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The Mexican value-added-tax exemption process

The Mexican value-added-tax exemption process

Tecma expert, Sergio Vazquez, is interviewed concerning the particulars of the Mexican value-added-tax exemption process.

Steve Colantuoni:

Hello. Today we are speaking with the director of finance for the Tecma Group of Companies. His name is Sergio Vazquez. One of the things that we want to touch upon is something that has been in the minds of a lot of people in the maquiladora industry, especially during the last few months, because of rules that were changed as a with the fiscal reform that was passed in the Mexican Congress in the last quarter of 2013. Specifically, we’re interested in the Mexican value-added-tax exemption process.

Sergio, can you tell us a little bit about what that exactly is?

Sergio Vazquez:

The certification process for Mexican value-added-tax exemption was suggested by INDEX, or the Mexican national maquiladora association. This was to done in order to find a solution so that export maquiladoras would not have to pay the VAT on inputs imported for the production of their goods until 2015. What this means is that, as long as the maquiladoras meet certain requirements that the government has established, they can be certified. As a result of obtaining the certification for the Mexican value-added-tax-exemption, they would not be obligated to pay the tax.

Steve Colantuoni:

Sergio, thanks for explaining to us that there is a process by which maquiladoras can be certified to avoid having to pay value-added-tax on the material inputs that they are importing to make there products for export. My understanding is that if a company manufactures in Mexico exports sixty percent of its product, if they are in general manufacturing and can certify that, it means that they will be able to exempt themselves from the payment of value-added-tax. If I’m correct for the apparel industry, or for textiles, the number is eighty percent. Is that correct?

Sergio Vazquez:

Steve you are absolutely correct. This means if a maquiladora meets all the requirements that the government has established through these rules, they will not be paying value-added-tax in 2015.

Let me just mention that this issue of VAT tax payment by maquiladoras was the biggest in the entire tax reform. This is a huge achievement by INDEX, in my opinion.

Steve Colantuoni:

It is my understanding, as well, and perhaps you can confirm this: the national maquiladora industry association, or INDEX, worked with the authorities to create a system with various levels of certification. Is that true, and, if so, what are they? Can you tell us a little bit about each one?

Sergio Vazquez:

Steve, there are three classifications for a company to be approved for Mexican value-added-tax exemption. These are based on certain criteria, such as company history, number of employees, as well as some other factors. The important thing is that “A” classification has an annual approval. This means that the certification exempts a company from not paying the tax for one year. The “AA” certification gives companies two years of exemption, and the “AAA” provides for three years. So, the recommendation is for all companies that think that they can meet the criteria for the “AAA” classification to go for it. They should not be spending time and resources that are required to get Mexican value-added-tax exemption each year. They should obtain it for three years.

Steve Colantuoni:

You spoke of the kinds of certification available for companies that are seeking value-added-tax exemption on the import of raw materials into the maquiladora industry. Can you tell me what the requirements are that companies have to abide by to be able to successfully get one of the certifications that you just mentioned.

Sergio Vazquez:

Sure. There are general requirements for companies that are just seeking to achieve the “A” certification as well as incremental requirements for those wishing to receive “AA” or “AAA.” Some of the requirements include: providing proof of where imported equipment originates and its value. How the building in which manufacturing in Mexico is being done. Is it owned, or is it leased?  Documents proving that taxes are being paid for employees may be required. Some other documents are required that demonstrate how inventories are being controlled, and information that demonstrates that the items are temporarily imported. These are requirements that are not that complicated to meet for an established company.

For the “AA” and “AAA” classifications, there are some other particular requirements. For example, numbers of employees. There are minimum employee levels for both “AA” and “AAA.” There are also minimum investment levels in Mexico required for these two certifications. This is basically the value of the machinery and equipment imported into Mexico to conduct manufacturing with depreciation calculated in certain ways. Some others exist like the “certificado de cumplimiento de impuestos” these are documents that prove that your suppliers have paid their taxes. In order to get the “AA” Mexican value-added-tax exemption you must get this information from forty percent of your suppliers. The number rises to seventy percent for companies seeking to be classified as
“AAA.” This is more difficult because not only do you need to be in good shape with the authorities, but also with your suppliers. Here they are talking about the supply chain. The entire supply chain should be in compliance with the governments requirements. So that is probably the toughest one.

Steve Colantuoni:

Sergio, what you just described would lead one to believe that a company has to have all of its ducks line up in a row, and everything pretty well organized. Is there anything that you can add, in terms of information, for those that might be listening that are just getting involved in this process that will increase the probability that they will succeed in achieving what it is that they are looking to get done?

Sergio Vazquez:

Yes, of course. We saw that the rules were published on January 1st, and we immediately began to set up a multi-disciplinary team. As you know, in many tasks, you need the contributions of customs folks, finance people, from operations, in essence, from many people. I think that the first step should be to set up the multi-disciplinary team, because you never know who is going to be providing some specific document or information through the Mexican value-added-tax certification process.

The second recommendation would be to start working on this initiative as early as possible, because there is also some national programs to visit based upon geographies. They started in this May already with the Southeast, I believe. Then they come with the North, which is in our case. The sooner you start, the better off that you will be.

Let me comment on one thing: one of our bigger clients was selected by the authorities, along with another twelve companies in the city to be part of what they call the “pilot program.” What is going to happen in general terms, throughout the country, has already happened for us. They already came. They already visited us. They already requested the documentation from us. So we were already somehow, let’s call it, “pre-certified” just for that entity. We wil have to comply and do the same with other business entities, because we have a few more.

In summation, my recommendation would be to set up a multi-disciplinary team, and get to work as soon as possible.

Steve Colantuoni:

Thank you for your answers, Sergio. Since Sergio has a deep knowledge of this topic, please feel free to call the Tecma office and ask for him. Submit your questions on the Mexican value-added-tax exemption process via our contact page on the website. We’ll make sure that the questions that you are looking to have answered by Sergio get to him.

Remember, interested parties can receive Mexico manufacturing information on a weekly basis by SMS Texting the word Tecma to 96000.

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