northern kentucky international trade and investment conference plante & moran, pllc- global...
TRANSCRIPT
Northern Kentucky International Trade and Investment Conference
Plante & Moran, PLLC- Global ServicesScott Sneckenberger
Many US based companies either have or are considering some sort of Mexican operation – customers are demanding it
The rules and requirements in Mexico are quite different than in the US
Most US manufacturers participate in Mexico’s IMMEX program, adding complexity and additional rules / requirements
The penalties and consequences for noncompliance are significant
A huge amount of misinformation and misunderstanding occurs, leading to wasted time and resources
US management teams need to fully understand the operation in Mexico in order to properly manage the Mexico team, and serve your customers
SRL (Sociedad de Responsibilidad Limitada) – ◦ Like a limited liability company in the US◦ Minimum capital of $3,000 MXP (about $300 US)◦ May not be publicly traded and 2-75 owners permitted◦ Check the box eligible under US tax regulations (flow through)◦ Still taxed at the entity level in MexicoSA (Socided Anomina) -
Like our US C-Corporation 2 owner minimumA controlled foreign corporation under US tax rulesMinimum capital of $50,000 MXP (about $5,000 US)
Shelter operation – Contract manufacturing-type arrangementShelter takes no product / quality responsibilityCan operate as a subsidiary of US company or stand-alone
Other options – Joint ventures, other contractual relationships, branches, etc.
The incorporation process normally takes approximately 30 days to complete.
Note that this assumes no delays in receiving information from parent companies
Process normally is as follows: Name approval – 3 names minimum required for
application Power of attorney – apostille required By-laws
Completed documents are taken to a Mexican notary to complete the process.
Maquiladora application process takes an additional 20-30 days
The maquiladora program was started by a former Secretary of the Economy in Mexico in the late 1960’s to promote employment in northern Mexico
Originally, Maquiladora manufacturing was for export purposes only
The traditional format for a maquiladora’s operation includes:- Foreign company
Owns inventory (raw materials and finished goods) Provides machinery & equipment on a free bailment lease Intangibles and essentially all other substantial assets
◦ The maquiladora: Provides manufacturing services to the foreign company Bills the US parent company for its services with 0% value added tax Temporarily imports raw materials (no duties or VAT for anything imported from
NAFTA) and M&E (no VAT if used in operation) Does not own the raw materials, work in process, or finished goods
In September 2006, the maquiladora and PITEX programs were combined into a single export program called IMMEX. The term maquiladora is still widely used to describe a Mexican company involved in manufacturing for export.
PROVIDES MACHINERY AND EQUIPMENT
BILLS LABOR + OVERHEAD +
MARKUP
SHIPS OUT FINAL
PRODUCT
SUPPLIES RAW MATERIALS / SUB ASSEMBLIES
US Company
Mexican Company
USA
MEXICO
Services CompanyProvides
services
Customers
US Customer
Invoice for
Goods
Mexican company acts much like a contract manufacturer or cost center for the US parent.
Mexico allows the temporary import of raw materials, machinery and equipment, and administrative equipment without paying any import duties (if items are of NAFTA origin) or value added taxes.
Avoids the creation of a Mexican tax presence for US company, allowing it to:◦ Avoid Mexican corporate income tax at 30%◦ Avoid Mexican value added tax (VAT) at 16%◦ Avoid Mexican minimum tax (IETU) at 17.5%◦ Avoid Mexican 10% Employee Profit Sharing
Allows the company to remain globally competitive
An IMMEX, in general, is a bonded warehouse. As such, you must strictly account for the goods on temporary importation. Full control and accounting of the goods on temporary importation is required.
Materials may remain in Mexico for a maximum of 18 months VAT and duty free.
Equipment may remain in Mexico duty free (must be NAFTA originating) and VAT free for the term of the maquiladora program
Approved inventory tracking software is required
A new IMMEX decree was released December 24, 2010 – effective January 1, 2011
The intent was to stop certain abuses that were detected within maquiladora operations.
Relevant changes include:◦ Maximum importation period for steel reduced
from 18 months to 9 months◦ Increased requirements for the use of the safe
harbor method, including 30% minimum foreign ownership of fixed assets
◦ Reduced the activities that are permitted within a maquiladora
Paperwork, including original invoices, are extremely important in Mexico for tax, customs, and legal purposes
Form over substance doctrine applies – no invoice, no deduction and no VAT credit / offset
Electronic invoicing is mandatory (effective January 1, 2011)
Must use approved software / formats Companies may use up existing stock of paper
invoices
What is IVA?◦ The source of the highest number of questions we
receive related to Mexico◦ The Mexican IVA is a value added tax that applies to
all sales deemed to be made in Mexico. It is designed to be an end-user tax, but companies involved in activities in Mexico must work to ensure that is does not become and additional cost. The current law applies this tax at a rate of 16% (a 11% rate applies in certain areas bordering the US)
◦ The law requires the seller to collect and submit VAT on transactions
When is IVA triggered?◦ The Mexican IVA is due and payable on the following
activities if they occur, or are deemed to occur, in Mexico: Sale of goods Sale of services Rental of goods Importation of goods or services
◦ The sale or rental of goods or services is deemed to occur in Mexico when the goods are in Mexico at the time they are shipped to the purchaser. If no shipment exists, the sale is deemed to occur in Mexico when the physical delivery of the goods takes place in Mexico.
System needs to provide financial records in Spanish and in Pesos to comply with Mexican regulations
Consolidation issues – currency conversion / FAS 52 – ASC 830 – in system or outside??
Accounting system in Mexico needs to provide accrual-basis information for Mexican income tax calculation
Cash basis information is also required to comply with VAT and IETU rules
