As Latin American nations tighten up tax and reporting mandates, unprepared multinationals face the risk of getting hit with significant penalties. In this podcast, Steve Sprague of Invoiceware International breaks down what changes are coming and how you can best navigate them, sharing insights on:
- The four areas of business that will be most heavily impacted
- How SAP ERP users can navigate new compliance complexities
- What Latin American compliance trends to look out for in 2016 and beyond
Listen to the podcast, and read an edited transcript of the conversation here:
Ken Murphy, SAPinsider: This is Ken Murphy with SAPinsider, and this morning I’m speaking with Steve Sprague, the Vice President of Product Strategy for Invoiceware International, which is a leader in helping multinationals manage business and government compliance in Latin America. Steve, thanks for joining me.
Steve Sprague, Invoiceware International: Thanks for having me this morning.
Ken: Steve’s here to talk to us today about what to look for as far as compliance in Latin America in 2016. Steve, as governments to turn to automation to ensure tax collection, what trends should executives be watching out for in the coming months?
Steve: I think we’re on the front end of a tidal wave of legislation. Governments, much like businesses, are turning to technology and automation to collect their revenues and reduce their costs, and it just happens to be that their revenues are taxes. In Latin America it’s important to understand that the majority of tax revenue comes from consumption tax, indirect. So when you and I go to purchase a good, or an automotive manufacturer purchases supplies, there’s a set value-added tax on that transaction. It can range anywhere from 16 to the low 20s from a percent perspective. So we’re talking about a significant amount of money that businesses need to look at.
There are really three areas that we see explosions in these requirements. The first is domestic VAT collection. This was all started by Brazil back in the ’08-‘09 time frame, but if you look at Latin America today, it’s in over ten countries. What these governments are doing is they’re actually inserting themselves into our business processes. You could almost consider them as a third trading partner within the buyer and supplier relationship. And they’ve done this because the after-the-fact audits have left quite a bit of tax leakage. So when we look at domestic VAT collections, you see Brazil, Mexico, Argentina, Chile, Peru, Uruguay now, implementing this concept of what we call business to government compliance, which means they force you to use standardized electronic invoicing, all invoices are registered with the government in real time, and all of your sales are registered with the government at the line item level down to the tax amount, down to penny. They’re looking at all of your general ledger and your financial movements within your financial systems in order to ensure that they’re collecting every single penny, peso, real of tax. And they’re serious about the audits.
It was interesting, I read an article in CNN the other day with the head of the Mexico tax authority, what they call the SAT. And he was stating that in the second half of 2016, they’re going to start electronic audits. In the blogs I’ve been writing for the past three or four years, I’ve been talking about how this was the final outcome. This is where these governments wanted to go, the ability to push a button and audit your VAT remittances. These countries now have the processes in place. They now have all of your sales in country in x amount in their databases. They have all of your purchases from domestic suppliers in x amount in their databases. And they’re now forcing you to do monthly reports. Basically they’re saying, tell us what you sold and what you purchased, and we’re going to compare it. And so, in the second half of this year, and Mexico normally does around 45,000 audits a year, they’ll transition 4 [thousand] of those electronically. And that’s a big deal, because the government’s not going to come to you to say, hey, here’s what a mistake was, please tell me if it’s correct or what the problem is, why doesn’t this add up? They’re going to come to you and say, look, you claimed ten million in deductions, we only show 8 million on our servers, we’re going to back out the 2 million deduction, and by the way, here’s your penalty. And so they’re serious about doing this.
The value-added tax component has exploded in Latin America, but it’s important to understand this is moving globally. It’s a trend that any country that’s dealing with VAT or GST, the global sales tax at a federal or national or even state level, have learned from Brazil, and they’re starting to implement it. We’ve seen movement in Vietnam, we’ve seen movement in Indonesia, and so this concept’s also going to be a global movement.
Now, the other thing that we saw at the end of 2015 is governments looking at cross-border transactions. If you look at the big three in Latin America, it was Brazil, Mexico and Argentina, they’re the ones that did electronic invoicing standardized within their countries a number of years ago. They’re now getting together to talk about invoice transactions from Brazil to Argentina. One of the big consumer product companies got hit at the end of 2014 with a 140 million dollar fine by Argentina, and it was triggered based on imports coming from Brazil. And so I think there’s a movement in cross-border that you’re seeing within Brazil, Mexico and Argentina, and that’s something to watch out for. There’s an organization called CIAT that is managing the standards and will probably be the platform of choice to operate this new cross-border XML, but that’s a movement that we’re seeing.
We’re also seeing cross-border come into play with the us and Mexico through FATCA, which is the foreign account area of the IRS where they look at how companies are moving money in and out, where companies have foreign bank accounts. Interestingly enough, in Mexico last year there was a foreign web service that was created whereby if Mexico companies sold to a US company or a Mexico company sold to a Canadian company, they had to register that transaction. They called it a foreign transaction. Through FATCA, in some of the negotiations with Mexico, they’re actually going to start sharing that data with the US. So the Mexico government will share with the IRS all foreign sales from Mexico to the US. And so we’re going to continue seeing an explosion in domestic collection, I see [collection in] 2016 moving cross-border, and I see it moving globally as well.
Ken: What is the impact, then, for the SAP ERP Financial user?
Steve: It’s interesting, the legislation really affects four areas of our IT or our business operations. The first one is all of billing. I think the biggest mistake companies make is just looking at it from a financial transaction perspective, do we have a tax calculation correct. But it’s not just a financial transaction. These governments are actually utilizing this automation to eliminate black market goods because black market goods are untaxed goods. So when you look at Brazil, you physically cannot ship a truck from your warehouse to your customer without a real-time, government-approved invoice on the truck. If you do, as you go through a weigh station or you try to cross state lines, they will literally confiscate the truck. So if someone ordered a hundred widgets, put a hundred widgets on the truck, and you crossed any lines from Sao Paulo state to Rio state, and for whatever reason there were only 99 on the truck, during the count at the weigh station, they would consider that a violation, they’d confiscate your truck, you’d have to pay a penalty to get your truck back out onto the road. So billing is a big deal. You need to look at it from an SD functional module, an FI functional module, but also the effect [of regulations] on your outbound shipping.
Now, the accounts payable is an interesting area in Latin America when you consider the concept of shared services. Over the last decade we’ve all wanted to reduce costs and globalize competitive processes, but AP in Latin America is not about eliminating paper. The government already did that. 95% of the economy is digitized. It’s about tax compliance. Because remember, you’re utilizing all of your vendor invoices, all of your purchases as a deduction against your VAT remittances. So in accounts payable, you’re seeing the process flows tied, ultimately, to an end tax report. So MM and FI from an AP module perspective have huge implications. Most companies that I talk to are still paying off PDF or transitioning paper documents to shared service, and that is ripe for audit penalties.
The third area’s record to report. As we move to single global instances of our SAP systems, it’s not easy to change. And these governments are all dictating new reporting requirements that affect how we manage our general ledger, how we manage our account postings, what we need to extract in these really complex reports. For example, in Brazil, they have a new document called Block K. They’re actually not just looking at all of your sales or purchases, they’ve been doing that for years. They now want to understand the inventory value, what’s the tax value of your inventory at a particular warehouse. They’re also looking your bill of materials, how much raw material was imported into your manufacturing facility in order to make a finished good. And actually, they’re leveraging up and down their in-country value-added tax. So record to report is the largest area of change. Brazil is by far the most complex, and Mexico’s right behind it with eContabilidad, but even small countries like Peru are looking at your cash balances, your inventory balances, your fixed asset balances. So it’s not just a transactional element, it’s a reporting element.
And then the fourth component of government compliance initiatives is around labor and payroll. If you think about AR, AP, and reporting, that’s how they get to calculating your value-added tax remittance. That’s how they ensure they’re collecting their revenue. Payroll is another tax that government wants. Brazil’s taking it a step further in 2016 with a program called eSocial. It’s not just paychecks on a monthly basis, it’s upwards of 40 labor events per employee. So, when you hire someone you register it with the government, when you fire someone, if they injure themselves on the job, if they took sick days, all of this information the government wants because they want to be able to tracks your social expenditures. Quick example, unemployment. They will know if a worker is collecting unemployment in Rio but is now working with a contractor in Sao Paulo, and so they’ll be able to catch that illegal move.
And so it’s SD and FI in the billing side; it’s MM from a module perspective in your general ledger on the AP side; it’s all about reporting and ensuring all of this information gets out of your SAP system and into the government formats in a monthly, quarterly and annual basis; and it’s now creeping into payroll and HR systems as well.
Ken: What about specific issues SAP users will face?
Steve: I think it’s important to understand that ERP systems are not capable of solving the problem on their own for a number of different reasons. One, sometimes they just don’t provide solutions in the country, whether that be for an electronic invoicing requirement, whether that be for a reporting-type requirement. The ERPs are just not set up to handle this. And it’s not just SAP. Oracle and Microsoft and even Totus, a Brazilian ERP system, have these problems. So that’s the first thing.
The second thing is that it’s a process issue, not a data issue. Usually, when an ERP tries to solve this, it’ll give you a data container to put that new government field in, and to put in how that gets received at the warehouse and if its receipt transaction is created. It doesn’t do the PO invoice matching. And, more importantly, when there’s a discrepancy, it doesn’t trigger a message back out to the supplier or government to adjust it. So it’s important to remember that not only do the ERP vendors not offer the solutions in many cases, but also it’s about a process, it’s not about data.
Another point is most companies are not on the latest version of SAP. If you talk to a lot of the systems integrators or the support staff out in the world, most companies are in what’s called an “n minus one” strategy, which means they always stay at least one support pack back. They don’t implement all the OSS notes. Because of that, it’s not that easy to implement ERP changes, because Argentina might announce legislation that has to go live in three months, and the ten OSS notes released might actually need another 200 legacy notes just to implement those ten. So it’s a really big deal because all of these changes are typically released in the newest support packs by ERP vendors, and that can create a regression test nightmare. I remember I was talking to a computer manufacturer when Brazil made their XML change, and they could have implemented all the OSS notes, but the regression testing would have caused them to stop 17 other global projects just because of a Brazil local change. So we need to understand that even if an OSS note is provided by an ERP vendor, it doesn’t mean it’s easy to install, and it definitely doesn’t mean it’s easy to install on time.
Last thing, specifically to SAP, if you’re to look at the solution approach – and remember, AR, AP, reporting, payroll and labor, those are the four buckets – you’re going to have to deal with upwards of 7 different solutions. So, what is the staffing component of that, what is the infrastructure component of that, what is the change management annually on that? Because you could see OSS notes, you could see SAP process integration, you could see a new solution called AIF, there’s a new reporting framework on HANA called Tax Declaration Framework, you’ve got Ariba in play on the procurement and the AP side, you’ve got vendor invoice management on the workflow side, you’ve got SAP information interchange. It’s a lot for someone to take on. So you really need to look at, what’s your ERP version, how do you deal with upgrades on an annual basis globally, and what do you want to do? Do you want to manage multiple solutions, or do you want to look at potentially a Compliance as a Service provider? It really comes down to, do you want to be in the business of maintaining your SAP system for compliance?
Ken: And Steve, lastly, how’s Invoiceware International helping companies navigate these ERP gaps and solve the business to government compliance issues?
Steve: I think there’s a trend in business to government, and we’re going to see this as a specific business sector, a specific set of solutions going forward. The reason for that is that governments are pretty much all the same in their requirements. What Brazil requires of a pharmaceutical company is the same as a beverage company or a breakfast food company or an automotive manufacturer. There aren’t multiple industry flavors, there aren’t multiple standards, the government is truly the government. So it’s ripe for economies of scale, us consolidators and aggregators. And that’s what Invoiceware is.
Within the SAP space, we provide Compliance as a Service. And, again, I think you’ll see this trend in import-export, I think you’ll see this trend in tax calculation. But we focus on those four buckets, AR, AP, reporting, payroll and labor, the four key compliance requirements. And the first thing that we do for multinationals is we provide a regional platform. It covers all of those four business requirements, and it covers 8 countries. It’s important to understand that three years ago it was primarily Brazil, Mexico and Argentina, but it’s now moving to ten countries in Latin America. And so by providing a regional Latin America platform, we eliminate local country solutions, we eliminate point solutions, and we eliminate a lot of the different headaches associated with SAP due to the ongoing change management.
We offer this through SAP management consults. This is important because an EDI solution or a bolt-on third party doesn’t solve all the issues, because 80% of your problem is how you build, monitor and maintain your global SAP system for the compliance requirements in the region. So by providing this SAP extension, this SAP code, we not only give your users the single user interface – they don’t have to log into five solutions – and one data set – what’s in SAP is what’s in the government, what’s in the government is what’s in SAP, there’s no chance for manipulation of the data in the process, which is key. Most importantly from an IT perspective, we can buffer SAP from change. We have customers that still run 4.6c from an SAP system perspective or version, but they’re fully compliant in Brazil, they’re fully compliant in Mexico. So you can focus on your global innovation, your processes, and not constantly try to figure out government changes and how to implement them in your SAP system.
Now, we provide this with enterprise support. This is a 24/7 business, in stack shipping, logistics, money, collections, payments, reporting. So you can always call us for what we’ve implemented, in English, in Spanish or in Portuguese. Whether it’s the local warehouse user or the corporate CFO, we can help you understand the issues and what needs to happen in the systems in order to maintain compliance. I think the most important thing that a Compliance as a Service provider does is we keep this at a fixed cost. You will know down to the penny, peso or real what it costs for compliance in Latin America. If Brazil changes, great, we’ll provide a new code, we’ll update it in your system, you move on with your business. You should not have to constantly figure out how to take this legislation and apply it to your systems because companies like Invoiceware have the economies of scale, this is all we do. We’re part of this new trend of Compliance as a Service. I think [it’s growing] not only where we have focused in the invoicing and reporting compliance, I think you’ll see it in tax calculation, I think you’ll see it in import-export, and I think you’ll see it in other government areas as well.
Ken: Steve, thanks for bringing us up to date
Steve: Thank you, I appreciate the opportunity and the time this morning.
Ken: Again, this is Ken Murphy with SAPinsider, and we’ve been speaking with Steve Sprague, Vice President of Product Strategy for Invoiceware International.