When New York first passed its law defining what constitutes a “vendor” subject to collecting sales tax in the 1980’s, the idea of online shopping sounded like science fiction. In retrospect, NY may have effectively enacted the first “economic nexus” law when they drafted their definition of “vendor” to include a person who regularly or […]
How to Reduce Risk and Protect Revenue In Mexico with the Digitization of Tax Administration
Invoicing in Latin America has become complex to the point of being daunting. Businesses that get electronic invoicing processes wrong could quickly grind to a halt. Mastering the eInvoicing process is critical, then, and it involves making sure that all four elements of eInvoicing are working smoothly at the same time.
New regulations, most notably in Mexico, have scrapped paper processes in favor of entirely digital methods of invoicing. What has developed is that four critical elements of eInvoicing have emerged, each of which is as important as the other and all of which have to work together in order for a business to keep its operation efficient and free of government-issued penalties.
Basics of the eInvoicing Process
The process starts with the eInvoice itself. (In Mexico, it’s called a CFDI.) This used to be a paper invoice, but it can’t be in Mexico anymore. In an effort to cut down on tax fraud, the government now requires electronic invoices in a standard XML format.
Companies doing business in Mexico must generate an electronic invoice in the standard format with information such as a tax ID number, description of goods, total amount of the invoice, taxes due and much more. The shipper has to submit that invoice and then receive unique a number back from the government called a UUID. Once the government generates the UUID, the company can ship its goods. This all happens in real time.
On the other side, companies receiving invoices must validate them with the government, matching information in the invoice with information stored in a government database. If the information matches, the company can take delivery of its shipment. If it doesn’t, the government can see discrepancies and can delay reception of goods, and in some cases penalize the company for submitting incorrect data.
The importance of eInvoicing
It’s clear, then, that getting the eInvoicing process is absolutely critical for business. Delayed or canceled shipments can quickly lead to frustrated customers and lost revenue. And then there are the tax implications themselves, which also have a strong financial component.
Value-Added Tax (VAT), which eInvoicing tracks, is effectively what a company paid in invoices minus what it received. If a company collected more tax than it paid, it owes extra in VAT, but it receives a credit if it paid more than it collected. eInvoicing compliance, then isn’t just about staying out of trouble with shipments and government penalties; it can actually help put money back in a company’s coffers and improve its cash flow.
There are four essential elements to the eInvoicing process in the cycle of the taxpayer
- eInvoice. This is the invoice itself in the standard XML format, the file that contains critical information about a shipment.
- eAccounting. This is the process of tracking eInvoices and determining how much a company owes or is due in VAT.
- eAudits. This is when things get a little scary. With invoicing taking place electronically, the government can also audit invoices electronically. With eAudits, the government has total visibility into a business and the ability to levy penalties as necessary. There is nowhere for a business to hide.
- eMailbox. The government uses this method to communicate with taxpayers electronically.
Staying compliant in Mexico
In order to successfully manage eInvoicing in Mexico and stay compliant with the SAT (tax administration), companies need to understand how all electronic documents are related to one another That’s a difficult task for an organization to take on alone.
Sovos facilitates eInvoicing smoothly, enabling a company’s employees to take on other activities and giving the company’s sales, accounts receivable and accounts payable leaders confidence that shipments will come and go on time with accurate VAT tracking and audit defense.
The key is to partner with a third party that can embed itself into an enterprise resource planning (ERP) or similar back-system and manage all components of the eInvoicing process. The third-party service needs to generate, signs and validate all invoices, and send outbound invoices to the government while receiving and validating all vendors’ invoices.
The importance of getting eInvoicing right
Of course, there’s more to managing eInvoicing than just managing the invoices themselves. Accounting is critical for calculating VAT, and audit defense is extremely important in a country with an automated auditing system. And those operations need to interact each time the company receives or sends an invoice.
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