Tax Credit for VAT and STPS (Mexico)

Overview

The maquila and manufacture industry is one of the biggest and important industries in Mexico; Furthermore, such industries have been growing rapidly in the last years; their establishment in Mexico of the biggest transnational companies is proof of this fact. Therefore it is important to ensure the competitiveness of such industries in global markets.

Having this in mind and through several efforts of the legislative branch, on January 1st, 2014, the Ministry of Treasury, through the Mexican Revenue Agency, published the 6th amendment to the General Regulations on Foreign Trade Matters for 2013 (the "Regulations") in the Federal Official Gazette, to be effective on the same date of publication. Such amendments incorporate new sections to the Regulations (from the s. 5.2.13 to s. 5.2.17) that apply to IMMEX companies, and companies that operate Bounded Warehouses ("Recintos Fiscalizados"), Strategic Bounded Warehouses ("Recintos Fiscalizados Estratégicos"), and Fiscal Warehouses ("Depósitos Fiscales"), in order to obtain a certification that aims to grant a 100% tax credit for Value Added Tax (VAT) and the Special Tax for Products and Services (STPS) on temporary importations that would start being paid as of January 1st, 2015.

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HOW TO APPLY?

To obtain the tax credit, companies must apply for a Certification, through the Revenue Agency System ("Solicitud de Certificación en Materia de IVA y del IEPS"), at the website www.ventanillaunica.gob.mx

In general terms, companies in good legal standing with their tax and customs obligations, may be able to obtain the certification on VAT and STPS, classified under one of the following categories: "A", "AA", or "AAA".

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REQUIREMENTS

Some of the requirements that companies must meet to obtain the certification are the following:

• Have an inventory control according to the applicable tax and customs regulations, specially Annex 24 of IMMEX Decree. Obtain a positive opinion from the Ministry of Tax, in terms of article 32-D of Federal Fiscal Code, regarding fulfillment of tax obligations issued with at least 30 days prior to the filing of the application. Such opinion must refer not only to the company, but also to its shareholders, legal representatives (powers of attorney), and members of the Board of Directors or Sole Administrator. Not to be included in the List published by the Mexican Revenue Agency in the Federal Official Gazette, in accordance to the Art. 69 and 69-B of the Federal Fiscal Code. Have valid digital stamp certificates, in accordance to the Federal Fiscal Code. File the documents regarding the personnel registered with Social Security Institute, and the proof of payment of the applicable social security contributions with respect to at least 10 employees, for the preceding 2-month period of the fiscal year of 2013. File documents evidencing the investment made in Mexico. Submit the name of the costumers and suppliers non-resident in Mexico, with which the company executed foreign trade operations during fiscal year of 2013. To allow access to the Customs Authorities for the performance of visits, audits and inspections.

In addition, the Regulations set forth other specific requirements that apply in particular to IMMEX companies, companies that operate Bounded Warehouses, Strategic Bounded Warehouses, and Fiscal Warehouses, as the case may be. Some of them are the following:

For IMMEX Companies:

• Have an IMMEX program in effect. Register all domiciles in which any activity related to the maquila process is carried out. Evidence that the value of the final products re-exported abroad derived from the maquila process is at least 60% of the value of the raw material imported under a temporary basis during the same fiscal year. Evidence legal title or possession of the premises in which the maquila process is performed.

For automotive industries operating as a Fiscal Deposit:

• Meet with requirements established in rule 4.5.30. Have a valid authorization and not be subject to an administrative cancellation process.

For Bounded Warehouses and Strategic Bounded Warehouses:

• Meet with requirements established by Customs Authorities for the control, supervision and safety of the premises and merchandises. Have a valid authorization and not be subject to an administrative cancellation process.

Likewise, for certifications "AA" and "AAA", companies must fulfill with more provisions in order to obtain such level of certifications (e.g., have an average number of employees during 2013 of at least 1,000).

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BENEFITS

Some of the benefits of the certification program are following:

• Tax credit for VAT and STPS for the temporary importations Performance of the export customs clearance in the tax domicile (only for "AAA" certified companies). To obtain a VAT refund within 10 to 20 days, depending on the category of certification: "A", 20 days; "AA", 15 days; and "AAA", 10 days. Validity of certification depending on the category of certification: one year in level "A"; two years, in level "AA"; and three years, in level "AAA". As long as the companies file a renewal application through the "Ventanilla Digital" system, within 30 days before the expiration.

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OBLIGATIONS ONCE OBTAIN THE CERTIFICATION

Companies that have obtained the certification shall permanently comply with, among others, the following obligations:

• To update the data information of their certification, in case of change of their transporting companies, Bounded Warehouse, and list of non-resident clients and suppliers associated to the production process. To carry out all their foreign trade operations with transporting companies with CAAT registration. For IMMEX companies, to register the entities with which they execute virtual operation, and the entities that perform a sub-manufacturing process ("submaquila"). To timely pay the applicable social security contributions, through the electronic system "SIPARE".

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CANCELLATION OF THE CERTIFICATION

Some of the events that would trigger cancellation of the certification are the following:

• If the company fails to comply with the requirements applicable for the authorization of the Certification. If the company does not prove that the products or materials temporary imported, returned abroad, were transferred or the customs regime was modified. If the tax authorities, as result of an audit, discover that the materials imported for an IMMEX program, are not located within the IMMEX address.

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CERTIFICATION SCHEDULE

Companies that wish to obtain the certification for the year of 2014 shall file their application depending on the company's address considering the territorial coverage of the Local Customs Authority ("ARACE") in accordance to the following calendar:

For the application process, the tax authorities will issue the relevant instructions and manual within 40 days following the publication of the Regulations' amendments. The lack of response by the Tax Authorities within the period above mentioned shall be considered resolved in a negative manner.

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SUGGESTIONS

As result of these new provisions, we suggest to companies with IMMEX program, Bounded Warehouse, Strategic Bounded Warehouse, and Fiscal Warehouse, to start preparing the necessary documents and requirements to submit their applications within the corresponding periods on time.

Additionally, due to amendments to tax and foreign trade laws bring a lot of changes and new obligations to IMMEX entities, we highly suggest to review the operations and conduct a correction plan to adjust to the new obligations applicable to the Companies.

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CONCLUSION

As mentioned before, the maquila and manufacture industry is one of the biggest and important industries in Mexico. Despite this fact and derived from the amendments to tax and foreign trade laws such industries suffered the elimination of the VAT special rate for temporary exports at the border zones, therefore the implementation of the aforementioned certification to obtain the tax credit for VAT and STPS will ensure the competitiveness of the maquila and manufacture industries in Mexico and global markets by helping the companies to achieve an acceptable cash flow with the refund of the VAT.

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ADDITIONAL RESOURCES

• Manufacture, Maquila and Service Industry (IMMEX), Economy Ministry (2014)

• Economy Ministry Guidelines for the Fulfillment of the Certification Application, Tax Ministry (2014)

• Rules and General Guidelines in Foreign Trade Matters, Tax Ministry (2014)