One of the reforms implemented in 2017 which has had a significant impact for Mexico’s fiscalization is the introduction of ‘proof of payment’. This reform outlines how in certain circumstances, when a buyer’s payment is executed as part of a commercial or financial transaction, the seller has an obligation to issue and deliver an electronic proof of payment receipt, which must be previously cleared by the Tax Administration (SAT). Buyers own the right to demand such an electronic evidence. If such an obligation is not fulfilled by the seller, a buyer has the right to report the seller via telephone or online.
The mandate’s details, as well as details of how this obligation is carried out in practice, can be found at the SAT complementos web site. This article will focus on the aspects that have not been widely presented, namely the rationale behind why the SAT has introduced this control measure. This approach will help readers better understand how one of the most pioneering tax administrations in electronic invoicing has reacted to market signals, serving as a reference to other countries that are also introducing real-time tax controls
Helping taxpayers fight tax fraud with fiscalization
Many buyers in Mexico have reported how companies who have provided them with products or services have canceled invoices that had already been paid; failing to clearly express notice or cause for such cancellations. As a consequence, buyers who were legitimately entitled to tax deductions or credit could not exercise their rights on a cancelled invoice.
Likewise, many sellers reported that they already issued invoices as part of a credit operation or with deferred payment and, at the same time, the recipient of the invoice has failed to make the agreed payment in time, but has attempted to deduct tax or use tax credit on a non-paid invoice. This is a problem for the seller as in this situation, they would have fulfilled their obligation related to invoice issuance.
Without the implementation of a tax control measure, the SAT cannot detect such cases of tax fraud in time, since it has no control over the flow of payments. Now with this provision, which will be mandatory as of April 1, 2018, the SAT will be aware of when an invoice is paid and therefore may reject any attempt to cancel the invoice. Similarly, when a taxpayer attempts to use the tax credit and the invoice has not yet been paid, the SAT may reject such an attempt. Moreover, the SAT will know the exact moment in which a commercial operation has been completed, which allows a more accurate determination of VAT.
Thanks to the information contained in the receipt of payments, it will be possible to relate received payments to issued invoices, which allows taxpayers to have better control of income and deductions since the new document details the amount that has been paid and identifies the invoice that is settled.
Over time, the information collected as a result of the payment audit opens up other possibilities for value-added services. For example, reputation services may collect information on taxpayers who systematically avoid complying with their obligation to issue proofs of payments or who attempt to abuse tax credit without having made the corresponding payments. Another service for buyers could be conditioning CFDI’s reception to the delivery of older proofs of payment from the same supplier.
Payment fiscalization is an example of one of the emerging tax control mechanisms that in this case is not focused on reducing the tax gap, but on preventing tax fraud due to false tax deduction or tax credit attempts. With the introduction of ‘proof of payment’, it is very likely that the SAT will introduce more control mechanisms in the future.
Guest contribution by Maria F. Freyermuth J, Product Manager, Reachcore