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In recent weeks, we’ve examined the rapid expansion of business-to-government compliance in countries that rely on VAT tax income. While Latin America is the current hotbed for such legislation, similar mandates are cropping up worldwide as countries prove the effectiveness of financial legislation in maximizing tax revenues. The reach of these mandates is far – affecting sales,procurement and even HR. Though many companies see compliance as cumbersome, there are multiple benefits to the automation required under these mandates – not the least of which is improved cash flow.

Business-to-government compliance can require extensive changes to accounts receivable and accounts payable processes – but with change, comes opportunity. On the AR side, e-invoicing requirements mean that XML invoices have to be sent to the government and approved before being issued customers and often before goods are shipped. Brazil is even acting as its own e-invoicing network, meaning that customers can easily download invoices from the server, eliminating the distribution burden on AR teams and ensuring that there is never an excuse for a missed invoice.

 

The real cash flow benefit, however, comes from the impact of business-to-government compliance on AP processes. Because invoices must be available to buyers even before goods arrive, e-invoicing mandates streamline AP approval processes, opening the door for improved cash flow and supply chain financing. Automating the inbound receiving process means that invoices can be deemed “okay to pay” as soon as goods arrive, reducing operational costs and providing greater flexibility over cash flow.

Proactive companies are using this automation to introduce supply chain financing in regions of the world where supply chain stability is critical. Using supply chain financing, corporations can lower the cost of payment processing while providing suppliers with greater access to liquidity, as payment approval windows decrease from weeks to hours. Suppliers have the ability to immediately convert invoices into cash, and can speed up the payment process based on their unique cash flow needs, payment terms and billing cycles.   

With improved cash flow comes increased stability in the emerging markets most inclined to implement business-to-government legislation, ultimately ensuring supply chain effectiveness and making these economies a less risky place to do business.

Recently, we’ve been examining the tidal wave of business-to-government regulations in emerging markets and their impact on business operations, including sales and procurement. Heavily involving both the accounts receivable and accounts payable teams, it’s clear that these mandates have significant implications on financial processes. However, recent legislation is adding a new operational unit to those affected by business-to-government compliance mandates: human resources.

recent legislation in Brazil and Mexico is adding a new operational unit to those affected by business-to-government compliance mandates: human resources.

Looking back 18 months at the compliance landscape in Latin America, only three countries – Mexico, Argentina and Brazil – were enforcing mandates, and these all encompassed A/P and A/R processes only.  Now 10 countries have introduced mandates, and they are entering an increasing number of busines processes.  While Brazil is typically considered the leader in compliance legislation, having the most robust, complex requirements, Mexico was actually the first to introduce HR-related mandates.  Last year, Mexico introduced Nomina Electronica - electronic payroll receipts.  Now, Brazil is testing eSocial, which collects labor, social security, tax and fiscal information related to hiring and employment practices. 

As IT and finance struggle to adapt to the pace and complexity of legislative change in this region, these additional business-to-government regulations present whole new challenges to HR departments.  Specifically, under Nomina Electronica, any company operating in Mexico paying employees a salary or wage needs to be issuing electronic payroll receipts. These payroll deductions are a critical component to the recent eAccounting legislation as you can’t deduct taxes until payroll has been submitted to the government electronically for approval and the approval codes linked to your monthly Journal Entry (Poliza Report). 

As has come to be expected of Brazil, its tax authority takes HR requirements to the next level. Under eSocial, which will go live in the next 12-18 months, employers must submit all information regarding their labor force to the government electronically. This includes labor events such as hiring, contracts, warnings, suspensions and terminations, which must be sent as soon as the event occurs, as well as payroll details, benefits, etc. This equates to up to 41 individual XML files per employee per month!

With the additions of personnel-related mandates, Mexico and Brazil are looking beyond VAT taxes and into payroll and income taxes in an increasing effort to ensure that they are receiving maximum tax revenue. We anticipate this trend continuing throughout emerging markets like Latin America as government’s attempt to stabilize and grow their economies, making it critical that companies operating in these regions begin creating proactive compliance strategies so they aren’t caught off guard.

Peru published new legislation on August 3, 2015 that mandates electronic invoicing as the standard starting in 2016.  Over the last few years, the SUNAT (Peru’s Tax Authority) has announced a number of e-invoicing waves; however, this latest legislation focuses exclusively on large and medium organizations classified as PRICOS (principal contribuyentes nacionales).

Below is the key information on the Peru mandate:

Name of mandate: Resolucion de Superintendencia de la SUNAT 300-2014

Important Dates:
Electronic Invoicing - Comprobantes de Pago Electronicos (CPE):

  • 1st wave: October 1, 2014 for 239 companies [Published 2013]
  • 2nd wave: July 1, 2015 for 778 companies [Published Sep 2014]
  • 3rd wave: July 15, 2016 of all PRICOS  as of July 31, 2015  [Published August 3, 2015]
  • 4th wave: December 1, 2016 for those taxpayers that as of July 31, 2015 have:
    • The capabilities of a principal contribuyente  of the intendencia of Lima Peru
    • The capabilities of principals contribuyentes of the regional and municipalities

All multinational companies should be included in the 3rd wave with a deadline of July 15, 2016. If you do not know if your organization is designated PRICO, check with the SUNAT immediately.The above information is published on the SUNAT website athttp://www.sunat.gob.pe/legislacion/superin/2015/203-2015.pdf.
Requirements

  • Electronic Documents: Electronic Invoices, Boleta de Venta Electrónica (end consumer), Credit Note, Debit Note, Daily Summaries, Comunicación de Baja
  • Outbound:  Sending Invoices to customers – These must be approved by the SUNAT and approved with aCDR (constancia de recepcion).
  • Inbound: Ability to receive invoices electronically from suppliers.
  • Certification Process (Proceso de Homologacion): Testing phase must be completed within 25 days.
  • Contingency:  Will be used when the systems online is unavailable due to updates and maintenance.
  • Storage:  Documents must be stored for 4 years.
  • Cancellations:  Applies to all electronic documents. You have up to 72 hours after receiving the CDR from the government.
  • Daily Summaries:  For contingencies and cancellations
  • Guia de Remision or Guia de Transportista: Document must be on truck and approved by government. Typical process for many companies is to ship with the Factura and the Guia de Transportista on the truck.
    • Libros PLE Mandatory Reports Electronically:
      • Compras (Purchases)
      • Ventas (Sales)
      • Libro Diario (Daily ledger)
      • Libro Major (General ledger)

As part of go-live, an organization needs to make their readiness declaration.  The requirements include:

  • Check if invoices, boletas de ventas, credit and debit notes, daily summary and contingencies are within the standards of the SUNAT
  • Both the electronic and paper documents must pass the certification process
  • Once Successful completion of the test, the SUNAT will issue a Resolucion de Intendencia (R.I)


Note: you can’t be live in Peru without the R.I. The legislation states that once you start the testing process you have 25 days to complete the process or you will be asked to start again. This means that having a provider that works with you through certification is critical.

From a timing perspective, keep in mind that you will not want to go live with electronic invoicing during a fiscal period as switching over from a manual to electronic invoicing may impede your accounting processes.

You will run into a lot of vendors in Peru, and many will say they can support compliance. So ensure you understand the entire process or you will find yourself with operational issues, IT support issues, and at risk for audit penalties.  Remember this is as much a project management issue and SAP ERP issue as it is a web service integration issue. Make sure your providers solve the SAP configuration issues, theLibros reporting extracts, the web service integration and the assistance and management of your certification.

Compliance with strict e-invoicing, finance and tax reporting legislation throughout Latin America is not a one-time, set-it-and-forget-it process. The pace of legislative change in this region is faster than ever as governments aim to expand the tax base and collect every penny, peso or reais they can. New mandates commonly move from initial legislation through implementation and even reforms before companies can fully grasp the implications of these requirements. With the global trend of governments re-evaluating their indirect tax legislation to close loopholes, eliminate fraud and maximize tax revenues, corporate taxpayers should be concentrating on the performance of their indirect tax functions more than ever before.

As global companies continue to expand in Latin America’s emerging markets, spreading their reach into new territories and thus different tax regimes, they are encountering new liabilities and ever-changing reporting obligations. For example, in Brazil, the ICMS rate (tax on the interstate movement of goods) is now variable based on the ratio of imports within a bill of material. Other countries, Each Latin America country has different tax reporting requirements. such as Peru and Dominican Republic, have implemented some important changes in their local indirect and direct tax laws. Plus, Mexico is facilitating and opening possibilities for foreign businesses to trade or manufacture in the country by revisiting its local conditions and tax laws.

Any corporate oversights of these recent legislative or rate changes, minor errors in calculations or operational mistakes leading to compliance errors can be costly. Errors in VAT/GST deduction and payment functions can have far-reaching consequences that go well beyond the tax value. However, growth into Latin America also presents new opportunities for well-managed, performance-oriented organizations, and achieving these efficiencies hinges on the stability of internal accounting systems.

With upcoming changes to reporting legislation set to take effect in the next six months in Brazil, Chile and Argentina, senior finance and tax professionals need to understand the risks associated with these mandates.Join us for our webinar on Thursday, August 13, as we provide an in-depth examination of new requirements being implemented this year, including:

  • Block K: In Brazil, the government is moving beyond sales and purchases to track the full lifecycle of goods. Currently, companies report incoming supplies and outgoing sales through Nota Fiscal electronic invoices and SPED reporting requirements. Now, the government will cross-reference these purchases and sales with production through Block K, which must be submitted monthly. Any inconsistencies will result in fines.
  • Acuse de Recibo: Chile’s new three-way-match process ensures the accuracy of deductions by comparing the purchase order, goods receipt and supplier’s invoice, and companies must legally declare VAT obligations within eight days of invoice submission.
  • eFactura & Libros: Argentina recently began enforcing e-invoicing and proforma VAT reporting requirements, and is currently modifying tax treaties that may very well result in changes to the country’s entire indirect tax system.

Companies are already struggling with the day-to-day support and change management Latin American compliance requires, and these new mandates further the complexities.

With fines, penalties and operational disruptions as consequences of an inadequate approach to managing e-invoicing and reporting mandates in Latin America, multinationals in this region should take note to avoid common errors. Not only does proactive compliance eliminate these risks, companies can improve operational efficiencies, streamline processes and improve cash flow through a strategic approach.

Avoid these top 10 mistakes in Latin American compliance that can cost your organization millions

Managing Latin American compliance for hundreds of clients, here are the top 10 mistakes Invoiceware sees in compliance management.

1) Maintaining multiple, local compliance solutions throughout the region.
Companies often use varying solutions in each country in Latin America because no ERP offers business-to-government compliance without multiple third-party add ons – creating a support nightmare!

2) Not using your ERP as the central system of record.
Most compliance solutions, including SAP’s own third-party bolt ons, house critical information outside of the ERP. Any resulting discrepancies between the corporate system of record and external systems and what is reported to the government creates huge tax and audit risks.

3) Not understanding the cost of ERP change management.
Most corporations have highly customized global ERP applications that don’t match government requirements. Mandates directly affect accounting systems, requiring specific naming structures and character limits, and the inability to adapt to these individualities results in compliance errors.

4) Not having a contingency plan.
Government-approved documents are needed to ship legally. Built-in back up processes are required to ensure there are no disruptions to your business operations and that you can always ship and receive goods.

5) Using PDFs as the invoice of record.
Many accounts payable teams rely on PDFs instead of government-approved XML invoices, but this process opens the door for discrepancies between internal records and the government’s files, triggering audits and fines.

6) Manually managing inbound receiving.
A manual, paper-based receiving process not only requires significant internal resources, it also increases the risk of error. Since PDF copies of the XML invoices accompany your supplier’s trucks in Latin America, this process can be automated to improve efficiencies and ensure accuracy.

7) Thinking it’s a local technical issue rather than a $100 million cash issue.
Fines, penalties, operational shut downs and missed tax deductions all have a direct impact on the overall bottom line, and with VAT remittances averaging 18% of sales revenues – the problem is hundreds of millions of dollars for billion dollar companies. A local, technical approach reduces corporate visibility into local finances, making them vulnerable to irregularities and increased scrutiny under the Foreign Corrupt Practices Act.

8) Relying on ERP technical notes to perform updates.
Companies running SAP for compliance, as an example, rely on support packs for the latest solutions, but these updates affect the entire global system, a process most companies don’t want to undergo frequently. Even with the latest updates, systems including SAP still requires certain information – including 30+ digit alphanumeric government IDs – to be entered manually, increasing the risk of errors.

9) Underestimating the pace of change.
Compliance mandates have spread from three to 10 countries in less than two years, with more business processes affected, including accounting, operations and human resources.

10) Overlooking maintenance and support costs.
Managing compliance internally requires up to 11 full-time staff, including personnel to monitor and manage regulation updates, middleware issues and ERP, as well as developers, financial analysts and more. Couple this with the hard IT costs associated with change management, and compliance easily totals six figures – per country!