Mexican Reform Law to Hit Border Factories With Higher Taxes, Say Mexican Lawyers

“The customs reform, we read it as very positive,” said Edmundo Elías-Fernández of Baker & McKenzie. “The tax reform is quite controversial, because it hits many sectors of the industry -- because they are increasing taxes,” he said.

Customs Changes Include Prior Disclosure, Minor Change for Brokers, Electronic Audits

The customs reform "made a lot of noise," but the changes are relatively minor compared to the tax reform, said Elías-Fernández. One relevant change is the addition of self-disclosure provisions to Mexican customs law, he said. Previously very limited, importers will now be able to self-disclose violations by rectifying their entries, he said. If the self-disclosure is made before an audit, the importer may not have to pay any fine, and any fine that does apply is reduced by 50 percent, Elías-Fernández said. “So the self-disclosure process, even if it is in diapers, has been born,” he said. “We’re going for a full disclosure system … similar to that in the U.S.”

The customs reform law also makes minor changes to Mexican customs brokerage operations, said Elías-Fernández, although the buzz surrounding the changes may be overstated. The law purports to make optional the use of customs brokers through the creation of an in-house representante legal, or legal representative. However, use of outside customs brokers wasn’t completely mandatory in the past anyway, because companies could use an in-house broker, or apoderado aduanal. The legal representative will still be subject to a set of government requirements, said Elías-Fernández. Those requirements are going to be so cumbersome that many companies will rather keep their customs broker than hire an in-house legal representative, he said.

“Frankly, from my perspective it’s pretty much the same,” said Elías-Fernández. Most companies will continue to use outside customs brokers to avoid hiring new staff, he said. “For some companies, it will make sense to have a legal representative,” he said. “For many companies, it will make sense to remain with a customs broker.” Marginal pressure to move customs operations in-house may have some impact on the Mexican customs brokerage industry, however. “This will certainly make customs brokers be more competitive, less expensive, and more efficient,” said Elías-Fernández. “We have to charge less and do it better.”

Finally, the law will also continue Mexico’s move toward completely electronic customs clearance procedures, said Turenna Ramirez Ortíz, a customs lawyer with Sanchez Devanny based in Mexico City. After making electronic filing through their single window VUCEM mandatory in June 2012, Mexican customs authorities will now electronically review the data and automate decisions on whether to audit shipments. Currently, when Mexican customs wants to review a shipment or even a whole year, they notify the importer at its tax address and review customs documentation at their importer’s facility. Now that customs audits will be electronic, “they’re going to do that a little bit faster and without the presence of the importer,” said Ramirez Ortíz.

Electronic audits have ramifications for some importers and exporters, in that it will make it easier for customs to detect mistakes or even differences of opinion, said Ramirez Ortíz. The audits will be faster, and importers and exporters will have less time to prepare a response and defend themselves, she said.

Biggest Changes VAT for Temporary Imports; Certification System Coming Soon

But the biggest changes for trade will come on the tax side, where maquiladoras will be hit with a flurry of new taxes and the elimination of preferential treatment. Of the tax changes, perhaps the most worrisome for the maquiladoras is the imposition of a value added tax on temporary imports, said Ramirez Ortíz. Maquiladoras use temporary importation to source many of the materials they use to produce goods for export. Whereas temporary imports were previously exempt from value added tax, the law will now require payment of VAT on temporary imports, with a refund available once the final good is exported, she said. However, although companies will be able to get their money back through the refund, they'll still have to pay, which will create cash flow problems for maquiladoras, said Ramirez Ortíz.

The Mexican government did pull back a bit from their original proposal for VAT on temporary imports, proposing a system where certified companies will be exempted from payment of the tax, said Ramirez Ortíz. But Mexican industry is still in the dark about how certification will work, she said. The details of the certification system will be set forth in an as-yet-unpublished customs regulation. Ramirez Ortíz thinks the Mexican government may use the existing NEEC certification system, which is similar to C-TPAT in the U.S. The problem is that very few companies currently participate in NEEC, she said. Even with the certification system, however, the VAT on temporary imports does not make for an ideal in-bond system. “[The goods] are not going to remain in the country, and therefore no duties should be paid,” said Ramirez Ortíz.

VAT on Temporary Imports One of Many Tax Changes to Hit Maquiladoras

The VAT on temporary imports will only be one of a flurry of tax changes that will hit the maquiladora industry, said Felipe Chapula Almaraz, a trade and tax lawyer with Cacheaux Cavazos based in Mexico City. While the VAT on temporary imports will take effect one year after the certification system rules are published by customs, other tax changes will take effect Jan. 1.

First, the law will make it harder for maquiladoras to qualify for “safe harbor” and “permanent establishment” protections that currently reduce their corporate income tax rates. Under the tax reform, maquiladoras that don’t export at least 90% of their production will not be eligible for the tax exemptions. That high threshold is different from the IMMEX program’s threshold that maquiladoras Monly need to export 10% of their gross sales, said Chapula. “That minimum now apparently will not be sufficient from the income tax perspective to offer you the protection of safe harbor or permanent establishment,” he said.

And the income tax rates themselves will rise too, he said. A 17.5% special tax rate for maquiladoras put in place by the Vicente Fox and Felipe Calderon administrations in 2003 and 2007 will be eliminated, and maquiladoras will be subject to the same 30% tax rate as other companies, said Chapula. “From the income tax perspective, maquiladoras will be placed at 30% with everybody else, and only maquiladoras that are exporting a [large portion] of their production will have safe harbor and permanent establishment protections,” he said.

Finally, the tax reform puts a VAT on sales when goods that were originally temporarily imported are diverted for sale in Mexico, said Chapula. “Now there will be a VAT on sales when the selling party is foreign, the buying party is a Mexican maquiladora … and the products are physically in Mexico,” if midstream the parent company decides to sell the goods to the maquiladora so they can be sold in the Mexican market. “You’ll have a double VAT, because one is VAT on temporary imports, and the other is VAT on sales, on the goods themselves,” he said.

There are some benefits to the new tax system for maquiladoras, said Chapula. “A good side I see to it with the certification is that they will weed out non-compliant maquilas, or maquilas that are taking incorrect advantage of the IMMEX [maquiladora] decree. However, the new system will take some getting used to, he said. ”I think maquiladoras will take some time to get used to that dual personality -- when you’re exporting act as a maquila, when you’re selling in Mexico you’re going to have to act as a domestic company,” said Chapula. “That duality is the one that’s going to take a little bit more time to digest,” he said.

“There has been a lot of pushback,” said Chapula. “The maquila industry is not happy with these reforms at all.” Most investment won’t leave Mexico as a result of the changes, said Chapula. “A minority may consider leaving and setting up their factory some other place,” he said. “What I do think will be the effect is that, at least for now, new investment will think twice about investing in Mexico, which is very sad,” said Chapula. “I think the new investment will either go to alternate locations or maybe sit tight and see how these things start to develop.”