If you’re a business based in the United States considering nearshoring some manufacturing operations to Mexican territory, you will not only want to understand the Mexican business culture itself but how Mexico’s Value Added Tax (VAT) may impact your operations.

What is the VAT Tax?

Locally referred to as the impuesto al valor agregado tax (IVA tax), the VAT is traditionally applied to all goods imported to Mexico, with some important exceptions. What is IVA in Mexico? The VAT is a 16% tax, applied in the following broad scenarios:

• When goods are imported.
• When goods are sold.
• When independent services are rendered.
• When goods are used.

The IVA or VAT can be thought of as a single, standardized tax rate that is applied nearly equally across the country and at each point along the supply chain. If a good is sold in Mexico, the VAT tax is baked into the sale price. In this way, the VAT functions as Mexico sales tax. This tax exists in addition to other fees associated with manufacturing or transporting goods through the country. A notable exception to the 16% tax rate is the northern border region, which enjoys a lower 8% VAT tax rate.

How is the VAT Tax Calculated?

On imports, the 16% VAT is calculated based on the Free on Board (FOB) price, or rather the price the good had when it left the U.S. plant it originated from, plus any additional freight charges, insurance, or duties incurred along the way. This also highlights that the Mexico IVA is applied to Mexican imports in addition to any import duty.

An important fact to note about the Mexico vat tax is that it is an indirect tax that is passed along at each point of a good’s journey from plant to end consumer. The end-consumer is the party that is ultimately responsible for paying the VAT. Each business entity that temporarily takes possession of the goods along the way recovers its portion of the IVA from the next buyer. In this way, the VAT is passed from entity to entity along the supply chain.

VAT Tax Exemptions

There have been certain exemptions to the IVA tax law. Most notably among these was an exemption for temporary imports, which allowed maquiladoras in Mexico and their import partners to pay no VAT tax on the materials sent to Mexico for processing, assembly, or finishing. While goods finished by a maquiladora are considered exports, the Mexico VAT on exports applies at a 0% rate, which means that no VAT is payable. 

While maquiladoras were traditionally exempt from any VAT tax, that precedence changed with substantial revisions to the law in 2015. The law revisions stated that maquiladoras would need to obtain a certification from the Mexico Revenue Service. Known as the Excise Tax Certification program, or more commonly as the VAT certification, this certification process gave business entities specific exemptions from the requirement to pay the VAT. 

More recent revisions to Mexico’s VAT laws in January 2020, as well as proposed changes in June 2020 in response to the COVID-19 pandemic, have introduced substantial changes that foreign businesses must be mindful of. Though many of the same benefits that applied to VAT certified companies under the 2015 regime can still be achieved, importers must now obtain the Authorized Economic Operator certification (AEO) to receive those benefits.

Certification Process for Mexican VAT Exemption

Beginning with changes to Mexico’s customs regulations in 2015, the temporary import of goods was required to pay the 16% VAT tax that applied to all other goods imported into the country. 

The exemption didn’t eliminate the VAT tax entirely. Instead, the VAT Mexico tax was due at the time of importation. Importers that held a VAT certification were granted an immediate credit for the VAT amount. Refunds were then issued for VAT taxes paid on temporarily imported goods, with refund speeds tied to the tier of the VAT certification. Those tiers were AAA, AA, and A. Entities that held the higher tier certification, such as AAA, not only received higher VAT refund speeds but also received other benefits like the ability to keep temporarily imported goods in Mexico for a longer duration.

Certifications under the 2015 VAT regime were processed through the Mexican Revenue Service. Each different tier of the certification, AAA – A, had different requirements. These requirements verified that the applicant met certain inventory and compliance measures. For maquiladoras, re-exported finished products were also required to be at least 60% of the value of temporarily imported raw materials.

For importers holding a AAA VAT certification, VAT refunds were issued in 10 days. AA certification holders had refunds issued in 15 days, and A certification holders had refunds issued in 20 days.

 

2020 Changes to VAT Tax

Substantial changes to the Mexican VAT were introduced in an amendment to Mexico’s customs regulations on July 24, 2020. These changes impacted everything from the certification process to refund speeds and introduced a new certification called the Authorized Economic Operator certification (AEO). These changes are very important for importers to understand, particularly if they haven’t applied for an AEO certification yet.

The July 24, 2020 amendments introduced the following changes to how the VAT for temporary imports is handled:

• The amendments eliminated the accelerated refund process for VAT certification holders.
• The length of time that temporarily imported goods could remain in the country was reduced.
• Moving forward only companies that hold an AEO certification can issue a pedimento, or virtual declaration, transferring imported inventory to Mexican residents. If the inventory is transferred to another maquiladora in the country, that maquiladora must also hold an AEO certification in order to export the goods.

These new requirements complicate the VAT exemption landscape. The top-level conclusion of these changes are that, in order to experience many of the benefits from the previous VAT Certification exemption regime, maquiladoras must hold an Authorized Economic Operator certification. For example, the recent changes reduced the amount of time temporarily imported goods can stay in the country from 36 months for AAA certification holders, to 18 months for everyone. However, importers that hold an AEO certification can extend this timeline to the full 36 months that existed under the old regime.

The removal of the tiered refund process should also be noted, as it will impact the cash flow of many maquiladoras. Under the new amendments, VAT certification holders will no longer receive an accelerated VAT refund. Under the amendments, all companies can now expect to receive VAT refunds through the general refund process, which can take up to 40 days.

Another notable addition to the new tax reforms may not necessarily impact maquiladoras but will have a big impact on the digital domain. Digital services now fall under the umbrella of the VAT rules. This affects a wide range of digital products, such as movies, downloads, games, dating websites, and much more. A VAT obligation will now exist for any business-to-business or business-to-consumer activity where a digital service is delivered.

June 2020 VAT Proposal

Additional changes to the IVA tax Mexico were recently introduced to the Mexican Congress in June 2020. These changes were drawn up in response to the COVID-19 pandemic as a way to provide some measure of relief for importers.

The core change introduced in the June 2020 proposal is to temporarily lower the value-added tax rate from 16% to 10% through the end of the fiscal year. This is great news for importers, particularly importers of digital goods who only recently became responsible for a VAT on digital imports. 

This reduced rate will not apply to the northern border region of the country. In this region, the VAT rate is already lower (8%) than the proposed changes. Instead, the proposed amendment seeks to define this northern border region and add a similar region on the southern border of Mexico. This border region will be a 20km strip that runs parallel to the northern and southern borders of the country. In the north, the states of Baja California, Baja California Sur, Quintana Roo, Caborca, Cananea, and part of the state of Sonora will be included in this border territory and be subject to the 8% VAT rate it enjoys.

The June 2020 proposal is currently making its way through the legislative process and may be subject to changes. Should the proposal be enacted, it will be valid until December 31, 2020.

How Your Company Can Be Duty and Tariff Free

Two laws that are very important for you to understand are Section 321 and the IMMEX program. By utilizing and understanding both of these laws, your business will bypass paying duties in America and Mexico.

If you are thinking about manufacturing in Mexico, take the time to speak with one of our knowledgeable representatives about how the VAT might impact your imports and how to take advantage of the IMMEX program and Section 321. 

Understanding the most recent regulatory changes to this regime is essential for gaining insight into how they might impact your nearshoring operations. Contact us today to learn more!

Sources:

1. “Mexico Amends Customs Rules for 2020, Impacting Maquiladoras and Others.”https://taxnews.ey.com/news/2020-1966-mexico-amends-customs-rules-for-2020-impacting-maquiladoras-and-others?uAlertID=Sd%2FG8rua1oj6%2Fl58EZ2AiA%3D%3D
2. “Mexico: VAT on Digital Services Provided by Foreign Residents Without Permanent Establishment.”https://home.kpmg/us/en/home/insights/2020/05/tnf-mexico-vat-digital-services-provided-foreign-resident-without-pe.html
3. “Fiscal Taxes & Customs Duties for Maquiladoras.”https://www.braumillerlaw.com/fiscal-taxes-customs-duties-for-maquiladoras/
4. “Value Added Tax (VAT): Impacts on the Maquiladora Industry Began Jan. 1, 2015” https://www.natlawreview.com/article/value-added-tax-impacts-maquiladora-industry-began-jan-1-2015-0
5. “Mexico – Pricing” https://www.export.gov/apex/article2?id=Mexico-Pricing
6. “Mexico: Proposal to reduce VAT rate to 10% (COVID-19)” https://home.kpmg/us/en/home/insights/2020/06/tnf-mexico-proposal-to-reduce-vat-rate-to-10-percent-covid-19.html#:~:text=A%20tax%20legislative%20proposal%2C%20presented,remainder%20of%20fiscal%20year%202020.
7. “Flash: Mexico – Tax reform initiative to reduce the VAT” https://home.kpmg/mx/es/home/tendencias/2020/06/flash-mexico-tax-reform-initiative-to-reduce-the-vat-rate-to-10-in-2020.html
8. “Mexico – Changes to Foreign Trade Rules” https://www.internationaltradecomplianceupdate.com/2020/07/31/mexico-changes-to-foreign-trade-rules/