Hidden USMCA Compliance Pitfalls for American Companies in Mexico

This blog was last updated on January 22, 2020

As part of the recently updated “new NAFTA,” or USMCA, Mexico is enticing companies to move operations into its maquiladora zone of factories along the US border. Major benefits of relocation include exemptions from value-added tax (VAT) and other taxes for qualifying manufacturers, along with a VAT rate reduced by half applied to local transactions carried out by businesses located in the zone. 

But the advantages of moving to the maquiladora zone come with potentially costly pitfalls with VAT compliance. Companies that aren’t prepared to comply with electronic invoicing and electronic accounting mandates could lose fiscal incentives and could also be subject to fines and penalties. The scope of the mandates includes not just transactions involving raw materials or manufactured goods but also digital goods or services, outsourcing services, and virtual imports and exports.

 Mexico already has one of the most complicated systems for VAT control in the world. Making a move to the maquiladora zone under the new USMCA agreement, while potentially a cost-saving move for US multinationals, will only add to the complexity. Here are a few factors US-based companies need to take into account regarding VAT compliance when making the maquiladora move.

American manufacturers don’t automatically become maquiladoras

Just building and opening a factory south of the US border is not sufficient for receiving VAT breaks from the Mexican tax administration, the SAT. Maquiladora owners must be in compliance with tax mandates in order to earn what’s known in Mexico as Immex status, which grants US companies the tax relief they seek from opening operations in the maquiladora zone. 

Immex status is not a sure thing for US manufacturers, and it’s not permanent. The SAT, will only grant Immex status to manufacturers if they have cleared all tax liabilities and have their compliance initiatives in order. The SAT awards three Immex certifications—A, AA and AAA—with each “A” representing the number of years the status is valid. 

The SAT can audit maquiladoras at any time and downgrade or revoke their status. Losing Immex status would not only cut into cash flow for maquiladora owners but would also increase operating costs and disrupt supply chains. US companies need to work closely with the SAT to ensure that details on imports, manufacturing and exports, along with inventory management and accounting records, are in compliance.

The Mexican e-invoicing system is incredibly complex

Even tax experts have trouble tracking all of the supplements involved with a single electronic invoice in Mexico. Compared to some other countries in Latin America, Mexico has kept its core electronic invoice, the CFDI, relatively simple. Whereas an invoice in Chile has 250 fields or more of required information, the CFDI only has about 50. 

Mexico pursued a different approach, requiring supplements, or complementos, to invoices for different business and transaction types. Complementos are add-ons to the core CFDI that contain specific information about the nature of a transaction. For instance, there is a complemento for reception of payments (complemento de pagos) and another for companies operating in the oil and gas industry. Get complementos wrong, and a manufacturer gets Mexican e-invoicing wrong, which can lead to fines, penalties and disruptions to the manufacturer’s supply chain. 

Just taking a high-level look at the Mexican e-invoicing universe reveals its complexity, as Spanish phrases and components of the mandate swirl into a confusing mass. Companies need to have AR and AP process in line in order to achieve and maintain compliance in a country with some of the toughest and most demanding VAT enforcement controls in the world. 

Mexican e-invoicing mandates can change suddenly and frequently

E-invoicing mandates are by no means static. Changes can come quickly and give companies limited time to adjust. Last fall, the SAT extended a significant complemento to include maquiladoras. The administration also changed its process for cancelling e-invoices in Mexico, requiring companies to react with shifts on both AP and AR compliance practices. 

It’s nearly impossible for manufacturers themselves to keep up with the frequency and complexity of changes in Mexican tax mandates, but missing mandate changes can put Immex status, and the tax breaks that go with it, at risk. 

The USMCA includes some welcome nods to US companies considering opening or expanding maquiladora operations, but by not property addressing compliance, manufacturers that rush into a move south of the border could be putting those advantages, as well as their businesses themselves, at risk.