Get Ready for the Audits
I have always stated that the sole reason for a government to mandate electronic invoicing across the business community is to reduce tax evasion. As in other Latin America countries, the transactional signing of standardized XML is always implemented with a corresponding reporting element. Brazil has Nota Fiscal and SPED. Chile has DTE and Libros. And now Mexico has CFDI and electronic books.
Fines are real and they are happening. The forcing of these reports will only put a larger focus on fines and penalties.
Six figure penalties are currently being imposed on organizations – why – they did not take the archiving and validation seriously on the inbound Account Payable validation process. One company is paying almost $90,000 dollars in fines because they were audited, and they could not provide the proper documentation to substantiate their VAT deductions. Another organization stated – we had the XML, but the stamp was not within the 72 hour rule of generation and the government did not recognize the invoice as valid. Therefore, they would not allow the VAT deductions. In a third case, the company had the XML and used it for deduction purposes, but the supplier had filed a cancellation with the SAT – and the XML updates were not applied to the buyers systems.
Take Away – you need to automate the XML processing through your ERP system, not just collect it and store it.
Most companies focused on implementing outbound CFDI and are doing the inbound validations manually. However, when you consider that the CFDI has gaps (i.e. PO Number) and other information that is used to ensure the retention tax is correct, you better be sure you have a solid process in place. If your VAT tax deductions are disallowed, what size fine will you be facing?
Below are the basics of the law:
On 4 July 2014, Mexican tax authorities published in the Federal Official Gazette the Second Amendment to the Temporary Tax Regulations, which contains the tax reporting requirements for accounting information. Recently, there was an extension of the first issues to January 2015.
According to E&Y, 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. The chart of accounts must include a field to include account groupings, as defined by the tax authorities in Annex 24 of the Temporary Regulations.
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). For final year-end balances, information on recorded tax adjustments should be included.
The tax accounts should be identified along with, when applicable, the different rates, quotas and activities for which no tax is due, as well as transferred taxes and creditable taxes. Guidance for these accounts is provided in Annex 24 of the Temporary Regulations.
3. Information related to journal entries in the accounting records. This should include details for each transaction, such as account, subaccount, sub-ledger and information related to electronic invoices, as well as identifies the different tax rates, quotas and activities for which no tax is due.