On October 14, 2024, Mexico’s Servicio de Administración Tributaria (SAT) published in the Diario Oficial (the Mexican equivalent to the US Federal Register), an amendment to the “General Foreign Trade Rules.” The October 14th amendment requires, among other things, that VAT certified companies provide online access to the SAT, including a username and password, to the VAT certified company’s Annex 24 inventory control system. The deadline for complying with this obligation is November 15, 2024.

To understand why this small amendment creates large financial risk to maquiladoras the following background is helpful.

Mexican law provides that Mexico’s 16% Value Added Tax (VAT or, in Spanish, IVA) is owed at the time of importation. In the case of temporary imports, such as those done by maquiladoras (or “IMMEX” companies), the importer may request the return of VAT after exporting the good made by the maquiladora in Mexico.

However, because Mexico’s VAT is rather high (16% of the value of the imported goods), and because Mexican tax authorities strictly review all refund requests -- resulting in only partial refunds and/or a long length of time to obtain refunds -- the majority of maquiladoras have opted to obtain a VAT “certification” from Mexican tax authorities. The VAT certification permits maquiladoras to apply a fiscal credit that effectively eliminates the VAT paid at time of importation, provided the goods are exported out of Mexico. But, certification requires the maquiladora to meet a number of fiscal and tax requirements, including maintaining an accurate “Annex 24” inventory control system (which is a software system distinct from the maquiladora’s ERP software), and to apply for and obtain SAT approval.

The VAT certification program has performed reasonably well since 2015, effectively allowing maquiladoras to avoid payment of VAT at the time of importation. Yet, in the last 24 months, Mexican authorities (SAT) have increased the number of temporary suspensions, or even cancellation of, maquiladora VAT certifications. SAT officials have based these suspensions and cancellations on errors or inconsistencies in the maquiladoras Annex 24 inventory control system. Such revocation, which results in having to pay 16% VAT at the time of importation, can make the financial situation of these companies precarious as many companies do not have the liquidity to pay the 16% for each importation and wait for an eventual refund of the VAT paid at importation.

The New Financially Risky Situation:

The October 14th amendment has created concern to many maquiladoras due to the fact that giving SAT online access to the maquiladora’s Annex 24 software will allow the SAT to quickly detect possible inconsistencies or errors in the Annex 24 software, which will likely result in the imposition of large and fiscally significant taxes and penalties, as well as an increasing the number of companies who will have their VAT certification suspended or cancelled.

Another area of concern is that Mexican tax authorities powers to review taxpayers are subject to constitutional and other legal checks regarding timing and substantive review requirements, which the SAT will ignore when given online access and remotely accessing the taxpayer’s Annex 24 information. For example, to request information or conduct an onsite visit, Mexican tax and customs authorities must have issue a written document specifying the taxes to be reviewed, the time period of review, the names of the authorities who will conduct the review, etc. Additionally, Mexican law establishes time periods for the review to be completed. The new requirement that forces companies to give online access to the SAT does not comply with these required legal checks on SAT’s audit activities and lacks any precedent in Mexican customs and tax law.

Together with our allied firm in Mexico, we are recommend that Mexican maquiladoras who are VAT certified companies challenge the legality of the October 14th amendment in Mexico’s federal court system. Unfortunately, the deadline for filing a lawsuit is near the end of November 2024. Companies that do not sue run the risk of being viewed has having consented to the SAT’s review of their Annex 24 software and will later likely be deemed to have waived any procedural defenses. By contrast, companies who sue will likely NOT have the amendment applied to their operations (at a minimum during the pendency of the litigation) and also can use the duration of the lawsuit to self-audit and ensure that their Annex 24 inventory software is as up to date and accurate as possible. 

On Wednesday, October 30, 2024, at 1 pm Pacific time, we will be hosting a free webinar to discuss the the amendment and to answer questions about steps maquiladoras can take to protect themselves. Register for our webinar here.

For further information, contact Michael Roll at (310) 294-9501 or at michael.roll@thetradelawfirm.com or Armando Beteta at (469) 501-1450 or at armando.beteta@thetradelawfirm.com.