Specifically, countries like Brazil, Mexico and Chile began leveraging technology for electronic invoicing, receipts and audits, as well as tracking foreign commercial exports. Tax authorities across the world watched to see if these digitization efforts would be successful. The results were quick and compelling. For example, Brazil increased its tax revenue by $58 billion in a single year after mandating e-invoicing.
Meanwhile, Latin America’s third-largest country, Mexico, began its digitization journey in 2010. By 2016, the Tax Administration Service achieved a historic tax collection and increased its taxpayer base by 5.2 million. Today, Mexico has one of the oldest and most complex sets of electronic invoicing regulations in the world, and its VAT reporting process is deemed the world’s most intricate.
Initially, Mexico’s tax authority, the Servicio de Administracion Tributaria (SAT), did a great job building out its e-accounting universe and ensuring that local and multinational businesses understood their tax reporting liabilities. However, now, as many multinational companies automate their respective filing processes within their SAP systems, tax reporting can quickly become complicated when trying to meet the nuances associated with Mexico’s reporting requirements.
As businesses utilize their SAP systems to manage e-accounting for Mexico, they’ll likely run into three hidden issues.
Division in disaggregated data
The first challenge that multinational companies have to manage is disaggregated data between accounting and transactions. During the VAT reporting process, the SAT assigns unique identifying codes (UUIDs) when it validates electronic documents. Accounting teams must tie any related documents used to support an SAP system invoice to that specific UUID.
Let’s look at payroll transactions as an example. Journal entries within an SAP system should have a UUID for every single payroll transaction at the individual level. This is a major change from how most businesses report payroll, which is usually done at a cost center level instead of the employee level, requiring new data and tracking methods. The same challenge holds true for travel and expense reporting. While an expense report is often a single document in a company’s SAP system, accounting teams must link each itemized expense (e.g., meal, taxi ride, etc.) to a distinct UUID.
Lost in translation: Internal and external reports
The second hidden issue lies in translation. Every business process is unique to a company, and financial ledgers within a SAP system may be grouped in a manner that works for a company.
Let’s take currency as a prime example. A multinational company doing business in Mexico may be internally reporting foreign transactions in dollars if it is headquartered in the U.S. While that process makes sense for that global company, when reporting to the SAT, the currency must be in pesos. While this may look like a small edit on the surface level, it can be a nightmare for companies that need to update the currency for tens of thousands of invoices.
Maintaining a source of truth in your SAP system
The last unforeseen challenge occurs during the audit phase. In the event of an audit, the SAT will be looking at financial documents within a company’s SAP system. Say, for example, that a company reconciled an invoice externally but not within an SAP system. A company may be able to justify that it did rectify that invoice. However, in this instance, the SAT will not accept the document as proof during the audit process because it was not rectified within the company’s SAP system.
Tax compliance solutions to assist with e-accounting
The SAT’s complex reporting requirements are a testament to Mexico’s ongoing effort to eliminate tax fraud and maximize revenue. Any missteps in the reporting process can have substantial implications for a multinational company operating in Mexico. And while manual intervention may seem like an option, it can be costly and lead to errors.
Currently, 25 percent of companies operating in Mexico manually input the government-issued UUID into their SAP systems, resulting in a 7 percent error rate that trickles down to VAT reports. With a significant number of errors on VAT reports, companies that manually input the UUID into their SAP systems increase their risk of triggering an audit.
Therefore, today’s companies need to have end-to-end, scalable tax compliance software that enables them to seamlessly automate filing and meet the SAT’s reporting mandates. While Mexico’s e-accounting process may be intricate, the reality is the rate of regulatory change around the world is accelerating. A global tax compliance solution that integrates with SAP will ensure multinationals remain compliant not just in Latin America, but everywhere they do business.