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The new maquiladora certification process for VAT exemption on temporary imports

The new maquiladora certification process for VAT exemption on temporary imports

Ciudad Juarez-based attorney, Humberto Gayou of Lexcorp Abogados, speaks to the Tecma Group of Compaies on the topic of the new rules of certification for maquiladora operations in Mexico seeking value-added tax exemption on temporary imports.

Ciudad Juarez-based attorney, Humberto Gayou of Lexcorp Abogados, speaks to the Tecma Group of Compaies on the topic of the new rules of certification for maquiladora operations in Mexico seeking value-added tax exemption on temporary imports.

Tecma Group of Companies:

Hello and welcome to another installation of Tecma Talk podcasts. Today we have with us a very well known lawyer from the Ciudad Juárez and El Paso area. His name is Humberto Gayou. He is with a law firm that’s based in Ciudad Juárez called Lexcorp Abogados. Today we are going to speak about new maquiladora certification requirements resulting from changes derived from recent Mexican tax reform. Welcome Humberto.  How are you today?

Humberto Gayou:

Thank you very much, Steve, very well, thank you.

Tecma Group of Companies:

Thank you for joining us. I’m sure the audience would like to learn a little bit about you. If you could give us some background information and familiarize yourself for the listeners, we would appreciate it.

Humberto Gayou:

Yes, of course, I am an attorney in El Paso—Juárez—Mexican attorney with a law degree from the Universidad Anahuac Law School, and a Masters from Yale Law School. I have been practicing for the last thirty years with the maquila industry. My areas of expertise are basically corporate and tax planning.

Tecma Group of Companies:

Today it’s a very important corporate issue that we’re going to take a detailed look at, and hopefully, after having listened to this discussion on the new maquiladora certification requirement people that have an interest in this topic, and there are quite a number of those with manufacturing operations already in Mexico and those thinking about doing manufacturing in Mexico, will have a better understanding of what is happening.

Last year, as everybody who is familiar with the subject knows, the Mexican legislative body, both houses of Congress, passed a tax reform. One of the things that was affected by the reform was passed was the maquiladoras ability to import items on a temporary basis without paying value added tax. Now there have been some changes to that regime. There are new maquiladora certification requirements that must be obtained, if a company wishes to be VAT tax exempt on temporary imports.

If you can give us a little bit of a background on what those changes are and then ,after that, explain the there’s a process by which companies can be exempted through certification from paying value added tax on temporary imports that would be very helpful.

Humberto Gayou:

Yes, exactly. The main section of the value added tax, maquiladoras or temporary importations were exempted from the payment of that tax historicall. As you just mentioned, thatchanges effective January 1, 2015. The Mexican tax authorities are giving a one-year moratorium for the maquiladoras, the export manufacturing companies, to go through the new maquiladora certification process and hopefully eliminate the value added tax, as well as be entitled to some other benefits. This year is particularly important, because it’s going to be the certification year. If maquiladoras do not complete it on time, then they will start paying the value added tax on temporary imports, which is essentially 16%, effective January 1, 2015.

Tecma Group of Companies:

So this is pretty critical in terms of companies’ cash flow. If you could tell us what is the schedule to submit applications for the new maquiladora certification requirments, of course, things are coming into effect in January 2015, but obviously one would suspect that the application must be completed by a certain time, could you provide us with information?

Humberto Gayou:

Yes of course. The application period will begin on April 1, 2014.

There’s a schedule that changes depending on where a company is geographically located in Mexico. For example, the companies that are in the Juárez area, of course, prone to the north-center area, will start the new maquiladora certification process on July the 7th. The companies that are in Tijuana, for example, which is in the North Pacific, will start April 15. The companies that are in the Northeast for example will start on June the 3rd. The first ones that will start are the automotive companies; they begin on April 1st. There is a specific timetable to submit the application. The application has not been published, but it is very important to be cognizant of the rules number one, and number two to be attentive as to when the application is published.
Once companies submit the application in accordance with the schedule, then the tax authority will have 40 days to give them a response. If they do not provide a response within those 40 days, the application will be considered the 9th. It is very important to be prepared to submit it completely, because the authorities may ask for additional information only once, electronically, and then you will have 15 days to submit the additional information requested by the authorities. Then the 40 days that the authorities have will start to count again after companies submit the additional information, assuming that such additional information was required.

Tecma Group of Companies:

In addition to the fact that there are different start dates, and a requirement to submit applications if you want to be able to exempt yourself as a company from value added tax on temporary imports, it’s my understanding that there are several difference kinds of new maquiladora certification classes. What are the different certifications that will be available to ask for, and what are the difference between them?

Humberto Gayou:

There will basically be three different kinds of certifications: A, AA, and AAA.

The maquiladora certification will depend on for how long the company has been operating in Mexico, the number people employed, and what percentage of temporary importations are exported, for instances. These particulars determine what benefits a company receives, as well as the term of the certification. For example if you have maquiladora certification A, the term once you are approved will be one year. If you have AA you will be certified for two years, and if you have AAA your certification will have a three year duration. Also the benefits change. In the case of AAA maquiladora certification, for example, a company will have additional benefits in connection with consolidated import benefits. There will be a shorter refund turnaround time on the value-added tax paid to local suppliers for instance. There are differences in how things work, and the variables are determined by the rules. They basically depend on the number of employment positions, for how long the firm has been operating in Mexico,and the size of a company’s investment. It is very important for the appropriate parties to get familiar with what kind of benefits they will be afforded depending on the specific characteristics of their maquiladora operations.

Tecma Group of Companies:

Okay. So it is important to be familiar with this information, because you don’t want to give yourself short shrift in terms of the benefits that you might be qualified to obtain as a maquiladora, I would imagine?

Humberto Gayou:

Yes, and you also don’t want to create inaccurate expectations of what you will get anyway. You need to know what are you shooting for and what is your ceiling.

Tecma Group of Companies:

With that in mind, what are the alternatives to the new maquiladora certification?

Humberto Gayou:

The alternatives to the certification are either to pay the taxes, and then ask for a refund, which can be a very time consuming and expensive process, and, as you just mentioned, this has a negative cash flow impact. Another alternative is to post a bond for the amount of the taxes of the duty that would otherwise be paid. The tax of the bond changes from case to case as it is from one to three percent of the face value of the bond. So that’s also an expensive proposition. Really the best alternative for anybody is to apply for the maquiladora certification.

Tecma Group of Companies:

There’s a little bit of time between today, when this is being recorded in January of 2014, and the time that the certification or the request for it must be submitted. What should the people that are running maquiladoras start doing as of today or as of January?

Humberto Gayou:

As of today, they need to make sure that they have full compliance with their tax obligations. One of the requirements of the certifications is to submit a certificate that that Hacienda (Mexico’s IRS) provides saying that your company is in full compliance. Manufacturers need to start making sure that they have their house in order so that they can submit their maquiladora certification application completely. The other thing that they should do is they should start gathering their documents; whatever will be required for the application. Be aware of when the application format is published so that they know what kind of information they will need to submit as soon as possible. and above and beyond make sure that you are in compliance with inventory control for customs purposes. So you need to have your house in order to be ready to submit your maquiladora certification application as soon as your time comes.

Tecma Group of Companies:

So in a broader sense, it’s something else that goes back to the legislation that created the need for this certification. The first thing, obviously, and maybe you could explain this in some detail, is that the business applying for VAT tax payment exemption is certified as being an operating maquiladora, which by definition of the Ministry of Economics requires that it export 80% of its product. Is that correct?

Humberto Gayou:

That is correct, yes.

Tecma Group of Companies:

So as long as you’re exporting 80% of your product this certification to exempt you from value added tax is available. And the purpose of the whole legislation it would seem was to basically make sure that the benefit of that exemption is utilized by companies that actually do export—I would assume that there are many that didn’t meet that 80% level that were getting the value added tax exemption as well, would that be correct?

Humberto Gayou:

That is correct. This is part of the enforcement the Mexican government is trying to do, to make sure that only the companies that are actually entitled to the maquiladora benefits get them, that there are no bad actors to put it one way that are trying to take advantage of the maquiladora certification rules. This together with the new definition of what a maquiladora is that is now incorporated into the income tax law is part of the general effort by the authorities to try to make sure that only the good guys get the benefits and the rewards.

Tecma Group of Companies:

That makes sense. It is clear that this is a very important subject People who listen to these podcasts often give us feedback and ask us questions, of course we like to direct them to the experts that we’ve spoken to on issues like this.

If somebody has a question after listening to this recording, and they’d like to get in contact with you, number one can they? And if the answer to this question is yes, number two: how would they go about doing it?

Humberto Gayou:

Yes of course, I’m glad to answer any questions. My phone number in CD Juarez is 011-52-656-227-0300, or can send me an email and my email address is:

hgayou@lexcorpabogados.com

We also have a U.S. number that actually dials into our Mexican office, and that is an El Paso number : 915-400-0070.

Tecma Group of Companies:

Hopefully companies will make this transition successfully, and take advantage of the benefits that are due to them. I want to thank you for talking to me today on this important topic and I would like to ask in the future if there are other similar that occur would you be willing to speak with us again?

Humberto Gayou:

Yes of course, Steve, thank you very much for this opportunity

Tecma Group of Companies:

Have a wonderful day.

Humberto Gayou:

Thank you, you too.

Remember, relevant and useful Mexico manufacturing content is available at one’s finger tips by downloading the Tecma Group mobile app from the Google Play Store, interested parties can also receive Mexico manufacturing information on a weekly basis by SMS Texting the word Tecma to 96000.

Photo credit: Mike Goren

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