There is no doubt that Brazil imposes the most complex set of tax reporting obligations globally. For example, Brazil’s tax authority (SEFAZ) requires that all businesses produce monthly SPED reports (self-audit tax reports) that cross-reference and check everything from tax collected on sales to tax value of inventory on hand and fixed asset depreciation.
Companies are required to build multiple text files from their accounting systems with information about critical business transactions and send them to the government for monthly, quarterly, or annual review depending on the business. The SEFAZ takes this information and matches the content with the aggregation of invoices and historic data they have on file. Companies must ensure that all information matches 100% of what is listed within the government files. Companies risk investigation and fines — which could range from 75% to 225% of the total tax value — for any discrepancies. As VAT equates to between 16% and 22% of total sales, fines for non-compliance are potentially significant.
Recently, tax authorities (including the SEFAZ) are moving beyond consumption tax and looking to reduce fraud within human resources and payroll. In a region where contractors are common and a majority of the population is unbanked, avoidance of payroll taxes through cash payments is the latest target of the tax authorities. Thus far, Mexico and Brazil have taken the lead.
Mexico’s Nómina Electrónica was the first to tackle this mandate in January 2014, and currently all paychecks to employees must be registered with the government. This was the first mass mandate in order to examine potential payroll fraud in the region. The most recent eContabilidad legislation requires the validation of payroll deductions as part of the journal entry reports. Mexico’s tax administration service (SAT) now has the ability to track fraud at the corporate level as well as at the employee level since they have a registration of all employee payments.
Brazil’s eSocial policy takes the next step in the evolution of government mandates, going beyond payroll events to include labor events. eSocial is a project of the Brazilian federal government that will collect labor, social security, tax, and fiscal information related to the hiring and employment practices of an organization.
Employers must transmit all information referring to their labor force online:
- Labor Events: The labor events are transmitted in individual files for each event as soon as they occur and are fed into a database that captures the working history of the employee including hiring, contract details, warnings, and suspensions.
- Payroll Events: The payroll file and all of the other social security contributions (cooperatives, service providers, rural, etc.) are transmitted monthly and must be consistent with the labor events file.
By requiring both labor events and payroll events, the Brazilian SEFAZ plans to eliminate fraud within its social services as well. By comparing payroll events with current HR events, the government will be able to identify someone that is collecting both a paycheck and unemployment insurance. They will be able to go as far to find individuals that are constantly claiming disability due to injuries on the job.
eSocial poses a unique problem for SAP ERP shops in that there will always be multiple data sources tracking the 41 different transaction types that the government mandates. Although the legislation has been discussed as a potential mandate since June 2014, the final legislation is still not out. However, the government turned on their testing environment a few months ago. This is always a sign of upcoming mandates and Brazilian companies should take notice to ensure they have a strategy in place. The current law states that a company will have six months to comply once the government releases the final standards — and the test systems are always a sign that they are close.
So what should you be doing right now?
Don’t just look at this as a local issue in Brazil — take a look at your Latin America requirements. There are over 10 countries in this region of the world imposing e-invoicing, VAT tax reporting, or HR reporting requirements. You don’t want to end up with another country one-off. Instead, form a business-to-government (B2G) SWAT team that covers invoicing and reporting, gather country requirements, and look for vendors with a regional presence. Stop reacting to legislation and start taking a proactive approach to this new reality of the government inserting itself into your business process and requiring electronic filing of data. Tax authorities have figured out that the best way to prevent fraud is through automation: Be prepared for the continued expansion of government compliance. As I have stated in recent articles, this is the new network we will be managing over the coming years.
Steve Sprague is the Vice President of Product Strategy for Invoiceware International. He is responsible for both product management and e-Invoicing regulatory updates. Over the last 16 years, he has designed solutions for SAP ERP that deliver out-of-the-box compliance for Latin America and European Union e-invoicing and fiscal reporting requirements.