August 7, 2019
By Marcos Carrasco Menchaca, Foley & Lardner LLP
When automotive part manufacturers or suppliers are looking to settle operations in Mexico, they typically request guidance regarding incorporation into the IMMEX (Manufacturing, Maquiladora and Export Services Industry) program.
Among the reasons to request such an incorporation, I usually hear that they have been asked by their clients to obtain it so that the client may receive temporary imported goods without having to pay duties and applicable taxes upon the client’s transfer, and can acquire the goods without paying Value Added Tax (VAT) upon their sale.
The IMMEX program offers economic benefits to qualifying companies that import goods into Mexico to be used in the manufacture of final products that are then returned abroad, or in rendering export-related services (including warehousing and distribution, among others). However, before rushing to obtain an authorization to operate under the IMMEX program, companies need to fully understand the program’s modalities, benefits and primary obligations.
Furthermore, before moving forward, a company should conduct a thorough analysis to determine if operating under the IMMEX program will actually benefit it, or if there may be other – simpler – trade facilitation instruments in Mexico from which they may benefit instead (e.g., when applicable, diminished import duties through Sectorial Programs known as PROSEC, or duty drawbacks). This is important to consider first, as the IMMEX program entails significant administrative burdens to authorized companies and non-compliance might have serious tax and even possibly criminal consequences.
Below you will find a brief explanation of the IMMEX program, how is it obtained, its modalities, benefits and the main obligations to comply with.
The IMMEX program characteristics, modalities, and requirements to obtain an authorization are found in what is known as the IMMEX Decree (formally, the Decree for the Promotion of the Manufacturing, Maquila and Export Services Industries), as well as in the General Foreign Trade Rules and Criteria issued by the Mexican Ministry of Economy.
The IMMEX Decree establishes 5 modalities under which an IMMEX program may be authorized. Within the most popular modalities in which companies enroll in the program, we find the (i) industrial, (ii) services and (iii) shelter options.
As a general rule, IMMEX authorized companies are entitled to import machinery, equipment and raw materials under a temporary basis, and take advantage of particular benefits upon such importations. For instance, they may benefit from an exemption in the payment of import duties, use preferential fixed customs processing fees and, when applicable, be exempted from the payment of antidumping or countervailing duties. It is worth noting that duties need to be paid upon the temporary importation of machinery and equipment.
While machinery and equipment may remain imported under a temporary basis and kept in Mexico under the IMMEX program as long as it is in effect, raw materials may remain in Mexico only for 18 months (as a general rule), time during which they must be incorporated into finished goods and exported, or imported on a definitive basis.
Depending on the specific operation to be realized by the IMMEX-authorized company, the permanence period may be reduced to 6 months. When an IMMEX company receives products from another IMMEX, the receiving company may virtually import them under a temporary basis. The period of time for this particular virtual importation would be 6 months instead of 18.
An important benefit of the IMMEX program is that companies can then apply for a Value Added Tax Certification, which would allow them to avoid paying the applicable VAT upon the importation of goods used in their manufacturing operation (either raw materials or machinery and equipment). In addition, VAT Certified companies are granted an extended permanence period for temporary, imported goods of 36 months.
For some companies, the VAT Certification may be the only reason to apply for the IMMEX program. For example, if an operation involves the importation of goods originating from a Free Trade Agreement entered into by Mexico, such as the North America Free Trade Agreement (NAFTA, eventually turning into USMCA) or the Agreement with the European Union (EUFTA), the only contribution to be paid upon the importation will be VAT; hence, the VAT Certification will eliminate the cost resulting from paying said contribution.
IMMEX companies are subject to stringent obligations, and their compliance is closely watched by the Mexican Tax and Customs Authorities.
Among the obligations that an IMMEX shall comply with, it has to: (i) carry out annual export sales greater than USD $500,000, or representing at least 10% of its total sales; (ii) keep an inventory record in an automated inventory control system; (iii) return abroad temporary, imported goods within their authorized entry period; (iv) submit an annual electronic report on the total sales and exports; and (v) submit monthly information for statistical purposes, among others.
IMMEX authorized companies are required to comply with additional controls when using third parties to perform sub-manufacturing activities, or when carrying out sales and transfers of finished goods to OEMs.
In my experience, the area in which IMMEX companies usually fail to comply is in maintaining an updated automated inventory control system. Complying with an updated automated inventory control system implies having a specific software that records and reports: (i) entries of temporary imports; (ii) production bills of materials; (iii) exits of finished products through exports, definitive imports or destruction; and (iv) existing balance.
In industrial IMMEX companies, the purpose of the system is for the authorities to verify the use of temporary, imported materials in the production of goods and its timely exportation abroad or definitive importation (when destined to the Mexican market).
Furthermore, auto part manufacturers must be aware of specific controls established for transfers from IMMEX companies to OEMs. The latter are obligated to deliver certain reports called “Constancias de Transferencias de Mercancias” (certificates of transfer of goods) which inform if delivered parts were incorporated into vehicles destined for the local Mexican market, NAFTA or EUFTA countries, or to the rest of the world.
Lastly, the operation of an IMMEX requires the execution of periodic internal audits to verify compliance with general obligations as described and, if applicable, particular obligations pertaining to the automotive sector.
The IMMEX program authorization will remain in force as long as the authorized company continues to meet the requirements of the program and complies with its IMMEX-related obligations.
Marcos Carrasco Menchaca is a Mexico City-based partner with Foley & Lardner’s Manufacturing Industry Team and International Trade Practice. He provides advisory and consulting services related to international trade compliance, and has broad experience in advising companies through the implementation of governmental exportation programs, such as the registration of companies in the IMMEX, VAT certification, Sectorial Promotion Programs (PROSEC) and Drawback, among others. He can be reached at email@example.com.