Maquila Matters: Issue 1
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Introduction to IMMEX
Conceived in very rough form nearly eight decades ago in an effort to promote the economic and industrial development of the northern region of Mexico, the Maquila sector was formally established in October 1966 with the implementation of the Border Industrialization Program. In a nutshell, a Maquiladora is a manufacturing or service company that is engaged in the temporary importation under the IMMEX program, either duty-free or under a duty deferral scheme, of inputs and machinery to be used in the production of goods to be exported.
While the laws governing Maquiladoras have been reformed on several occasions, including through the issuance in November 2006 of the Decree for the Promotion of the Manufacturing, Maquila and Export Service Industry (commonly known as the IMMEX decree), the purpose of encouraging the establishment of export-oriented companies in Mexico by providing a favorable tax regime has remained the same.
Since its creation the Maquila sector has grown to become a key driving force of the Mexican economy, with manufacturing companies operating under the IMMEX umbrella accounting for approximately 4.4% of total Mexican employment and generating some US$126 billion in total sales to foreign markets during the first ten months of last year. U.S. imports from Mexico have expanded at a significantly faster pace than imports from the rest of the world and at roughly the same pace as imports from China since about 2008. Indeed, as production costs in China have increased a significant number of companies have shifted their manufacturing operations from the Asian giant to Mexico and other Western Hemisphere countries.
For many companies setting up a Maquiladora in Mexico may be the best way to grow their business, increase profit margins, and reach a broader audience for their products by responding quickly to shifting trends in consumer demand. However, effectively navigating the new Maquila tax requirements could be the difference between success and failure.
The New Maquila Import VAT – Obtaining Credits and Refunds
The new tax law that took effect in 2014 eliminated the value-added tax exemption for temporary imports of goods, machinery and equipment, and increased the VAT in Mexico’s border states from 11% to 16%. As a result, imported goods are now subject to VAT payment at the moment of import and will be accredited a set-off only after the Maquila exports the final goods from Mexico. This has the potential to pose a considerable cash-flow challenge to many businesses, significantly impacting their bottom line. Fortunately, the Mexican government will allow for a 100% VAT tax credit at import and return any VAT payments within 10-20 days if the Maquila obtains certification through the Mexican tax authority.
Obtaining the proper certification to take advantage of these credits and refunds can be a challenge. Among other things, Maquila companies are required to (1) show that they, as well as their shareholders and outsourcing parties, are in full compliance with all applicable tax regulations; (2) have an adequate and up-to-date inventory control system and a proper physical control of imported goods; and (3) report on a monthly basis their balances of imported goods.
The certification application must be filed through the single window for foreign trade operations. If an application is incomplete, the applicant will be notified and given 15 days to provide any missing information. Applicants will be notified of a decision to approve the application within 40 days from the day following the date of receipt of a complete application. If approval is not granted within the 40-day timeframe, applicants should assume that their application has been denied. If Mexican authorities determine that the applicant does not have all appropriate controls in place, the applicant will have to wait at least six months to submit another application. It is therefore imperative for companies seeking VAT certification to do things right the first time around.
Introduction to Maquila Terminology