Manufacturing in Mexico: Operative Compliance for IMMEX

Please review the first post of this series, Maquila Manufacturing in Mexico: Key Milestones.

Once you’ve completed the pre-operative phase, your focus shifts to maintaining and optimizing your operations in Mexico. This phase includes all ongoing operations compliance for the key functional areas of a maquila (IMMEX) facility in Mexico.

All IMMEX operations in Mexico must comply with certain requirements both at the federal and local level. In addition to specific requirements, there are basic compliance material that all manufacturing operations in Mexico must abide by. 

1. Financial Management

Maintain accurate financial records, submit timely tax returns, and ensure continuous compliance with financial regulations. To achieve a well-elaborated financial statements, it is essential to have accounting policies that assist administrative personnel in the way in which accounting records should be made and the way in which your accounting team should prepare the financial statements of the company.

Mexican Financial statements are in accordance with the International Financial Reporting Standards and must be elaborated in Mexican pesos and values are rounded to thousand of pesos.

Tax Declarations and Payments:

Mexico has a comprehensive tax system, and understanding the tax implications for your IMMEX operation is vital. Proper tax planning and compliance will contribute to the financial success of your operation.

• Income Tax - a federal tax payable at a 30% rate, like a direct tax on the profit obtained in Mexico. For IMMEX, the Safe Harbor regime is used, applying the higher rate between (1) 6.5% of annual costs and expenses, and (2) 6.9% annual value of domestic assets.

• Value-Added Tax - payable at a general rate of 16% on sales of goods and services, import of goods and lease payments. Some exemptions apply. Declarations must be made on a monthly basis and some credit opportunities exist.

• Payroll Tax - a state fee applicable over the labor force cost. It is declared monthly to the Finance Secretary of the corresponding state, and ranges from 2-3% of payroll.

• Profit-Sharing - employers in Mexico are obligated to pay workers a share of the profits based on their annual tax declaration. The amount to be distributed among the workforce is 10% of the profits before income tax.

• Interests, Royalties and Technical Assistance Fees - Interests paid to a resident abroad with permanent establishment in Mexico are subject to a withholding tax rate of 4.9% to 35%. Royalties paid to a resident abroad are subject to a withholding tax of 35% and the rate may be reduced with a tax treaty. Technical Assistance paid fees are subject to a 25% withholding tax, unless the tax is reduced with a tax treaty. 

• Property / Real Estate Tax - In Mexico, the acquisition is between 2-4% of the assessed value of the property at the moment of the purchase. Then it will be paid annually and is calculated at a fraction of the value of the property. 
  
  

VAT Refund:

In Mexico, VAT (value-added tax) is payable at a general rate of 16% on sales of goods and services, import goods and lease payments. There exist some exemptions such as the sale of medicines, food products and related, primary sector activities such as agriculture and livestock, sale of land, residential construction and rentals, medical services, salaries and wages.

VAT declarations must be done on a monthly basis in the subsequent month of the tax dispersal. When a company has paid more VAT in purchases and expenses than VAT collected from clients/sales, it can be credited against future payment of VAT. Taxpayers in Mexico have the right to request the surplus VAT balance within 5 years of filing. Based on the information submitted, the Tax Authority in Mexico will have the faculty to authorize, partially authorize, desist or deny the application of the VAT refunds.

Deadline for filing a VAT Refund Request:

Other tax incentives may be available depending on available programs and location. For example, Mexico's northern and southern borders receive a 50% tax credit on their VAT payments as well as a 2/3 Income Tax credit. Restrictions apply.

Tax Incentives

VAT payments on temporary goods associated with the IMMEX Program can only be exempted if the taxpayer has the IMMEX Program certification and VAT Certification. When a company operates under these programs, the right control of the temporary goods is indispensable for the success and the compliance with the Tax Authority (SAT). 

There are also tax incentives for companies operating within the northern and southern border zones. This benefit consists of a tax credit equivalent to 50% of VAT that, as a facility, will be applied directly on the rate of 16%, so that a reduced rate of 8% results. Additionally, taxpayers operating in the zone pay only 2/3 of the income tax caused by the income carried out on activities located in the zones.

Additional incentives may include:

• Foreign tax credits
• R&D tax credits
• Employment of vulnerable populations
• Some real estate or capital investments

Most recently, the Mexican federal government unveiled substantial tax incentives for companies operating in the southern part of Mexico, dubbed the Inter-Oceanic Corridor that connects the Pacific port of Salina Cruz in Oaxaca state with the Gulf coast hub of Coatzacoalcos in Veracruz.

Outsourcing and Vendor Compliance

The Federal Government, seeking to promote the best practices in the outsourcing services, on April 24th, 2021 published the new rules where the main objective is to ban the outsourcing schemes allowing the specialized services as non part of the core business of an entity.

These are the major changes:

• The new regulation prohibits outsourcing of direct workers and direct personnel. With this change operative structures having two companies (one for operations and another for personnel) are forbidden.
• Outsourcing of specialized services is allowed (as long as the services to be rendered are not part of the company’s main economic activity or corporate purpose as described in the company’s by-laws).
• Companies providing specialized services will require a new registration before the Labor authority. Staffing agencies can provide support in recruitment, selection, training, among other activities, and will be considered intermediaries.
• Shared services provided among companies of the same group will be considered specialized services. All specialized services will require a written contract indicating in detail the purpose of the services to be provided or the works to be executed and the approximate number of workers who will take part in the execution of such contract.

The compliance with the Outsourcing reform must be in an internal and external dimension, companies must monitor the processes of their suppliers to ensure their compliance and to keep your company safe of suppliers that do not have good practices and may put in risk your company operation. Currently with the reform, its a joint responsibility between companies and suppliers to meet with the requirements.

These are the main aspects to meet:

• Legal - Legal documentation of the company and its suppliers
• Fiscal - Positive opinion with the Tax Authority
• Employer obligations - Positive opinion with the Social Security and Housing Fund
• Contractual concordance - service contract with clients and suppliers is related to their predominant economic activity
• Specialized Services Compliance

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2. Human Resources Management

There are many key functions and activities that are both legally required and commonly provided for engagement and retention of talent within an IMMEX manufacturing facility in Mexico.

Unions in Mexico:

In Mexico, unions typically represent hourly employees. Strictly speaking, no one is forced to join a union, but if workers wish to do so, the company would be required to sign a collective bargaining agreement following the labor procedure. 

Typically union agreements include some combination of an annual fee or deposit from the company plus employee quotas which are usually deducted from their salary. Generally this deduction amounts to 2-5% of employee salary. No fee structure is established by law. 

Promotion Systems:

Promotion systems should be transparent, published, and based on evaluations. Salary increases are based on the following criteria: absenteeism, safety, training metrics, quality certifications, seniority, production knowledge, and technical abilities. A performance evaluation is typically applied once or twice per year, with an adjustment in salary being applied annually according to the results of the evaluation, and consideration of the cost-of-living in Mexico. 

As a best practice, regularly review and update salaries and benefit packages to stay competitive in the market. Continue to hire and train personnel as your operation grows.

Training Program:

All employers in Mexico are required to provide training and instruction for their employees, have a program available at the workplace, and register is before the Ministry of Labor, if required. 

Companies with more than 50 employees must establish a Joint Committee for Training, Instruction and Productivity, comprised of equal representatives from company and employees. 

Specialized Services:

Outsourcing services or execution of specialized works are allowed in Mexico, only when the core business of the company is not being contracted from a 3rd party. The outsourcing entity must have a registry issued by the Ministry of Labor, known as REPSE. There is a monthly reporting requirement for hiring any specialized services, including required data from both parties.

It is important that these specialized service providers (including transportation, cleaning services, private security, etc) have compliance with their payroll, as well as their fiscal and tax requirements. It is a best practice to obtain this verification each month in order to avoid doing business with a non-compliant provider, which could have negative repercussions on the company in Mexico.

Continue reading about HR compliance by downloading the free Employment Law ebook.

3. Trade Compliance

The IMMEX Program is an instrument which allows the temporary importation of goods that are used in an industrial process or service to produce, transform or repair foreign goods imported temporarily for subsequent export. 

The primary goal of the IMMEX Program is to enable foreign companies to manufacture in Mexico through cost-efficient methods and incentives while still focusing on the quality of goods being produced. 

"Maquiladoras" are factories in Mexico run by foreign companies, making goods for the export market. They operate under a preferential tax and fiscal program, giving them advantages for operation.

Effectively managing imports and exports is essential for maintaining a smooth supply chain. Efficient warehousing and distribution are vital for timely delivery of products.

Customs and Trade Regulations:

The National Customs Agency (ANAM) is responsible for inspecting goods entering and leaving Mexico. For manufacturing companies, its important to coordinate between a Mexican and a U.S. customs broker, authorized for "clearing" goods through customs for importers and exporters. They prepare documents and/or electronic submissions, calculate and pay taxes and duties. Importers with products qualifying for preferential treatment under the USMCA Certificate of Origin must ensure compliance on their presented documentation.

Additional to duties and taxes, other regulations may include permits, quotas or special licenses. Import duties depend on the HTS Classification Code of goods to be imported. Some cases also require providing documents that demonstrate the compliance with Mexican product safety and performance regulations. There are additional duties applied to certain products.

In 2022, the Bill of Lading Supplement became mandatory. This document contains information of the merchandise, locations (origin and destination), as well as the vehicle or the different means of transport. This information is incorporated into an electronic invoice of transfer type or entry with the Bill of Lading Supplement. It is issued by the transportation company and transmitted to the corresponding customs system. 

Inventory Management System:

As a primary requirement of the IMMEX Program, an automated inventory system called Annex 24 must be implemented in the company, in order to effectively track temporary imports under the program. 

The Annex 24 software provides all of the reporting requirements for the inventory management compliance of the IMMEX Program. The software will include any general taxpayer information of suppliers or customs representatives and all customs declarations including descriptions of materials and their usage. Reports will pull necessary information in order to prepare necessary reports to meet the IMMEX compliance requirements.

The risk of error in the Annex 24 system requirements can be very impactful, including tax penalties and the potential loss of import duty reduction programs. It could also lead to the loss of the IMMEX certification

VAT Certification:

VAT, or value-added tax, is similar to a sales tax in Mexico, payable at a 16% rate. It is applied on the sales of goods and services as well as lease payments and imports of goods and services. Temporary imports under the IMMEX Program and similar programs are subject to the general 16% VAT rate. Such imports may qualify for VAT relief when obtaining special certification from the tax authorities related to the adequate control of such imports. The relief is applied in the form of an immediate VAT credit when clearing customs, which means that the temporary import is done on a cashless basis for VAT.

The most common reasons why a VAT Certification could be cancelled is for non-compliance over the following areas:

• Discrepancies between the actual discharges of materials and the discharges recorded in the inventory and control system
• Discrepancies between the quantities and values declared in custom entires and those physically exported
• Discrepancies in the identification data of machinery and equipment declared in customs entries compared to the actual identification data of the machinery and equipment
• Electronic customs filing for machinery, equipment, tools and raw materials imported by the Mexican Entity
  
  

Authorized Economic Operator:

Participating in Mexico's AEO Program yields substantial benefits, simplifying administrative processes, reducing customs inspections, permitting priority in inspection lines, and granting access to exclusive lanes. Operators can also benefit from extended timeframes for temporary import of goods and increased flexibility for amendments and corrections after customs clearance. 

If a company has already been certified by the USA Customs and Border Protection (CBP) Program, CTPAT, Mexican Customs recognizes the certification by simplifying the certification process. They will experience an expedited AEO process after a joint inspection between CBP and the SAT (Mexican tax authority).

Trade Agreements:

Mexico is part of 13 trade agreements, including the U.S.-Mexico-Canada Agreement which includes a chapter on facilitation that addresses various aspects of trade between the three member countries. Special rules apply to automotive goods, such as regional content calculations, labor content and use of steel and aluminum for producers within North America.

4. Safety and Environmental Compliance

Regularly review and update your environmental and safety protocols to ensure a safe working environment and compliance with evolving regulations.

Hazardous & Non-Hazardous Waste Permit

Industrial processes generate a variety of wastes (solid, paste, liquid or gas) that can be corrosive, reactive, explosive, or toxic, that can present risks to the human health and to the environment. The Official Mexican Norm NOM-052-SEMARNAT-2005 outlines the list of hazardous wastes.

For companies that generate waste, they will require a special permit to comply with federal and local laws. Various documentation is required regarding the identification and legal registration of the company, location, operational license, flow diagram of the process, type and quantity of wastes, laboratory analysis, service contacts, waste water study, and payment of services.

For the transportation of hazardous waste, an authorization must be granted for the recollection and transportation, outlining the previously obtained federal permit, vehicle registration, waste registration and all transportation requirements that pertain to the operation of the vehicle on public property.

Health and Safety:

There are 41 official Mexican NOMs in health and safety material in the workplace, outlined by the federal STPS in Mexico. Some of the most important and applicable operational requirements for manufacturers include: 

• EHS Personnel & Safety Procedures

• Workplace Health Studies

• Emergency Response Systems

• Hygiene in Food Systems

• Psychosocial Risk Factors

• Safety Conditions in the Workplace

There are other governmental agencies with specific requirements for maquila manufacturers in Mexico, including COFEPRIS. The Federal Commission for the Prevention of Health Risks (COFEPRIS) regulates food/beverage products as well as supplements, cosmetics, medical devices, cleaning products, medicines, and more. It also regulates commercial establishments that offer services related to the physical and mental health of persons. 

Each employer in Mexico must create a Health and Safety Commission to investigate the causes of illness and accidents, and to propose resources to avoid them. 

Environmental Monitoring:

During the manufacturing operation, there are various reporting requirements, policies and procedures, deviation detection, correction actions development, implementation, mandatory periodic inspections and audits. It is important to design an Environmental Health & Safety Management System according to the quality systems of ISO 14001 & 45001, providing systemic compliance with the applicable legal requirements on the EHS matter. 

The operative compliance of the manufacturing facility in Mexico is dictated by the Mexican NOMs, outlined in the federal SEMARNAT (Ministry of Environment and Natural Resources) & STPS (Ministry of Health). Some of the most important and applicable operational requirements for manufacturers include: 

• Waste, Materials & Management

• Monitoring of Emissions

• Environmental & Wildlife Impact

• Maintenance and Operational Safety

• Safety Conditions in the Workplace

For more information, consult our free EHS Regulation in Mexico e-book.