Traceability Is the Name of the Game

For all those who establish a business in Mexico, one of the first impressions about the complexity of the market comes from the electronic accounting system required by the Mexican tax authority, or Secretaría de Hacienda y Crédito Público (SHCP), through the Servicio de Administración Tributaria (SAT). From creation to dissolution, the SAT requires that all transactions, internal or with interested parties, be recorded in the electronic accounting system.

While it seems convoluted and overwhelming given the workload it can entail, it must be observed from the perspective of its ultimate purpose: the traceability of transactions, money andbeneficiaries. 

From a practical point of view, a company does not exist in Mexico until it obtains its identifier or Cédula de Identificación Fiscal, popularly known as RFC (Registro Federal de Contribuyentes). While a tax identifier is common in other countries, the RFC differs because only after getting it can a company receive authorization to invoice and effectively operate.

Always with traceability in mind, let's analyze the elements that make up the process. First, let's look at invoicing, the administrative and accounting process that reflects the primary reason for a for-profit venture, that is, revenue generation. The authorization to invoice happens when the digital tax stamps are issued and then used to "ring" or generate invoices with the characteristics and certification required by the authority, a process that happens with the help of SAT-authorized suppliers (PACs – Proveedores Autorizados de Certificación). The authority has the power to cancel tax stamps if it believes a company is not in compliance with fiscal requirements or, as is more commonly known, has a negative compliance opinion. This opinion influences not only the ability to invoice but also important aspects such as the loss of import and export permits.

Any invoicing your company issues should result in an associated payment from customers. The obligation to issue documents to maintain traceability of the sales transaction extends to the payment transaction. Just as the invoice is issued in the sale or provision of the service, at the time the payment is received on account of such provision, a payment complement must be issued.* The latter must incorporate the same certification elements of the invoice, as well as data specific to the method of payment that make it easier for the authority to maintain the traceability of the money.

In addition to the sale, companies purchase goods or services. Whether costs or expenses, none of these are deductible unless there is an invoice duly issued by the supplier with its corresponding characteristics: QR code, XML file in defined format and certification provided by a PAC. In the absence of these characteristics, in addition to compliance with some other requirements included in tax legislation, the expense would become nondeductible for tax purposes, impacting your organization's profit margin and due taxes.

The payroll expense does not escape these requirements. All payroll receipts that your company issues must meet the requirements of the certification or “timbrado.” The reason?  Yes, you guessed: traceability. The tax authority needs to understand not only the flow among moral persons but also among physical persons, in this case, employees.

Value Added Tax (VAT) is the third component impacted by the requirements of the tax authority. All records generated by sales and purchase transactions involve an associated VAT status. For the tax authority, VAT processing is determined based on the flow it follows. As a result, the VAT payable or recovered is calculated on a monthly basis resulting from the difference between the VAT actually collected and the VAT actually paid.

In addition to these elements, there are others that help achieve the goal of traceability. We are referring to the chart of accounts and trial balance, both of which must be encoded in electronic format (XML files). The authority determines the chart of accounts that should be used to report monthly activity for tax compliance, so if your company uses a corporate chart of accounts, make sure to maintain an equivalence mapping or, better yet, maintain a management system that allows for automatic mapping. Finally, and for the purposes of unforeseen reviews carried out by the authority, it is desirable for your company to maintain electronic accounting, which consists of generating XML files that collect information about each journal entry.

Understanding the flow of money and its beneficiaries includes ensuring tax collection and, in the case of Mexico, the tax authority demonstrates a great sense of urgency. Your company must file monthly returns for the operation that include the tax impact during the period. Not only should any difference in VAT or income tax (ISR) withheld from third parties be declared, but provisional returns must be filed on any generated income that carry a preliminary tax payment. Failure to comply with this obligation can not only lead to a negative compliance opinion but also to the payment of potential penalties, as well as inflationary adjustments applied to the owed amounts. So, it's important: Review the calendar and don't miss the deadline for paying those obligations.

At this point, you are probably exhausted just thinking about how to prepare and perform your obligations in this complicated traceability system imposed by SAT. The authority knows that it is onerous and, therefore, has enabled on its portal the necessary functionalities so that your company can execute all these operations with the proper certifications and controls, from invoicing to electronic accounting.

If your company requires integrated management systems, better known as ERPs, consider that many of them already have “localizations” to meet the Mexican tax requirements and have partnerships with PACs, making meeting all requirements more manageable.

As with other topics we've reviewed in previous articles, you should be wondering how to focus on the essence of your business without failing to comply with controls and regulations imposed by the tax system. In the midst of this uncertainty and a complex landscape, your best option is to have the help of local experts with the necessary knowledge to navigate the system, helping you keep your company in strict and disciplined compliance and, of course, to be successful in your business.

*When the payment method is PPD (deferred payment in partialities)