Companies dealing with complex sales and use tax determination, VAT regulations and other tax challenges across the globe know that SAP alone is not equipped to support the varying requirements from country to country. As SAP sunsets support and updates for ECC and R3, companies must move to HANA to keep their systems up to date. With this inevitable change to S/4HANA or HANA Enterprise Cloud, now is the perfect time to step back and develop a comprehensive strategy to managing tax worldwide.

SAP users must migrate to HANA by 2025, but a majority have not yet started the process. Since the move requires major changes to ERP infrastructure, SAP users with global operations should take advantage of the unique opportunity to be more strategic in their implementation. With the right approach, companies can future-proof their solutions in a way that ensures they can keep pace with constant changes in tax regulations throughout Latin America, Europe and beyond.

Learn how to minimise business disruption during an SAP S/4HANA upgrade project in the wake of modern tax: Read Preparing SAP S/4HANA for Continuous Tax Compliance and don’t let the requirements of modern tax derail your company.

Governments around the world are implementing technology for tax enforcement. In order to keep up, companies must make the digitisation of tax a core pillar of their HANA migrations.

In the move to HANA, companies must consider the new world of tax, which includes:

• Constant change management – Companies must be able to anticipate and quickly adapt to major tax reform legislation and smaller rate and field changes while not disrupting operations or risking non-compliance.
• Internal processes – Compliance often requires changes to basic processes, procedures and technologies employed by global companies. For example, in Latin America, logistics can be impacted by VAT regulations because many countries now require e-invoices to act as a bill of lading, created before products can ship.
• Required automation – Standardisation requirements in Latin America and Europe are designed to quickly identify errors and data discrepancies by eliminating paper-based reports in favour of automated processes. Companies must automate their own operations to avoid errors and audit triggers.

The move to S/4HANA or HANA Enterprise Cloud requires companies to move all of their processes, customisations and third-party add-ons to the new platform. As such, there are several critical considerations.

What to migrate, and when

Since most companies’ SAP ERP systems have been built and customised over many years, many will benefit from a phased approach to HANA implementation. The less customised modules, such as Financial Accounting (FI) and Controlling (CO) will be easier to move than Materials Management (MM) or Sales and Distribution (SD), which will need a long-term plan for customisations.

What to do with customisations and third-party apps

Many SAP configurations have become a patchwork of customised code and bolt-on applications. This is especially true when it comes to sales and use tax determination, e-invoicing, and VAT compliance and reporting, since requirements are vastly different in every jurisdiction a company operates. The move to HANA gives companies the opportunity to consolidate, eliminating local configurations in favour of a global strategy. Companies that proactively plan can help to ensure that the next 15 years are simplified, without the constantly changing configurations needed in the previous 15 years as governments have gone digital.

The Common Reporting Standard (CRS) is fast becoming the global standard for tax information reporting outside the United States. As more countries adopt CRS, and as penalties for late, incorrect or missed CRS filings become more severe, financial institutions need to know what their compliance requirements are. The following are clarification and detail about what insurers need to know about CRS reporting obligations.

Establishing Key Terms

Under the CRS, the term “Financial Institution” means a Custodial Institution, a Depository Institution, an Investment Entity, or a Specified Insurance Company.  (CRS, Section VIII: Defined Terms, A.3).

A “Specified Insurance Company” is “any Entity that is an insurance company (or the holding company of an insurance company) that issues, or is obligated to make payments with respect to, A Cash Value Insurance Contract or an Annuity Contract.” (Section VIII, A.8).  Insurance companies that only provide general insurance or term life insurance will not be specified insurance companies, nor will reinsurance companies that only provide indemnity reinsurance contracts.

Typically, an insurance company meets the criteria of a Specified Insurance Company if:

• It’s regulated as an insurance business in the country where it does business
• More than 50% of the company’s gross income in the past calendar year came from insurance, reinsurance, and annuity contracts
• At any time in the last calendar year, the combined value of the entity’s assets associated with insurance, reinsurance and annuity contracts was more than 50% of its total assets for that year.
• The entity issues cash value insurance or annuity contracts

Insurance companies that provide only general insurance or term life insurance are typically not classified as FIs; likewise, reinsurance companies which provide only indemnity reinsurance contracts and insurance brokers are typically not considered to be FIs.

Of the five types of financial accounts that must be reported under CRS, two relate to insurance companies: annuity contracts and cash value insurance contracts.

Reporting Requirements

Under the CRS, all reporting FIs have the obligation to report the following:

• Name, address, jurisdiction(s) of residence, TIN(s), date of birth, and place of birth of each reportable person that is an account holder
  • For insurers, reportable TINs may include insurance contract numbers.
• The account number
• Name and identifying number of the reporting FI
• Account balance or value at the end of the relevant calendar year or other appropriate reporting period

The CRS does note that in reporting account balances or values, that Cash Value Insurance Contracts and Annuity Contracts, FIs should report the Cash Value or surrender value of the contracts.  (Section I, A.4).

In order to meet the requirement to report residence of the account owner, insurers who provide Cash Value Insurance Contracts may rely on the current residence address in its records until  1) there is a change of circumstances that causes the FI to know or have reason to know that the residence address is incorrect or unreliable, or 2) that the time of pay-out (whether full or partial)  or maturity of the Cash Value Insurance Contract.

Insurance companies do not have to report, review, or identify a pre-existing individual account that is a Cash Value Insurance Contract or an Annuity Contract provided that the FI’s jurisdiction prevents FIs from selling contracts to residents of that jurisdiction.

Due Diligence Requirements

The CRS establishes an alternative due diligence procedure for Cash Value Insurance Contracts and Annuity Contracts in Paragraph B of the Special Due Diligence Rules.  The CRS advises that a reporting FI may presume that an individual beneficiary (other than the owner) of a Cash Value Insurance Contract or Annuity Contract receiving a death benefit is not a reportable person, and that FIs may treat such accounts as other than a reportable account unless the reporting FI has actual knowledge or reason to know that the beneficiary is a reportable person. If the beneficiary is a reportable person, the FI is required to follow the procedures established in paragraph B of Section III.

The Commentary to the CRS notes that an alternative procedure similar to the above may be necessary for certain employer-sponsored group insurance contracts or annuity contracts.  In such cases, the Commentary suggests adding a provision to account for group insurance contracts. In cases where such group insurance plans exist, the Commentary advises a provision to state something similar to the following: “A Reporting Financial Institution may treat a Financial Account that is a member’s interest in a Group Cash Value Insurance Contract or Group Annuity Contract as a Financial Account that is not a Reportable Account until the date on which an amount is payable to the employee/certificate holder or beneficiary, if the Financial Account that is a member’s interest in a Group Cash Value Insurance Contract or Group Annuity Contract meets the following requirements:

• The group cash value insurance contract or group annuity contract is issued to an employer and covers twenty-five or more employees/certificate holders;
• The employees/certificate holders are entitled to receive any contract value related to their interest and to name beneficiaries for the benefit payable upon the employee’s death; and
• The aggregate amount payable to any employee/certificate holder or beneficiary does not exceed $1 million.

(Commentary on Section VII, paragraph 13; pg. 153). The last provision is provided if the Financial Institution does not have a direct relationship with the employee/certificate holder at inception of the contract and thus may not be able to obtain documentation regarding their residence.

Conclusion

Insurers who fall under the definition of Financial Institution provided by the CRS are obligated to report on Cash Value Contracts and Annuity Contracts, so long as such contracts are allowed in the jurisdiction the FI is reporting from. These FIs have an obligation to comply with the due diligence requirements that the CRS imposes on them, and can make use of an alternate procedure to comply.

Overview

The main indirect tax of Mexico is the Value Added Tax (locally known as IVA), which generally applies to all imports, supplies of goods, and the provision of services by a taxable person unless specifically exempted by a particular law. The tax is imposed by the federal government of Mexico and ordinarily applies on each level of the commercialisation chain. This tax has been applied in Mexico since 1980.

Click here to read “Why the New Process for Cancelling E-Invoices in Mexico Matters”

Tax Rate

Mexico applies a single standard rate of 16% across the country. However, there is also a 0% rate applicable to exports and the local supply of certain goods and services. Sales of ice, fresh water, machinery and raw materials for manufacturers, books, newspapers, magazines by their editors, medicines, as well as the supply of services to eligible manufacturers, are subject to the 0% rate.

It is worth mentioning that until December 2013, Mexico applied a reduced rate of 11% in Mexican Border states of Baja California Norte, Baja California Sur, Quintana Roo, the municipalities of Caborca and Cananea, and in the bordering regions of the Colorado River in the state of Sonora. This was an effort largely to attract businesses to these areas and because the sales tax in the U.S. border states was half of the IVA in Mexico. These regions were commonly referred as the “maquiladora zones.”

That 11% reduced rate was revoked starting January 1, 2014, and substituted with a broader regime of incentives aimed at the manufacturing companies located in that region.

Taxable Base and Exemptions

As mentioned before, the Mexican IVA applies to all goods and services unless specifically exempted by the law. There is a wide variety of goods and services exempt from the tax, including:

• Sales of houses except those to be used for commercial purposes
• Retail sales of books, magazines and newspapers
• Used goods sold by non-taxpayers
• Currencies
• Financial instruments
• Gold at least 99% pure
• Machinery and equipment used on agriculture
• Certain goods between manufacturers subject to special export oriented regimes
• Certain commissions related with mortgage loans and the administration of retirement funds
• Free services provided to members of qualifying nonprofit organisations
• Educational services provided by public and private chartered entities
• Public transportation provided in urban or suburban zones
• Maritime transportation of goods provided by entities not resident in Mexico
• Insurance services
• Qualifying financial services
• Certain public shows
• Professional medical services
• Copyrights

Credit-Debit Mechanism

The Mexican IVA doesn’t differ much from IVA in other countries in that it allows the taxpayer to deduct the IVA that has been paid to the taxpayer’s suppliers or IVA that the taxpayer has paid himself at the time of importing goods that were subject to the tax. In addition to the IVA paid on imports and local purchases, the taxpayer also has the right to credit the IVA withheld by clients that are required to apply the reverse charge system that we are going to examine later.

In those instances where the taxpayer cannot use all the credit that has been accumulated on its purchases, the remaining amount can be carried over to later periods or eventually even to request a reimbursement from the government.

Taxable Event and Periodic Payment

One of the unique characteristics of the Mexican IVA is that when determining the taxable event, the law requires the taxpayer to use the cash accounting method rather than the accrual accounting method. What this basically means is that IVA on a sale is considered due when the seller is effectively paid, rather than when the invoice has been issued, the service provided or the good has been supplied. If the seller does not get paid, no tax liability exists either.

In general, the Mexican IVA should be paid on a monthly basis, no later than the 17th day of the month after the taxable event occurred.

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