Operating Your Automotive Business in Mexico: 4 Must-Know Statutory Requirements
There are many advantages and incentives to expanding automotive business operations to Mexico. Mexico has free trade agreements with 50 countries including the United States, where roughly 80% of its exports go. In addition, Mexico takes a strong initiative toward growing its automotive industry, and there is always an ongoing interest in Mexico for more automotive exports, which are crucial for the Mexican economy. In fact, in 2018, Mexico was one of the largest automotive supply exporters in the world.
Mexico is the sixth largest passenger vehicle manufacturer in the world, producing 3.7 million cars a year, and Mexico is the fifth largest producer of auto parts in the world, earning USD 99 billion a year in revenue off auto parts alone.
For an automotive manufacturer to take advantage of Mexico’s operational benefits, it must ensure that it remains compliant with all of Mexico’s statutory requirements.
Below are four key legal statutory requirements that apply to automotive manufacturing operations in Mexico.
1. Electronic Invoicing
The first major requirement is electronic invoicing. Any automotive business which generates more than 250,000 pesos per year, or about $16,000 per year, must have a digital tax receipt called a Digital Fiscal Document through Internet (known as a CFDI—Comprobante Fiscal Digital por Internet). Comprobante translates in English to the word “Proof”. This requirement is proof a valid e-invoice exists.
Before using CFDI invoices, an automotive business must complete the set of tasks listed below.
- Register to obtain a federal taxpayer registration number from the Tax Administration Service (SAT—Servicio de Administración Tributaria), the Mexican federal tax authority.
- Get an Advanced Electronic Signature (FIEL—Firma Electronica Avanzada). This is a set of data that will be attached to sent electronic messages; it acts as a unique e-signature.
- Get a Digital Seal Certificate (CSD—Certificado de Sello Digital). This is the digital stamp SAT will issue. It is used to apply the Supplier’s Digital Seal (SelloCFD) before the invoice is sent to an authorized certification provider.
- Engage a third-party e-invoicing company, known as an Authorized Certification Provider (PAC—Proveedor Autorizado de Certificación). PAC’s are authorized by SAT and must follow detailed requirements. They provide mandatory validation and certification of a business’s e-invoices. The PAC has certification software for applying the digital stamp to an invoice.
Any e-invoicing system must include a PAC. PAC’s act as authorized agents of SAT. PAC software becomes certified by SAT and complies with the rules set forth by the e-invoicing laws.
As an automotive business operating in Mexico, all invoices, regardless of internal shipments to Mexican customers or external shipments outside of Mexico, must obtain a digital stamp.
Furthermore, e-invoice documents must meet the following data requirements:
- Names and addresses of all involved parties. This will include your business address, the customer’s business address and the customer’s shipping address.
- Tax details showing the calculated VAT.
- Date of transaction, invoice reference number, and ship from location
- Line details showing the quantity and price of each item or service involved, including the extended amount of each line.
- The federal ID of the seller.
- Customer’s export details for extra-Mexico shipments.
- Central Bank of Mexico exchange rate if in a foreign currency.
Credit notes, to revert claimed VAT, must contain all of the same information.
The process of properly issuing e-invoices is as follows.
- A sales transaction occurs within ERP.
- An integration program will create an export of the required invoice data. The invoice data will be imported into the PAC software. The data is validated via the PAC software.
- After validation, the PAC adds a unique certificate number (called the noCertificado) along with the UUID, the supplier’s digital seal (SelloCFD), date and time (FechaTimbrado), and version. Then the PAC sends it to SAT within 72 hours of being generated. If it is sent after 72 hours, SAT will not recognize it as valid.
Your company can issue XML and PDF versions of the certified invoice from the PAC software.
If an automotive business does not follow this process, its invoice will not be stamped, and therefore, its invoice will not be validated. Without an invoice, it will not be able to receive payment, and it will not be in compliance with SAT. Therefore, if the above process for e-invoices is not followed, the automotive business simply cannot operate in Mexico.
2. Electronic Accounting/Accounting Standards
CFDI legislation also requires that Mexican automotive businesses comply with electronic accounting (e-Accounting). Accounting documents must be prepared in Spanish, and they must be completed according to the Mexican Financial Information Standards. Here, we list more of the critical details regarding the electronic accounting standards.
- Automotive businesses are required to submit their chart of accounts, trial balances, and journal entries, which are sent to SAT as separate XML files.
- Chart of accounts are submitted once when created, then sent each time it is changed.
- Trial balances are submitted each month.
- Journal entries are sent at the request of the government, or in the case of requesting a tax refund or receiving back any compensation.
- Along with trial balance, include open balances, movements (debit/credit), and final balances.
- Journal entries are required to include:
- UUID (Universally Unique Identifier—this is a 36-character string) of the digital fiscal voucher supporting the transaction. For expenses abroad, one must include the foreign invoice number and the tax ID of the foreign taxpayer.
- Payment method, and payment method data such as the issuing bank and date of transfer.
- Currency of transaction.
- Total amount (including VAT if applicable).
3. Value Added Taxes (VAT)
Mexico—like most countries—uses a value added tax system instead of a sales tax. VAT (locally known as IVA) is Mexico’s primary indirect tax, meaning that it is not paid directly; it is transferred or charged to a third party until reaching the consumer. The VAT is applied at a standard rate of 16%, though there is a 0% rate for exports and for supplying local goods and services.
Mexico has a range of VAT rates, including:
- Standard VAT rate: 16%
- Borders Reduced VAT rate of 11% was dropped in 2014
- Zero Rated Supplies: foodstuffs; water; agricultural supplies; books and magazines
- VAT Exempt Supplies: immovable property, land, financial services, insurance, cultural exhibitions and events, imports
The VAT is levied under the following four circumstances:
- Sale of goods
- Provision of independent services
- Granting use or enjoyment of goods
- Importation of goods and services
For example, if a company sells a vehicle to a buyer in Mexico, the VAT rate of 16% is applied. However, if that same vehicle is exported to the United States, a 0% rate is applied.
4. Withholding taxes
The fourth and final of the key statutory requirements is withholding taxes. Withholding Tax is required when an automotive business pays its vendors under the following conditions:
- When a company distributes dividends to a nonresident or a resident individual, it must withhold a 10% tax.
- Interest paid to a nonresident is subject to a withholding tax rate that ranges from 4.9% to 35%, and 40% for payments to those in a tax haven.
- When royalties are paid to a nonresident, those royalties are subject to a withholding tax of 35% for patents and trademarks, 25% for other royalties, and once again 40% for payments to those in a tax haven.
- Fees paid for tech assistance have a 25% withholding tax, unless a tax treaty states otherwise.
- Permanent establishments that distribute dividends or gains to the head office must pay a 10% tax on those dividends or gains.
Adapting to these requirements Using QAD’s Enterprise Applications
These statutory requirements will no doubt pose new compliance challenges for any automotive business. Here are the solutions an automotive business can leverage in order to adapt to these challenges and ensure compliance with SAT.
A QAD Mexico-compliant software-as-service tool is set to release in the coming months. Until then, automotive businesses can engage a third-party PAC to assist in achieving compliance with SAT.
A popular e-invoicing solution is ATEB COFIDI, which is used by over 90,000 Mexican companies. Any solution will require some level of interface with the compliant solution. They will include:
- An output file of customer invoices requiring the UUID digital stamp. These invoices will be exported from QAD to the e-invoicing solution. After the data has been validated, a UUID will be assigned to the document.
- These certified documents are then generated as XML and PDF documents.
- These certified invoice documents can be delivered to the customer via electronic tools (email, FTP, customer portals etc.).
The electronic accounting mandate in Mexico means that automotive businesses need to follow a long list of new requirements. A Mexico e-Accounting module was specifically designed for this purpose. With the module, automotive businesses can develop the necessary data set and send it to SAT in an XML file format as required.
In general, the solution requires the mapping of the company’s financial master data to the statutory catalogues published by SAT.
VAT Tax Solutions:
Any issues involving including VAT into tax calculations will be taken care of by the QAD Global Tax Management Module (GTM). This is a staple tax calculation module that has been in place for 25 years, supporting different tax calculations worldwide, and is not limited to Mexico.
QAD’s GTM, when implemented appropriately, supports requisite tax calculations for Mexico VAT. QAD’s GTM master data configuration are database-wide tables. For companies operating in multiple countries, a wholistic master data configuration must be considered to support both Mexico and non-Mexico jurisdictions.
QAD Withholding Tax
Recent versions of QAD have provided a solution for the withholding tax requirement.
A supplier requiring withholding is identified in the supplier record. Accounts payable processes all invoices using a standard process. Withholding Tax (locally known as ISR) is calculated and withheld when invoices are settled via the payment process. This withholding amount remains on the supplier’s record until the amounts are settled with a payment of withholding taxes to SAT. This recent functionality provides the appropriate accrual-based accounting entries along with the withholding transactions within the supplier payment cycle.
Understanding the statutory requirements in detail, along with having a clear understanding of the solutions for obeying these mandates, are going to be crucial for a lawful and successful operation in Mexico. To see more about how QAD can help your accounting processes in Mexico, please contact the QAD experts at Logan Consulting.
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