Legal Foundations

1. Introduction

It is common that when the original documentation that makes up the accounting is too voluminous, it causes space problems, makes it difficult to obtain the information, and represents significant storage costs.

In addition to the above, recent natural disasters such as Hurricanes Stan and Wilma caused significant material losses (including paper documentation) to several taxpayers, who today face a serious legal and tax problem to support the operations covered by said originals.

That is why digitization represents an option not only to save space and resources, but also a preventative measure against unexpected contingencies for companies.

The following analysis aims to guide companies regarding the tax obligations that must be met to digitize accounting in accordance with current tax regulations.

II. Applicable tax provisions

Article 28 The Federal Tax Code (CFF) establishes that persons who are required to keep accounting records must observe the following rules:

YO.- They shall maintain the accounting systems and records specified in the Regulations of the Federal Tax Code, which must meet the requirements indicated in those regulations. 1

1 Article 26 The CFF Regulations stipulate that accounting systems and records must be kept by taxpayers using the instruments, resources and recording and processing systems that best suit the particular characteristics of their activity, but in any case they must at least meet the requirements contained in that same article.

II.- The accounting entries will be analytical and must be made within two months of the date on which the respective activities are carried out.

III.- They will keep the accounts at their home address, although they may be kept in a different place when the requirements set out in the aforementioned Regulation are met.

The same provision mentions that the accounting includes the special records and accounts required by tax regulations, those kept by taxpayers even if they are not mandatory, and the books and social records required by other laws.

In cases where the other provisions of the CFF refer to accounting, it shall be understood that it is made up of accounting systems and records, working papers, records, special accounts, books and social records, electronic tax registration equipment and systems and their records, tax verification cash registers and their records when it is required to carry such machines, as well as the supporting documentation of the respective entries and the proofs of having complied with the tax provisions.

Furthermore, the third paragraph of Article 30 The Federal Tax Code (CFF) establishes that documentation and accounting records must be kept for a period of five years, counted from the date on which the related tax returns were filed or should have been filed. In the case of accounting records and documentation corresponding to transactions whose tax effects extend over time, the five-year period begins to run from the date on which the tax return for the last fiscal year in which those effects occurred is filed. When dealing with documentation corresponding to items for which an appeal or lawsuit has been filed, the retention period begins to run from the date on which the final resolution of the appeal or lawsuit becomes final.

Additionally, the fourth paragraph of the same article indicates that persons who have their financial statements audited by a Certified Public Accountant in accordance with the terms of Article 52 of the CFF itself, may microfilm or record on optical discs or on any other medium authorized by the Tax Administration Service (SAT) through general rules, the part of their accounting indicated by the CFF Regulations.

In this regard, it is clarified that microfilms, optical discs and any other media authorized by general rules will have the same value as the originals, provided they comply with the requirements established by the CFF Regulations, with the President of the Board of Directors, or failing that, the individual who directs the legal entity in question, being responsible for their compliance.

As a clarifying point before continuing with the analysis in question, it is important to bear in mind that from a technological point of view, the microfilming process is now obsolete, although the tax provisions subject to this study still refer to this term, with the digitization of documents being the most viable alternative to fulfill the objective at hand.

In this line of thought, the Article 41 The CFF Regulations stipulate that taxpayers may microfilm or record on optical discs or any other medium authorized by the SAT through general rules, the receipts or supporting documentation of the acts or activities they carry out, the services they receive, and the purchases they make, provided they comply with the following requirements:

	Before microfilming or recording the financial statements, the Certified Public Accountant issuing the audit report must conduct a selective review representative of all documents. The accountant must declare, under oath, that the microfilmed or recorded documents correspond to the originals in the file at the time of the audit, and that the microfilming or recording was carried out in accordance with the provisions of the aforementioned article. This declaration must be signed by both the Certified Public Accountant and the taxpayer.
	Microfilm or record the documents, grouping them, both issued and received, by month, in sets of related documents, classified by accounts and sub-accounts, so that the totals can be compared with the contents of the taxpayer's accounting systems and records.
	Add up for each month the total value represented by the documentation issued or received, and microfilm or record the corresponding audit record of the adding machine.
	Record, at the beginning and end of the microfilming or recording, the date on which it is made, which must be signed by the authorized accountant.
	Perform the microfilming or recording in duplicate, so that one of the copies can be used for constant use, and the other is kept in a safe that guarantees its indestructibility until the verification powers of the tax authorities are extinguished.
	Use for microfilming panchromatic film with a safety base that guarantees image permanence for the same period referred to in section V above.
	Relate the front and back of the documents, when the microfilming or recording is not done with equipment that microfilms or records both sides of said documents simultaneously and these contain annotations on the back.

As a regulatory measure in response to technological modernization in this type of process, it is anticipated that recording on optical discs, compact discs or magnetic tapes will be carried out under the following terms and with the characteristics indicated in rule 2.7.1 of the current Miscellaneous Tax Resolution:

Use 5.25” or 12” optical discs, compact discs or magnetic tapes for recording information, whose recording characteristics prevent the information from being totally or partially erased.

Optical discs, compact discs, or magnetic tapes must have an external label containing the name, the taxpayer identification number, the sequential number of the media, the total number of documents recorded, the operating period, and the recording date. The documents must be recorded without any editing and in their entirety, using an image scanner that covers the dimensions of the largest document, with a minimum resolution of 100 dots per inch.

To have and make available to the tax authorities an agile consultation system that allows them to locate documentation in a simple and systematic way.

The consultation of documents recorded on the aforementioned devices must be for both those issued and those received, classified as established in the CFF Regulations.

The last document recorded on the device must contain the total value of the journal entries, identifying the total credits and debits for the month.

In the case of documents that have a front and back, record them consecutively, referring to or noting on the front that the information is complemented by that contained on the back of the same document, and referring to or noting on the back of each one the data that allows the front to be identified.

When dealing with documents containing several pages, they will be recorded consecutively, and the first one must indicate the number of pages it contains.

Retain until the date on which the next annual declaration is submitted the originals of the microfilmed or recorded documents corresponding to the last twelve-month period for which an annual declaration was or should have been submitted, or until the date on which a final decision is issued, when the powers of verification in matters of taxes and duties have been exercised, in relation to the period whose documentation is microfilmed or recorded.

Documents proving the acquisition of investment goods, customs documents, vehicle ownership or use documents, documentation related to social security contributions, and tax returns must be kept in original form for the period specified for this purpose. Article 30 of the CFF, as long as the powers of the tax authorities are not extinguished under the terms of Article 67 of the Code itself.

On the other hand, the last paragraph of Article 63 The Federal Tax Code (CFF) indicates that copies or reproductions derived from microfilm or optical discs of documents held by the tax authorities have the same probative value as the originals, provided that they are certified by a competent official, without the need for comparison with the originals.

Finally, section VIII of Article 83 The Federal Tax Code (CFF) defines as an infraction the act of microfilming or recording on optical discs, or on any other medium authorized by the Tax Administration Service (SAT) through general provisions, documentation or information for tax purposes without complying with the requirements established by the relevant provisions. This infraction is sanctioned with a fine of 1,870 to 9,340 pesos. (Amount updated to the 2006 fiscal year.)

It should be noted that the tax provision in question does not specify whether the aforementioned fine should be applied to each document that is microfilmed or recorded without complying with the applicable requirements, or whether it is a general sanction.

III. Comments and conclusions

From the analysis of the above, the following comments and conclusions can be drawn:

1.- First, the digitization options only apply to those who audit their financial statements in accordance with the terms of Article 52 of the CFF, and imply an additional certification by the Public Accountant issuing the opinion.

2.- Several of the original documents from a twelve-month period for which an annual return was filed or should have been filed, and which were recorded, must be kept at the taxpayer's tax domicile at least until the date on which the next annual return is filed.

3.- Notwithstanding the foregoing, certain receipts must be kept in their original form and at the taxpayer's tax domicile until the verification powers of the tax authorities are extinguished, such as those that prove the acquisition of investment goods in fixed assets, customs receipts, those for the ownership or use of vehicles, documentation related to social security contributions, and tax returns, among others.

4.- Given that the microfilming process may be technologically obsolete, the guidelines set forth in rule 2.7.1 of the current Miscellaneous Tax Resolution constitute additional requirements for recording the relevant documentation on optical discs, compact discs, or magnetic tapes, and the other requirements mentioned therein must be met as applicable. Article 41 of the CFF Regulations.

5.- While it may seem that document digitization is a procedure that involves detailed work and a considerable investment of time, since practically every single receipt must be reproduced through the character reader (scanner), it is also true that it offers the great advantage of destroying a large part of the original documents, preserving only the optical disc, compact disc or magnetic tape, thereby freeing up storage space in offices and warehouses, improving the efficiency in the handling of accounting records, and reducing administrative costs.

Additionally, this alternative is also a preventive measure that allows companies to safeguard a large part of their paper accounting records against the risk of catastrophes or disasters, both accidental and due to force majeure, which unfortunately have occurred more frequently in recent years in various parts not only of our country but of the world.