Mexico tax deductions have been put under a microscope with new eContabilidad (eAccounting) requirements that went into effect this September. The SAT, Mexico’s tax authority, now has 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. Contact us to automate your accounts payable in Mexico and throughout Latin America to reduce your audit risk.