Mexico Maquila compliance

Half of companies in Mexico’s export manufacturing program need more liquid cash reserves to cover import taxes.

By: Eric Kulisch
Photo: Oksana.Perkins / Shutterstock
   The Mexican government has attracted foreign manufacturers to its northern border region over the past 50 years through preferential tax and tariff programs for factories that process or assemble imported materials and parts for re-export. The aim was to allow foreign-owned plants to temporarily import duty-free equipment and materials to make products for export to the United States, and even other countries. 
   The Maquiladora program didn’t really take off, however, until the North American Free Trade Agreement went into effect in 1994, enabling duty-free trade for content produced within the continent and the elimination of many quotas. Lower labor costs, a skilled workforce, the low-value of the peso, and logistical advantages also contributed to the rise of export-oriented manufacturing. 
   NAFTA is dominating the news these days as the new Trump administration prepares to renegotiate its terms. With no concrete policy proposals advanced so far, it is difficult for companies to determine how, or if, their operations will be disrupted. President Donald Trump as recently as Monday criticized companies for pulling up stakes and moving facilities to Mexico in search of cheap labor, and has threatened to impose significant tariffs on companies that want to send their products back across the border for sale in the United States. 
   But global sourcing decisions rarely are easy exercises if done properly and the cost of labor is only one part of the equation. One factor that companies often fail to account for is the regulatory complexity associated with trade preference programs and the level of compliance work necessary to qualify for the benefits. That’s particularly true with the Maquiladora program—now known by its Mexican acronym IMMEX after being merged in 2006 with another incentive program—where constantly changing laws make establishment and management of a maquiladora in Mexico confusing and challenging.
   Two years ago Mexican authorities implemented a new law requiring detailed inventory tracking of imports for the privilege of being exempt from paying the 14-to-16 percent value-added tax (VAT) up front—a huge advantage in terms of cash flow. Many companies are still struggling to become eligible for the tax benefit—a job that became more difficult with a new round of data requirements in December—while the rest work hard to avoid any compliance setbacks that could jeopardize their status, say manufacturers, logisticians and customs experts operating in Mexico.
   There are more than 6,750 companies with IMMEX permits, accounting for more than 83 percent of the nation’s manufacturing exports, and 3,298 of them (49 percent), are not certified, according to Mexican government statistics.

Stricter Compliance. Obtaining a permit for IMMEX status is relatively complex, with companies required to provide large amounts of data about facilities and products to regulatory authorities to show they meet legal and administrative requirements, have foreign suppliers and customers, and commit to international sales of $500,000, or at least 10 percent of total invoices.
   Companies benefited from a streamlined system for importing that automatically exempted them from Mexico’s value-added tax, and certain other import taxes and duties, as long as the finished goods are exported within a specified period of time.

I’ve heard some companies wonder if the IMMEX program is still viable for them

   But regulators suspected that many companies registered for IMMEX to import goods for domestic sales and avoid the VAT, so in January 2015 the Tax Administration Service implemented a rule requiring all companies to pay VAT unless they pass a certification process.
   Companies that aren’t certified can apply to get the VAT refunded on the back-end—once the goods are exported—through the Mexico Customs administration’s duty drawback program. But that requires paying a customs broker to handle the extra administrative work and companies to have enough cash on hand before final sale to pay the tax. For firms with large manufacturing commitments, the time-value of money can be in the tens of millions of dollars per year, experts say.
   “From a cash flow standpoint it would be paralyzing,” Alan Russell, president of TECMA, a company that provides outsourced maquiladora and logistics services to overseas manufacturers. “Depending on one’s volume that could be a lot of money tied up for 60 to 90 days.”
   Smaller companies seem to be the most affected by the new rules, because they don’t have the administrative resources to quickly get through the certification process and stay in compliance, according to people in the maquiladora industry.
   Brenda Cordova, a customs attorney in the San Luis Potosi office of the Braumiller Law Group, said manufacturers face a significant task to provide all the evidence that their imports are properly matched to export shipments and then need to dedicate at least one full-time person who is responsible for maintaining a clean record and submitting periodic reports to authorities, because even an inadvertent mistake can jeopardize one’s status in the program.
   One client has put its certification program at risk because of a typographical error on a data element required for the maquila program, said Cordova, who is litigating the case.
   Some people involved with the program also complain the certification process takes too long.
   In fact, if Mexican authorities determine that an applicant does not have all appropriate controls in place, it has to wait at least six months to submit another application.
   A year ago, the government decreed that IMMEX companies must also register with the Registry of Imports instead of automatically being registered. And companies must have automated inventory controls.
   In December, the Mexican Ministry of Economy added another layer of data requirements about production processes on IMMEX companies that aren’t certified, Cordova said. 
  The customs attorney said all the new requirements are expensive to meet and raise questions about whether Mexico’s primary goal remains investment promotion.
   “I’ve heard some companies wonder if the IMMEX program is still viable for them. We have been requested by some companies to analyze their program and determine if it’s better to have an ordinary manufacturing program versus an IMMEX program,” she said. “These over-regulations are making investors think twice about the benefits they can receive from a maquilla program.”

Complexities. As government agencies regulating trade in Mexico become more sophisticated and automated with their auditing, it is more important than ever for companies to stay abreast of changes to the programs that provide tax relief and establish systems of their own for managing compliance in a less manual way, Bernie Hart, vice president of global trade management at Livingston International, a logistics company that specializes in managing customs processes for customers, said.
   Before 2014, customs and tax authorities had no real way to monitor shipments and mostly relied on good will and information from brokers. Today, they have much more detailed processes for collecting electronic data at the part-number level using a “single window” government filing system, and matching it up with product classifications and import/export declarations. Manufacturers seeking certification are being asked to show their import/export balances for the past five years, he said.
   Certification now requires companies to review their imports by part number and track what supplies go to each plant in Mexico, inter-company transfers between plants, material that is scraped, and finally what is exported.
   “That becomes a very daunting task,” Hart said. “It’s a ton to keep track of. The Maquila process has been around for a long time, but government never enforced it. And if you can’t prove where the stuff goes, you’re going to have to pay the VAT and fines.”
   Reconciling past records for raw materials, parts, sub-assemblies, kitting and other materials is very difficult, if not impossible, for many companies, especially if the company has changed brokers and suppliers multiple times, Hart said.

It’s a ton to keep track of… And if you can’t prove where the stuff goes, you’re going to have to pay the VAT and fines

   Livingston, as well as other providers of global trade management software and services, are helping clients map and monitor their import data so it matches with their inventory and export data, as well as report it to the government.
   Even large companies with sophisticated systems may face more compliance challenges than smaller companies because their supply chains are more complex, or they can’t easily feed the information to the government in the correct format or in a timely way. Large companies have to pull data from multiple business units and divisions that have different reporting requirements before trying to reconcile the import/export data.
   “That can be an absolute nightmare to manage,” Hart said.
   One of Livingston’s multinational customers has import and export balances every month that don’t match and one reason is that their upstream ERP system releases information that is subject to changing information fed in from fulfillment applications within its supply chain. It will have to conduct reconciliations indefinitely until it is able to fix the upstream programs, Hart said.
   “A lot depends on how complicated their fulfillment and supply chain processes are because if you’re small and only have to deal with a couple of suppliers, it may be relatively easy than if dealing with 3,000 different vendors,” Livingston’s global trade management guru said.
   “And if you’re a large multinational and using SAP as your primary fulfillment tool, and the company has undergone several acquisitions over time, there could be multiple ERPs, and if they all shipping to and from Mexico there’s the potential for their processes and data elements to not line up,” he added.
   The bottom line is manufacturers need to be more involved with their supply chain on the Mexican side of the border and with their inbound and outbound customs filings.
   “You need to have processes and procedures behind this, you need to have audit programs in place, and not just rely on your broker,” Hart said, adding the broker likely won’t have all the necessary information unless an extremely integrated customer relationship exists.