Tax Compliance Implications Abound for Maquiladoras in Mexico
Maquiladoras, a special class of manufacturers in Mexico, benefit from reduced tax obligations, making business-to-government compliance accuracy even more critical for the companies holding this status. A change in a manufacturer’s Maquiladora certification would impact its tax rating, increasing tax liabilities and affecting cash flow.
Introduced in the 1960s to increase employment in Mexico, the Maquiladora designation allows select manufacturers to import materials and equipment tariff-free for assembly, processing and/or manufacturing, and then export the finished product. These manufacturers are a significant portion of Mexico’s industrial environment – second only to petroleum – and therefore are a large contributor to Mexico’s overall economy.
This select group of manufacturers includes many of the multinationals operating in Mexico, and they are subject to specific regulations designed to ensure they meet Maquiladora requirements, including satisfying Mexico’s transfer pricing guidelines. As such, compliance with e-invoicing and e-accounting measures in Mexico is especially important to Maquiladoras, as these taxpayers not only risk fines, penalties and operational disruptions for errors, but also risk their tariff-free tax status for imports.
Manufacturers designated as Maquiladoras must keep specific records of their Maquiladora and non-Maquiladora-related activities, and all revenue-generating operations must be related only to Maquiladora activities. These manufacturers cannot earn revenue from any endeavors other than those that are Maquiladora-related, and must create separate entities for local sales, distribution and service-oriented operations. Additionally, Mexico has specific requirements for the ownership of machinery and equipment used by Maquiladoras – again requiring detailed records to prove compliance.
Special VAT incentives apply to Maquiladoras. Specifically, those with certification can credit VAT paid on imports against their VAT obligations, eliminating the need to claim a refund and improving cash flow. However, obtaining this certification requires approval by the SAT, Mexico’s tax authority, meaning that the applicant’s business-to-government compliance initiatives – eContabilidad accounting records, in particular – must be in order, and all tax liabilities must be cleared.
Three types of VAT certifications are available to Maquiladoras – A, AA, AAA, with each “A” representing how many years the certification is valid. Each have separate requirements, but all require significant involvement from the SAT, as well as satisfactory inventory management and accounting records – with details on imports, manufacturing and exports. The SAT can audit Maquiladoras at any time, and may downgrade or revoke certification for compliance issues or errors, which would have significant implications on cash flow, operating costs, supply chain management and, of course, tax liabilities.
Accurate compliance measures are critical to any company operating in Mexico, but Maquiladoras have even more to lose in the event of an error or discrepancy – their tax benefits. That’s why automated receiving, AP processes and reporting are especially important to these multinationals.Contact us to learn how we are automating compliance for some of the world’s largest manufacturers.