We reported last week on the fraud related issues in Nigeria attributed to bad invoicing and the cost to the country and its citizens as a result. It seems that a similar story can be told in Mexico.
Between 2007 and 2009 Mexico’s Tax Administration Service (the SAT) lost about $3.4 billion mostly due to what the SAT calls, “apocryphal invoicing”. Similar to Mexico, Brazil had similar intentions to reduce fictitious invoicing and also wanted to streamline the collection of local sales taxes when the government mandated e-invoicing. These changes, while having good intentions, have not come without issues in Mexico in particular.
An overview of the counties that have mandated electronic invoicing include:
- Brazil – Mandated for Accounts Receivable and Accounts Payable
- Mexico – Mandated for Accounts Receivable and Accounts Payable
- Chile – Mandated for Accounts Receivable and Accounts Payable
- Argentina – Mandated for Accounts Receivable and adding in for Accounts Payable
- Columbia – Similar to European model with Trading Partner Agreement requirements
Figure 1 – Latin American Countries with laws mandating electronic invoicing
While e-invoicing had been in place in Mexico for many years, in May of 2013 the SAT announced a mandate for e-invoicing. By the end of 2013, all companies earning more than 250,000 Pesos annually (approximately $20,000) would have to submit a standard electronic form for approval. Previously, if a company’s revenue was less than 4 Million Pesos (~$310,000) e-invoicing was not required.
In addition to eliminating the legacy Comprobante Fiscal Digital (CFD) or digital tax receipt invoice system, the new compliance mandates will affect all outbound shipping by companies. The newly required Comprobante Fiscal Digital por Internet (CFDI) or electronic digital tax receipt is a real-time process, which obliges the issuer to contract an Authorized Certification Provider (PAC) and requires accounts payables organizations or shared services to use CFDI e-invoices from their suppliers. The PAC is responsible for validating the invoice documents and declaring them to the Tax Administration Service (SAT).
Starting on January 1, companies are only able to issue XML e-invoices in CFDI format, generated by an authorized service provider. Companies must work with a PAC or use an e-invoicing provider that partners with a PAC. This moved about 80% of the burden of the changes to the accounts receivable side.
The Mexican government was also the first to outsource their electronic signing to third parties. Only invoices bearing a PAC electronic stamp are legally valid for tax purposes. Only a few months in and companies are already reporting numerous issues with PAC providers including:
- Customers have had to delay shipments because their PAC was down and they couldn’t get the proper documentation. Companies have had to pay additional fees with their logistics providers.
- Delayed business has led to lost business.
- Fins are being imposed on organizations that didn’t take the procedures seriously with archiving and validating the processes.
- Multiple vendors are being required to complete all the steps of obtaining the correct signatures.
- Changes in the SAP ERP system have led to issues with the local server which leads to issues with the SAP ERP system.
The Mexican government made a move that few other governments do when changes were made to the archiving of documents, and the Mexican government planned to store all legal invoices. As OB10’s VP of Compliance, Markus Hornburg, noticed, “this is a big step towards real-time auditing and removes the possibility for anybody to tamper with stored invoices… Tax payers will be able to access their invoices online through apps that the government will create, which made me smile as most governments shy away from new technology like this."
While innovative, this sudden shift has resulted in resistance and many technological issues. About 15-20% of AP departments for buyers say they are seeing invoices come in that are not valid. Then the supplier has to cancel, revalidate and re-process the invoice.
Mexico’s SAT has forced over 4 million small businesses to report revenues and costs every two months with invoices, trying to force them into the formal economy. This move has been met with much resistance as many of the small firms in Mexico want to stay small. The so-called, “Peter Pan syndrome” occurs when firms want to stay small to fly under the radar and avoid tax and regulation.
Many companies that are working to avoid taxes and accountability often suffer from a lack of efficiency, technology and innovation. In addition, they may be more likely to fall prey to extortion by criminal gangs as well as to fleecing by corrupt authorities.
The Mexican Government is well aware of the many issues that they are facing, but with time to work out the kinks, hopefully e- invoicing will run more smoothly. In addition, the move to make smaller businesses come out from the shadows and be accountable for earnings will increase technology and innovation for the B2B ecosystem in Mexico.