Mexico Mandates Tax Reporting Framework – January 2015 – Is Your AP Department Ready?

Spend Matters welcomes a guest post from Steve Sprague of Invoiceware International.

The Mexico electronic accounting mandates are poised to cause a fire drill that will sweep across the Fortune 2000 this month.

This will worsen as we approach yearend book closing, SAP is frozen for reporting and Latin America goes on Christmas break. Required to be live by Jan. 25, 2015, there will be very limited resources with the necessary skill set to help companies comply with these complex mandates and the new reporting processes.

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Sadly, as many multinationals running in Mexico begin to truly understand the work behind the scenes, it may be too late to avoid serious issues. This is because the common approach, soon to be put to bed, has created a functional gap between the System of Record for finance processes and the electronic components that will now be required at the reporting level.

This mandate has left the entire Fortune 2000 at risk for audit, substantial fines and serious tax implications if they fail to remain compliant. The risk is great when you consider that the entire program is designed to create real-time audit capabilities by enabling electronic reporting.

Through the first 6 months of 2014, for every peso that Mexico's tax administration service SAT put toward auditing, it recovered 61 pesos, or the equivalent of $4.65, BNamericas reported. From January to June, that totaled nearly 79 billion pesos, a profit increase of more than 34% when contrasted with the same period in 2013.

And this is before the e-accounting (e-contabilidad) reports are even in play. Remember that as of Jan. 25, businesses will start to file electronic reports: Chart of Accounts, Trial Balances & Summaries & Journal Entries.

Now that the SAT, the Mexico tax authority has the adoption of electronically registered invoices via XML - they are now applying the reporting technology to use these transactions for audit purposes.

And big data meets big brother will be in full action. Consider the amount of data the government now has – through the first half of 2014, 2.4 billion electronic invoices have been sent to the Mexican government, up from 119 million in all of 2011, based on SAT data.

The exposure to getting this wrong is:

The Basics

Taxpayers must maintain accounting records through electronic systems that can create XML format files, which include the following:

  1. Chart of accounts used during the period. Due in January and if changes are made within 3 days of alterations.
  2. Trial balance, with initial balances, movement for the period and final balances for each of the accounts of the taxpayer, including assets, liabilities, equity and results of operations (revenue, costs and expenses). Due January 2015 for (July to December) and monthly afterwards no later than the 25th of the following month or April 20 for annual forms.
  3. Information related to journal entries in the accounting records. Will be due based upon audit requests. In other words – you have to implement them as they will be used to audit you and compare your transactions to the government databases.
  • All Sales
  • All Purchase
  • All Payroll Checks (Nomina)
  • All T&E (Gastos)

These four key bucket will have to have the CFDI XML unique identifier, known as a UUID, linked to the Journal Entry when audited. Ninety-five percent of companies are processing their A/P off paper in Mexico and not the XML for various reason. And therefore, not capturing this data in their accounting tables.

Two Issues that you cannot avoid:

  • The Chart of Accounts while stating only level 1 and level 2 data, could cause companies a number of issues. For example, what if you don’t break your sales down by the SAT classifications – this will potentially cause you to have to right split procedures or adjust how your accounting system reflects accounts.(Revenue, Depreciation, Rebates, etc.).
  • The UUID (which is the unique code identifying a legal, registered invoice) will have to accompany the journal entries. The UUID code will be used to justify your tax deductions. Ninety-five percent of companies don’t integrate these signing attributes back into their ERP system, let alone ensure that valid UUIDs are posted to the accounting documents, as they didn’t implement end to end solutions. Instead, they implemented third-party signing solutions that are loosely integrated and have no capability to solve this problem as it is an ERP issue, not a PAC issue.

This is Mexico’s move toward the Brazilian audit model – where Brazil has Nota Fiscal and SPED, Mexico now has CFDI and e-contabilidad. The implementation of this is a business process issue that will affect all global A/P departments that process Mexico invoices. In an environment where audits can happen in real time, are you sure you have covered all the issues – don’t get fooled – this is more than just some simple extracts. Look at the increase in audit penalties to date and think about what this means for the Mexico SAT in the future.

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