these automations are in place, not only have you streamlined internal resources and minimized your audit risk, but you’ve also opened the door for supply chain financing opportunities. Since invoices are approved to pay in real time and automatically entered into your ERP, the payment approval process is reduced from weeks to hours. Companies can offer supply chain finance opportunities to their suppliers and improve supplier stability and liquidity, all while reducing audit risk and ensuring compliance with the stringent business requirements in this region.