3 Reasons You Could Fail an Audit in Latin America

Often in these articles, I describe the business process – but I wanted to look at Latin America E-Invoicing from an audit risk point of view.  Often when we look at the issues, our IT teams think about interfaces and archives, but we don’t always look at the financial risk of systems in these Latin America countries.  Remember, in Brazil, Mexico, Argentina and now Chile, the tax authorities have 100% real-time visibility into your invoice data.

Getting this wrong in Latin America means significant fines of 50% to 225% of the tax value on the invoices that are considered to be in violation. When you consider the tax rates in these countries, you can easily see fines in the hundreds of thousands to millions.  I was researching a company with a $90 million dollar revenue stream in Brazil the other day – and they are reporting a fine of almost $9 million for the year 2013 and I spoke to a company the other week that has already been fined $100K US dollars for 4 missing XML. That is right 4 XML caused a 6 figure fine as the XML is what is required for the audit and they were missing 4 of them which means their VAT deductions were too high as they couldn’t use that to substantiate their deductions.

Here are the top 3 reasons you could fail an audit in Latin America.

1. You are manually validating your Inbound Account Payables invoices. When you consider that everyone makes mistake when typing (average is 3% data entry errors), why large companies with significant invoice volume from a procurement perspective do this manually will always amaze me. Remember, in VAT countries in Latin America, you pay your VAT remittances on the net of what you charge your customer minus what you pay your suppliers.  If you deduct too little, you won’t get your money back, and if you deduct too much you will pay fines. And most importantly, if you don’t have the XML that exactly matches what the government has to back up those deductions during an audit– you will definitely pay fines.   
2. The goods you receive from suppliers don’t match the XML they sent – whether damaged in transit or some other area. Remember if you receive the goods, you are responsible for the tax obligation and the need to have a supplier update the XML. In the most severe cases, companies will do what is called “gating” in Brazil where they won’t let the truck enter their grounds until the NFe matches the PO correctly and has been validated to be commercially accepted.
3. You report on data that is different from the government site. Two examples, in Argentina you do not want to post the accounting document until you have the government verification. And in Chile – there are two status messages that come back from the government. You want to be sure that you have received both for your eBills before you process your Libros reports – this is most important at the end of the month.

So as you evaluate the costs of your systems – don’t just look at the IT costs. Ask yourself one question – Would your systems pass an audit in Latin America?

It’s tough enough to keep up with the tax rates, you shouldn’t have to worry that the IT system and its gaps are exposing you to potential million dollar fines.