Mexican Tax Reform and Inter-Maquila Transfers
Established in the 1960s, and further expanded under the NAFTA, maquiladoras were originally conceived to incentivize companies to manufacture in Mexico utilizing mainly materials and components that were imported on a temporary basis. These items would then be transformed and exported as a finished product. A significant advantage to be reaped by manufacturing under the maquiladora regime was that foreign companies could simultaneously take advantage of the lower cost of manufacturing in Mexico, as well as reduced tariffs and duties and a value-added-tax (VAT) exemption. Since inputs imported into Mexico temporarily are used in the production of finished products that will then be exported, these inputs and products were not historically subject to a VAT tax as long as a pedimento for their import was completed.
A pedimento is the legal document used to import materials and components incorporated into the production of goods into Mexico. It allows them to be temporarily entered into Mexican territory to be subsequently transformed, or used to create an end product. The end product is then exported.
The document is an import manifest of sorts, assigning specific codes to each item being temporarily imported. However, inputs brought into Mexico for assembly of an end product do not always pass through just one maquiladora during the course of manufacturing an item for export. When materials are used in the production of sub-assemblies that must then be transferred to another Mexican production facility for the next or final phase in the production process, the sub-assembly no longer fits the classification code or codes assigned to each of its component parts. Since only the individual components that make up that sub-assembly were imported, sub-assemblies technically have not been temporarily imported, and are thus potentially susceptible to VAT taxation during inter-maquila transfers.
What is then needed to execute VAT exempt inter-maquila transfers is a virtual pedimento The virtual pedimento treats the sub-assembly as though it had been temporarily imported just as its component parts had been. Executing a virtual pedimento exempts manufacturers from paying the VAT on item(s).
In the late summer of 2013, Mexico’s government began to consider an overhaul of the nation’s tax system. A lack of familiarity with the complexities of maquiladora manufacturing by Mexican legislative bodies resulted in some initial unworkable, and potentially damaging, proposals as regards the tax treatment of temporary imports and inter-maquila transfers. Initial versions of proposed legislation eliminated the exemption from VAT on temporary imports, and the ability to use virtual pedimentos to transfer items from one maquiladora to another without being subject to the VAT. In addressing the concerns of the elimination of the virtual pedimento process, some lawmakers suggested the possibility of exporting sub-assemblies out of the country, and then re-importing them, under a new pedimento, as a way to confer temporary import status upon them. Opponents of this approach successfully argued that doing so would greatly diminish the price competitiveness of goods manufactured in Mexico by substantially increasing transportation costs.
At the end of the process, lawmakers arrived at a compromise solution. The VAT exemption on temporary imports was eliminated, and temporary imports to maquiladoras used by companies to make their finished goods will pay value-added-tax. Despite this, and the fact that the VAT will be charged during inter-maquila transfers as well, collected VAT can be recovered through a 100 percent tax credit to companies that are certified as being exporters of 90% of their production. This refund to exporters will offset value-added-tax’s imposition on industry. Companies which receive the yet to be fully defined certification from Mexico’s Tax Administration Service (SAT) will be eligible for an immediate 100% tax credit against VAT levied on them for such imports and transfers, thus never having to pay the VAT. Furthermore, companies without this certification may guarantee their tax liability by means of a bond, in order not to pay VAT on temporary imports.