It is common in the manufacturing industry that, with the idea of optimizing production processes, companies enter into agreements with subcontractors to complete part of their operation. In general terms, the role of a subcontractor is to perform specific tasks as part of the overall production process of a company.
Mexico regulates the use of subcontracting by IMMEX companies when it involves the transfer of temporarily imported materials to be processed. The Mexican IMMEX Program regulations name such transfers as Sub-maquila or Sub-manufacturing; they are defined as the industrial-manufacturing or industrial-service processes performed by a third party (ordinarily not an IMMEX authorized company) that are directly related to an IMMEX company´s procedures.
As per such definition, an IMMEX company is entitled to enter into a contract with any company located in Mexico, that is not itself necessarily authorized as an IMMEX company, but that has the necessary infrastructure and technology to complement the production of its finished goods to be exported.
The IMMEX company needs to register the Sub-manufacturers under its IMMEX Program, so that its temporarily imported materials may be transferred to the Sub-maquila to be subject to a specific manufacturing task or service.
In addition to the optimization benefits it may represent, it is worth noting that Sub-maquila services may be deemed as exportation of services, hence, they could be levied at a 0% Value Added Tax (“VAT”) rate, rather than to the general 16% rate. The foregoing, in the proportion that the IMMEX companies incorporate the components processed by the Sub-maquila to the exported finished products; for the portion of components that are not incorporated by the IMMEX Company to the exported products, the general 16% VAT rate for services will apply.
Relevant obligations and formalities apply. For example, IMMEX Companies shall give certain notices related to the transfer of goods to the Sub-maquila entities, and provide a copy of such notice for transfer purposes. Also, IMMEX Companies need to file monthly reports related to the information of exported goods, though exceptions apply.
Foley’s international trade specialists recommend IMMEX Companies with Sub-maquila operations to verify their compliance with the applicable obligations and formalities.