Manufacturing Compliance Regulations in Mexico
September 28, 2019
In recent years, the global manufacturing landscape has undergone significant changes and developments. This shaking up of the status quo has loosened China’s grip on the market, providing openings for other world players seeking to carve out their own niche within the manufacturing industry. One such beneficiary of this trend has been Mexico, which has seen an increasing rate of U.S. companies doing business in Mexico.
Today, according to NAFTA, “There are 2,860 maquiladora companies operating in Mexico with nearly 90% of them in the border zone. These companies have a combined gross production of $85.74 billion and represent 55% of Mexico’s manufacturing exports.” Seeing this budding opportunity, if you wish to expand or move your manufacturing facility to Mexico, there are several steps you must take in order to ensure that the transition is successful. One such step involves understanding and complying with the country’s various manufacturing requirements and processes.
Curious what those are? Read on to learn about manufacturing compliance regulations in our comprehensive guide.
Manufacturing in Mexico
In order to begin incentivizing manufacturing practice within its borders, the Mexican government created IMMEX, (Maquiladora, Manufacturing and Export Services Industry). Also known as the Maquiladora Program, it had three primary goals:
- Draw foreign investment into manufacturing in Mexico
- Push industrialization and thus stimulate the Mexican economy
- Increase employment opportunities
While this successfully incentivized some American companies to set up shop south of the border, it wasn’t until the further additions of NAFTA and USMCA that Mexico truly became a manufacturing powerhouse. These programs created benefits such as:
- Duty-Free – Manufacturers classified as maquiladoras are able to import production equipment, assembly components, and import materials duty-free so long as they’re eventually shipped out of the country.
- Skilled Workforce – The specialization of the manufacturing created a diverse and technically skilled labor force in all areas of manufacturing including:
- Machine operation
- Low Shipping Costs – Mexico’s relative proximity to the states decreases delivery times and transportation and warehousing costs, particularly compared to China.
- Decreased Trade Risks – The mutual trade benefits created via USMCA decreases the likelihood of trade disruptions.
- Low Labor Costs – Per Trading Economics, fully burdened employees cost approximately $4.75 per hour and employees with base salaries and incentives make approximately $5.90 per hour.
Manufacturing Compliance Regulations in Mexico
The General Directorate of Standards (DGN) is the governing body that manages and coordinates regulatory compliance standards within Mexico. They work both domestically and with other bodies such as:
- International Organization for Standards (ISO)
- Pan American Standards Commission (COPANT)
- Electrotechnical Commission (IEC)
- Codex Alimentarius
In regard to trade and manufacturing standards there are two primary standard-setters according to export.gov they are:
- “Official Mexican Standards (NOMs) – NOMs are technical regulations, including labeling requirements, issued by government agencies and secretariats. Compliance is mandatory. Any bureau, person, or council can propose the creation or modification of a NOM to the appropriate committee.
- Mexican Standards (NMXs) – NMXs are voluntary standards issued by recognized national standards-making bodies. Compliance is mandatory only when a claim is made that a product meets the requirements of the NMX, when a NOM specifies compliance with an NMX, and whenever specified in government procurement.”
Using these bodies, as well as IMEXX and USMCA, the following are some of the laws and regulations for manufacturing companies that you should keep in mind:
Maquiladora VAT Certification
In 2013, President Enrique Peña Nieto’s government passed sweeping tax reforms that applied to various industries within the country, including manufacturing. If maquiladoras in Mexico sought to avoid paying the 16% VAT import tax, they would have to work with the Mexican Tax Authorities (SAT) and the Maquiladora Industry Association (INDEX) by following regulations and achieving SAT certification.
In order to attain VAT exemption, SAT set out a framework of various manufacturing compliance regulations and certification requirements. The certification is available in three categories, “A,” “AA,” “AAA.” As you might imagine, each additional level provides further benefits and also includes further regulatory requirements.
Your manufacturing company must adhere to the following manufacturing compliance requirements:
- Have valid “digital seals.”
- Provide opinion of positive tax compliance issued via SAT.
- Install and maintain satisfactory inventory controls in order to track imported raw materials and goods.
- Show that all employees are registered with the Social Security Institute (IMSS) as well as provide proof of payments.
- Provide documentation of financial investment within the country.
- Let customs officials perform inspections, both initial and impromptu.
Your business must satisfy all of the compliance regulations for an “A” certification as well as the following:
- Now VAT refund request denials in the previous 12 months.
- No tax liability assessments in the previous 12 months.
- At least two-fifths of the Maquiladoras’ previous year’s operations were with suppliers that are certified to be positively tax compliant.
- The business has been operating for at least 5 years, or the business has 1000+ employees registered with IMSS in the preceding year; the value of the machinery and equipment is at least $2.5 million.
Your business must satisfy all of the previously discussed regulations for both “A” and “AA” in addition to the following:
- More than 70% of all operations are with suppliers that are tax compliant.
- No tax liability determination in the previous 24 months.
- The business has been operating within IMMEX for more than 7 years, or the company has 2500+ employees registered with IMSS in the preceding year; the value of machinery and equipment surpasses $5 million.
- No VAT refund requests were denied for more than 20% of all VAT in the previous year.
Rule of Origin
One of the most important compliance regulations in Mexico is the recently amended Rule of Origin (RoO). Rules of Origin are guidelines that are agreed upon in a free trade agreement (FTA) which stipulate what percentage of goods or manufacturing inputs must be imported from the countries within the FTA.
Originally under NAFTA, the RoO was set at a lower threshold. According to a Center for Strategic and International Studies report,
Under NAFTA’s rules of origin, an automobile must contain 62.5 percent regional value content using the net cost methodology for the car or truck to be imported into a member country duty-free. Auto parts must meet a 60 percent RVC using the net cost method to meet NAFTA’s rule of origin. The USMCA includes three methods to calculate RVC: net cost, build-down, and build-up.
During the U.S., Mexico, Canada (USMCA) renegotiations, the rule of origin was amended to stimulate even further investment in North American manufacturing by preventing how much of an automobile’s parts could be sourced from a nonmember. The same report states,
The USMCA contains three rules, all of which must be met to qualify for preferential treatment: an overall vehicle RVC, different RVC thresholds for certain parts, and a labor value content rule. The USMCA contains a 75 percent RVC for light vehicles and light trucks and a 70 percent RCV threshold for heavy trucks.
Although the governing bodies of the USMCA agreed to a three-year rollout, it’s vital that you begin changing your manufacturing process to reflect these compliance changes, particularly if you exist within the auto manufacturing space.
Recently, Mexico has updated its regulatory framework for product safety and quality assurance in order to be compliant with U.S. standards. In the past, these safety regulations were fairly lax, but that is no longer the case. Now, under the new legislation, recall procedures are mandatory and class action suits are finally having some effect.
According to Foley and Lardner:
The Federal Consumer Protection Agency (PROFECO) can now remove or call for repairing defective and insecure products, open investigations on product safety concerns, and impose relevant sanctions to the manufacturing companies in Mexico not complying with product safety standards or that otherwise could harm the life, safety or health of consumers.
Before this, recall procedures only took place on a voluntary basis, now that is no longer the case. So, if you fail to meet product safety standards or recall procedures, you’ll face serious penalties that could be detrimental to both your reputation and your bottom dollar.
Manufacturing in Mexico
The compliance regulations discussed above are amongst the most important for you to know, but simply adhering to just those won’t cut it. These days, there are dozens upon dozens of regulations for manufacturing; many of which depend heavily upon your specific niche within the manufacturing space. Therefore, it’s crucial that you take the time to review all of the relevant compliance regulations and confirm that you’re following them before relocating your manufacturing facility.
Naturally, understanding and complying with a foreign country’s laws can be a tricky subject to navigate. That’s where NAPS comes in. We offer a full-service Administration Compliance Management Program that ensures that your business will comply with NAFTA, USMCA, IMMEX, amongst others. Together, we can help you navigate the changing landscape of Mexico’s manufacturing business and make your expansion or move a success.