Governments have rapidly adopted digital models to better collect every type of transactional tax, including value-added tax (VAT), goods and services tax (GST), and sales and use tax. The SAT (Mexico’s tax authority) is no different. Interestingly, Mexico has been a trailblazer in the digitization of tax, adopting new digital models and processes to ensure compliance.
While Mexico wasn’t the first to introduce mandated eInvoicing, it has added unique requirements that give the government unprecedented visibility into business operations. These requirements are critical for businesses operating in Mexico to understand, as failure to comply can result in delayed or cancelled shipments. Moreover, the tax implications themselves have a strong financial component that can directly impact the bottom line. As such, businesses must know these seven critical elements of VAT compliance in Mexico.
- eInvoice and UUID (unique identifying code). Also known as CFDI in Mexico, this is the invoice itself in the standard XML format, the file that contains critical information about a transaction. Companies doing business in Mexico must generate an electronic invoice in the required format with information such as tax ID number, description of goods, total amount of the invoice, taxes due and much more.
- eAccounting. The SAT also requires eAccounting (eContabilidad), the digital process of reporting accounting information. More specifically, a company’s Chart of Accounts, Trial Balance, and most difficult, the Journal Entries. The combination of all of these shows how much a company owes the SAT or how much the government owes them. Mexico’s eAccounting measures require companies to detail five different types of documents in their polizas (journal entries): sales, purchases, nomina (payroll), travel and expenses, and pagos (payments). Each entry must be linked to all corresponding transactions with the UUIDs to justify your VAT deduction.
- eMailbox. The government uses this method to communicate with taxpayers electronically. This function allows the tax administration to send out notifications to the taxpayers electronically in a method that is faster, more reliable, simpler, and more convenient and secure. It also helps that there is a digital record of all correspondence between the taxpayer and the tax administration.
- ePayroll. Electronic payroll mandates require Mexican businesses to sign payroll using unique digital stamps. Once the payroll is stamped, the company/employer is obligated to send its XML and PDF versions to the employee by mail or in person. There are several advantages to the use of ePayroll in Mexico, as it not only saves companies time and money but also enables employees to get paid much more quickly.
- Complemento de Pagos. This regulation on payment receipts ensures that companies remit all taxes owed by tracking exactly when and how invoices are paid – closing a loophole that emerged when companies submitted multiple payments for a single invoice. Businesses in Mexico must include detailed information on each payment receipt, including date, payment method, currency, exchange rate, electronic seal, validation certificate and much more.
- Export tracking. Last year, Mexico announced major initiatives to increase visibility into commercial transactions within and beyond its borders. As such, companies exporting from Mexico now must implement a new foreign trade complemento requirement that must be used any time a taxpayer is permanently exporting goods to a foreign country.
- eAudits. With all of these processes taking place electronically, the government now has all of the visibility and documentation it needs to conduct audits electronically. With eAudits, the government has total visibility into a business and the ability to levy penalties as necessary, automatically, with no intensive investigations. This process benefits companies in several ways. Mexico’s unique approach to resolving audits allows taxpayers to avoid long and costly judgments, provides legal certainty in such matters and offers transparency for all parties involved. In addition, eInvoicing provides improved accuracy and efficiency, allowing businesses to better defend themselves against potential audits within their existing ERP system should a government audit arise.
To successfully manage VAT compliance, companies in Mexico must have a strong understanding of how all these electronic documents and process are related, as well as what it takes to keep up with this digital transformation of tax.
To start, businesses should work to centralize and automate processes for effective tax determination and information reporting, considering solutions that offer global tax determination, complete eInvoicing compliance and a full range of tax reporting solutions. These solutions should be all-encompassing and capable of doing the hard work for businesses while providing access to tools and data through the business systems already in use.
With advanced preparation and by implementing the right systems and solutions up front, businesses operating in Mexico can ensure compliance, improve accuracy and keep their tax operations running smoothly and efficiently.
Sovos provides businesses with a comprehensive VAT compliance solution that is accurate, data-driven, proactive and strategic. To learn more about eInvoicing and VAT reporting in Mexico, download our eBook today.