Mexico SAT announces Electronic Audits to start 2016

In a recent interview the CNN Expansion, Aristoteles Nunez, the head of the SAT, stated that they will start to deploy electronic audits starting in the second half of 2016. This is a move that I have been discussing for the last 5 years and even more so in the last 12 months.  Following a path similar to Brazil, Mexico is now in a position where more than:

• Over 5 Million Tax IDs are exchanging standardized XML invoices known as CFDI
• More than 5.7 Billion XML invoices were exchanged in 2015 according to the recent Mexico SAT statistics
• And with the advent of eAccounting, more than 1 Million taxpayers are filing electronic accounting reports on a monthly basis – including Chart of Accounts, Trial Balances, and Journal Entries

In other words, the Mexico SAT now has the automation, data and linkage of data to reports to start performing audits electronically.  Currently, the Mexico SAT is averaging 45,000 audits annually. Starting in the summer, the SAT looks to transition upwards of 4,000 of those audits to electronic means by comparing the data reported within eAccounting reports to the transaction data contained within the XML archives.  As this process unfolds, think of the scalability – the number of audits based on comparing electronic data will rise over the next 12 months, and in my view surpass the current number of physical audits. What if the Mexico government could audit all tax payers through Big Data?  This is the path forward and a reality for all who operate within the country to manage.

As fiscal data custodians and end users, there are a few best practices you should be following now that the SAT is making the eAudit public:

1. Ensure you are not paying off the PDF. Amazingly enough, upwards of half the companies we speak with are not paying off the XML.  Remember during an audit, the only thing that matters is the XML.
2. Implement the Polizas (Journal Entry) report. Many companies only implemented the Chart of Accounts and Trial Balances as Polizas were primarily focused at companies looking to get tax refunds. It is important to remember that the Journal Entry reports are the most important during an audit. 
3. Turn to process automation for posting government approval codes (UUID) to your accounting documents. Remember that a fully approved invoice is required to support your tax deductions.  If you receive an invoice for 100 pesos and send a credit note back to the supplier stating you will pay 90 – you still have to remember that the government XML needs to get updated.  The only way to track “straight through invoices” that will pass government audits is through Account Payable automation.
4. Implement validation reports so you are not guessing if your data will pass an audit. If you only implemented standard ERP notes, your financial controllers are at risk. As they will have to manually review thousands of documents. You can implement validation reports that will show a number of key metrics including: non-deductible invoices, accounting documents missing UUID, expenses that don’t have substantiating XML, and more.  Remember, if you are not using automation, then you are relying on spreadsheets.

The government is utilizing standardization and automation to collect their revenue which just happens to be taxes.  And the eAudit warning has been given. The question is how seriously will you take this and what solutions are you implementing to defend your tax deductions in Mexico.