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Carlos Angulo-Parra and
Edmundo Elías-Fernández (Juarez)
Tel: (52-16) 29-1300
Fax: (52-16) 29-1399
Carol S. Osmond (Toronto)
Tel: (1-416) 863-1221
Fax: (1-416) 863-6275
While there are a number of provisions of the North American Free Trade Agreement ("NAFTA") directly affecting maquiladoras, the provisions which will have the most profound impact will not come into effect until 1 January 2001. Currently, maquiladoras continue to benefit from the waiver of Mexican import duties on imported materials, parts and components for use in the manufacture of finished products for export, while also benefitting from preferential rates of duty upon importation of their finished products into the United States and Canada, provided they meet the NAFTA rules of origin. As of 1 January 2001, however, there will be restrictions on the duty relief available on non-NAFTA origin materials used by maquiladoras in the assembly or manufacture of finished products for export to the United States and Canada.
While these provisions will not come into effect for a few more years, it is important for those companies with existing maquiladora operations, as well as those considering establishing maquiladora operations for the first time, to plan for these changes to the maquiladora program. The purpose of this article is to provide an overview of the relevant provisions of NAFTA and to make suggestions as to how companies with maquiladora operations should be examining how these provisions will affect their operations.
General Restrictions on Drawback and Duty Deferral The most significant provision of NAFTA directly affecting maquiladoras is Article 303 which deals with restrictions on drawback and duty deferral programs. "Duty deferral program" is defined in Article 318 as including "measures such as those governing foreign trade zones, temporary importations under bond, bonded warehouse, maquiladoras and inward processing programs." Generally, under drawback, an importer receives a refund of import duties paid on the importation of materials used in the production of goods for export. Under a "duty deferral program," no import duties are paid at the time of importation; the payment of import duties is deferred until the finished products are withdrawn for domestic consumption. Alternatively, if the finished products are exported, no import duties are ever paid.
While the maquiladora program is included in the definition of "duty deferral program" under NAFTA, it should be noted that the maquiladora program was not conceived as a program to "defer" import duties on materials until the finished products were withdrawn for consumption in the domestic market. The maquiladora program is a temporary import program which was originally created as a means to waive import duties on materials which were imported into México for incorporation into finished products for export. Only subsequently were maquiladoras permitted to sell a portion of their production into the domestic market and the main purpose of the program continues to be to encourage the assembly or manufacture of finished products for export. As a result of NAFTA, the level of permitted sales by maquiladoras into the Mexican domestic market as a percentage of the value of the previous year's exports is being gradually increased until the year 2000. As of 1 January 2001 all of a maquiladora's production may be sold into the domestic market.
Article 303 addresses the concern, particularly of the United States since it has the largest market of the 3 NAFTA countries, that drawback and duty deferral programs represent an unfair advantage for foreign exporters, since domestic manufacturers receive no drawback or waiver of import duties on materials imported to produce goods for sale into the domestic market. There was also a particular concern that producers who would benefit from duty free entry of their products upon importation into another NAFTA country, should not also benefit from duty relief on their inputs.
Paragraph 1 of Article 303 provides that a NAFTA country may not refund, waive or reduce the amount of import duties owed on a good imported into its territory, on condition that (i) the good is subsequently exported to another NAFTA country, (ii) used as a material in the production of another good that is subsequently exported to another NAFTA country, or (iii) is substituted by an identical or similar good in the production of another good that is subsequently exported to the territory of another NAFTA country, in an amount that exceeds the lesser of:
(a) the total amount of import duties paid or owed on the good on importation into its territory; and
(b) the amount of import duties paid or owed on the good that is subsequently exported to the territory of the other NAFTA country.
Therefore, if materials are imported into one NAFTA country for use in the manufacture of finished products which are exported to another NAFTA country, the first NAFTA country may only refund or waive import duties on the materials imported into its territory equal to: (i) the import duties normally payable on the materials on importation into the first NAFTA country, or (ii) the amount of import duties paid on importation of the finished product into the other NAFTA country, whichever is the lower amount.
Paragraph 3 of Article 303 provides further that where a good is imported into a NAFTA country under a duty deferral program and is subsequently exported to another NAFTA country, or is used as a material (or is substituted by an identical or similar good which is used as a material) in the production of another good that is subsequently exported to another NAFTA country, the NAFTA exporting country must assess import duties as if the exported good had been withdrawn for domestic consumption, but may waive or reduce such import duties to the extent permitted under paragraph 303(1).
It should be noted that pursuant to paragraph 6 of Article 303, the foregoing provisions do not apply in certain circumstances to certain types of goods imported into one NAFTA country and subsequently exported to another NAFTA country. For example, these provisions do not apply to goods exported in the "same condition" as they were imported, nor do they apply to a NAFTA "originating" good. Pursuant to Par. 6(b) Art. 303, processes such as testing, cleaning, repacking or inspecting the good, or preserving it in its same condition, are not considered to change a good's condition. A NAFTA country may fully refund or waive the import duties payable on such goods when they are exported to another NAFTA country. It should be noted that special restrictions apply to drawback or duty deferral on certain types of television picture tubes (ref. Par. 8 and Annex 103.8).
Implications for Maquiladoras Currently, maquiladoras are permitted to import materials used in the production of finished products for export without the payment of Mexican import duties. If such materials were imported definitively into México, however, rather than being imported temporarily under the maquiladora program, they would generally be subject to import duties, as well as other charges and taxes, depending on their specific tariff classification and value as determined for customs purposes. Under the maquiladora program only if the finished products are sold into the domestic market is the maquiladora required to pay import duties and other charges and taxes on the imported materials used in the production of the finished products.
México may continue to provide such duty relief under the maquiladora program until the end of year 2000, regardless of whether the finished products receive NAFTA preferential duty rates upon importation into the United States or Canada. As of 1 January 2001, however, if the finished products are exported to the United States or Canada, duty relief will only be available on the non-NAFTA origin materials imported into México, if the finished product is subject to import duties upon importation into the United States or Canada, in which case the amount of Mexican import duties which may be waived will be equal to: (i) the Mexican import duties payable on the non-NAFTA origin materials used in the manufacture of the finished product, and (ii) the U.S. or Canadian import duties paid on the finished good, whichever amount is lower. In other words, the maquiladora will be required to pay the difference between the Mexican import duties normally payable on the non-NAFTA origin materials and the U.S. or Canadian import duties payable on the finished product. Therefore, the waiver of Mexican import duties on materials will not be eliminated entirely as of 1 January 2001 but will be restricted. As between the United States and Canada, these restrictions came into effect on 1 January 1996. Moreover, note that no Mexican import duties, if any, will have to be paid at the time the materials are imported into México, but only at the time the finished products are exported to the United States or Canada.
For example, assume a maquiladora imports materials from Japan or another non-NAFTA country with a value of US$100 for use in the manufacture of a finished product, and the Mexican duty rate which would normally apply to such materials is 15 percent, for a total of US$15. The finished product valued at US$200 is exported to the United States. Assume further that upon importation into the United States, the finished product does not qualify for NAFTA preferential duty rates, and will be subject to the Most Favored Nation ("MFN") tariff rate which we will assume is 10 percent for the finished product in question, for a total of US$20. As of 1 January 2001, México may waive import duties on the materials equal to the lower of the following 2 amounts:
(i) the Mexican import duties payable on the materials, that is, US$15; and
(ii) the U.S. import duties on the finished product, or US$20.
Since the amount of the Mexican import duties payable on the materials is less than the import duties paid on the finished product on importation into the United States, México may continue to waive the full amount of the import duties on the materials.
However, if the facts were the same, but the MFN duty rate on the finished product on importation into the United States were 5 percent, rather than 10 percent, México could waive import duties on the materials equal to the lower of the following two amounts:
(i) the Mexican import duties payable on the materials, US$15; and (ii) the U.S. import duties paid on the finished product, US$10 (5 percent of US$200). Therefore, México could only waive import duties on the materials up to US$10 and not the full amount of Mexican import duties normally payable; that is, the importer of the materials into México would have to pay US$5 in Mexican import duties on the materials at the time the finished product is exported to the United States. Finally, if the finished product were to meet the NAFTA rules of origin and therefore qualify for NAFTA preferential duty rates, and assuming the NAFTA duty rate for the finished good in question had already been reduced to zero, México could grant duty relief on the materials equal to the lower of the following two amounts:
(i) the Mexican import duties payable on the materials, US$15; and (ii) the U.S. import duties payable on the finished product, zero. Therefore, México could not waive any import duties on the materials and the importer of the materials into México would have to pay the full amount of import duties normally payable on the materials at the time the finished good is exported the United States. In other words, if a product qualifies for a NAFTA preferential duty rate (and assuming the NAFTA duty rate has already been phased out entirely), a finished product will not be entitled to both a preferential duty rate under NAFTA and a waiver of the Mexican import duties on the materials imported into México to produce the finished product.
If the materials are imported from the United States or Canada but they are not NAFTA originating, the results would be the same as above. If the materials are NAFTA originating, México will be permitted to grant a waiver of any import duties still remaining on such materials. In order for the materials to be treated as originating, however, a NAFTA certificate of origin will have to be obtained from the producer or exporter.
In summary, as of 1 January 2001, a maquiladora will not pay Mexican import duties at the time of importation on materials imported into México. However, at the time of exporting the finished product to the United States or Canada, if the materials are not NAFTA originating, the maquiladora may be required to pay all or a portion of the Mexican import duties normally applicable to such materials, depending upon the amount of import duties payable on the finished product upon importation into the other NAFTA country. Moreover, since under NAFTA, the duty rates on goods imported from México into the United States and Canada will eventually be phased out entirely, as of 1 January 2001, if a good is exported to the United States or Canada, generally no duty relief will be available on the materials used in the production of the finished good if the finished good is NAFTA originating. However, if the materials are produced in Canada or the United States and meet the NAFTA rules of origin, México will be entitled to waive any remaining import duties on such materials without restriction. Naturally by year 2008, there will be no Mexican import duties remaining on any originating materials imported into México from the United States and Canada.
Finally, it should be noted that the NAFTA provisions only apply to the refund or waiver of import duties on materials used in the production of finished products for export to the United States or Canada. If the finished products are destined outside North America, there are no such restrictions under NAFTA on duty back or waiver, although there may be restrictions in other free trade agreements to which México is a party. A company with maquiladora operations in México must therefore take into consideration the following when considering the implications of NAFTA:
1. What is the Destination of the Finished Product? If the finished product is being exported outside North America, a full waiver of Mexican import duties normally payable on imported materials will generally continue to be available under the maquiladora program. If the finished product is destined for the United States or Canada, the waiver of Mexican import duties on the materials may be restricted entirely or partially.
2. What is the MFN Duty Rate for the Finished Product? The MFN duty rate is the rate that the United States and Canada apply to imports from most countries. It is also the rate that applies to imports from México if the products in question do not meet the NAFTA rules of origin. If the MFN duty rate in the United States and/or Canada is zero, the duty rate applicable to the finished product will be zero regardless of whether the finished product is NAFTA originating. Therefore no waiver of Mexican import duties will be available for the materials used to produce the finished products for export to the United States or Canada as the case may be, assuming the materials are non-originating. If the MFN duty rate is not zero, a partial or full waiver of import duties will be available, assuming the finished product does not qualify for preferential duty treatment under NAFTA. (Note that the MFN duty rates are generally different in the 3 NAFTA countries.)
3. Is the Product NAFTA Originating? If the product is NAFTA originating, if the import duties upon importation into the United States or Canada have not already been phased out, they will eventually. Once the product is eligible for duty free entry, no waiver of Mexican import duties will be available on the materials used to produce the finished product, assuming the materials are non-originating. Until the finished product is eligible for duty-free entry under NAFTA, however, a full or partial waiver of the Mexican import duties on the materials will be available.
4. How Does the Amount of Duty Payable on the Materials Compare with the Amount Payable on the Finished Product? If the amount of U.S. or Canadian import duties payable on the finished product is equal to or exceeds the amount of Mexican import duties payable on the materials, a full waiver of Mexican import duties will be available for the materials. If the import duties payable on the materials exceed the import duties payable on the finished product, only a partial waiver will be available, and the maquiladora will be required to pay Mexican import duties on the materials equal to the import duties normally payable on the materials less the import duties payable on the finished product, again assuming the materials are non-originating.
5. Are the Materials NAFTA Originating? If the materials are produced in Canada or the United States and meet the NAFTA rules of origin they will receive a preferential duty rate upon entry into México and will eventually enter México duty free. However, up until the import duties are phased out entirely, México will be entitled to waive any remaining import duties on such materials. It should be noted, however, that under the maquiladora program, the materials enter México duty free regardless of their origin and sometimes under a special tariff classification for maquiladora entries. In order for the materials to receive duty relief as originating under NAFTA it will be necessary to properly classify the materials as they would otherwise have been classified and to certify or obtain certification that the materials meet the NAFTA rules of origin.
For companies manufacturing in México wishing to take advantage of NAFTA, they must obviously first consider the source of their materials for purposes of determining whether their finished products will meet the NAFTA rules of origin and therefore qualify for NAFTA preferential duty rates upon importation into the United States and Canada. Some manufacturers have changed or are changing their source of supply for materials to North American suppliers in order to meet the rules of origin. However, it is possible that a finished good assembled or manufactured in México from some or all non-NAFTA origin materials may meet the NAFTA rules of origin because sufficient processing takes place in México. In anticipation of year 2001, however, manufacturers in México will once again have to consider whether they should switch to North American suppliers as duty relief on the materials will generally no longer be available if the finished product qualifies for NAFTA preferential duty rates upon importation into the United States or Canada (assuming the duty rates have already been eliminated). For manufacturers which do not meet the NAFTA rules of origin, they may still be affected if their finished products are exported to the United States or Canada and the import duties payable on the finished products on importation into the United States or Canada are less than the Mexican import duties that would normally be payable on the materials imported into México for use in their manufacture.
Machinery and Equipment The foregoing discussion has dealt with restrictions as of 1 January 2001 on the duty relief available for materials used in the manufacture of finished products for export to the United States or Canada. Under the maquiladora program, however, duty relief is available not just on the materials but on machinery and equipment. Paragraphs 1 and 3 of Article 303 deal not just with materials but also goods which are imported and re-exported to another NAFTA country. Therefore, if the machinery and equipment (assuming they are not NAFTA originating) are to be exported back to the United States or Canada, it appears that pursuant to paragraph 3, the importer of the machinery and equipment into México would be required to pay Mexican import duties on the machinery and equipment at the time they are exported from México equal to the lower of the following 2 amounts:
(i) the import duties that would normally be payable on importation of the machinery and equipment into México, and
(ii) the import duties that would be paid on importation of the machinery and equipment, into the United States or Canada.
If it can be demonstrated that the machinery and equipment was imported into México from the United States or Canada, as the case may be, there would not normally be any U.S. or Canadian import duties payable on re-importation of the machinery and equipment into the United States or Canada, provided the machinery and equipment has not been advanced in value or improved in condition. Therefore, when the machinery or equipment is returned to Canada or the United States, the Mexican importer would have to pay Mexican import duties on the machinery and equipment. Paragraph 3(a) of Article 303 provides that the import duties must be assessed as if the exported good had been withdrawn for domestic consumption. Currently, in México when machinery and equipment originally imported into México temporarily under the maquiladora program is imported definitively, Mexican import duties are payable on the depreciated value of the machinery and equipment at the time the definitive importation takes place, with interest calculated from the time of the initial temporary importation until the import duties are paid. As a practical matter, this issue may not arise as there is no requirement that the machinery and equipment ever be exported from México provided it continues to be used under the maquiladora program. In addition, the machinery and equipment could be transferred to another maquiladora, destroyed or donated to charity, provided Mexican legal requirements are met. Finally, if the machinery and equipment is NAFTA originating, no Mexican import duties would be payable, even if the import duties on such machinery and equipment had not been entirely eliminated at the time of importation into México. To evidence that the machinery and equipment are NAFTA originating, however, a NAFTA certificate of origin would be required.
The Future for Maquiladoras Since its inception in the mid-1960s, the maquiladora program has been one of the main generators of employment, exports and foreign exchange for México, as well as an important means of transferring technology and know-how to México. With the current economic crisis in the country, maquiladoras continue to play a critical role in the economy as the country struggles to find its way out of a severe recession. It has been said that the maquiladora industry will disappear once the provisions of NAFTA discussed above are implemented. While the Mexican Government has not announced its intentions with respect to the maquiladora program after 2000, we do not anticipate that the program will be eliminated. Those maquiladoras exporting outside the United States and Canada will not be affected by these provisions of NAFTA. Therefore, there is no reason why the maquiladora program should not remain in place for companies exporting outside North America.
For those maquiladoras which assemble or manufacture finished products for export to the United States or Canada, the maquiladora program would also continue to offer important advantages. If the finished products are still subject to import duties on importation into the United States and Canada after 2000 (either because the MFN duty rate is not free and they do not qualify for duty free entry under NAFTA, or they qualify for NAFTA preferential duty rates but these duty rates have not yet been fully phased out), full or partial duty relief on the materials imported into México would still be available. Even for those companies whose finished products would benefit from duty free entry into the United States and Canada, there would be other advantages to using the maquiladora program. First, there would be a deferral of any import duties payable on the materials until the finished products were exported to the United States or Canada and in the case of NAFTA originating materials, any remaining import duties would be waived entirely. Secondly, machinery and equipment could continue to be imported into México duty free. Thirdly, maquiladoras benefit from more streamlined customs procedures, the value of which should not be underestimated, and materials imported temporarily under the maquiladora program are not required to meet certain non-tariff requirements on importation, such as Mexican Official Standards or "NOMs," which would apply if they were imported definitively. Finally, maquiladoras are not required to pay value-added tax on imported materials and could continue to enjoy this benefit after the year 2000. Since the value-added tax is an "internal" tax and does not apply only to imports, there is no restriction under NAFTA on waiving the value-added tax on importations of materials by maquiladoras. Generally, a company importing materials into México outside the maquiladora program for use in the manufacture of finished products either for export or sale into the domestic market would pay value-added tax on the materials at the time of importation but would be entitled to a credit or refund of the value-added tax which is paid. The advantage for maquiladoras is that they are never required to pay the value-added tax and therefore do not have the administrative burden associated with claiming a credit or refund of the value-added tax. Therefore, the maquiladora program would continue to be the best option for companies involved in the export sector in México, even after the NAFTA provisions are fully implemented, and consequently, it would be surprising if the Mexican Government decided to eliminate the program. However, given that maquiladoras will as of 2001 be permitted to sell 100 percent of their production into the Mexican domestic market, in order not to give maquiladoras a competitive advantage, the Mexican Government may attempt to offer many of the advantages which currently exist only for maquiladoras to all Mexican manufacturers. In this regard, the Mexican Government has already begun the process of eliminating import duties on production machinery and equipment.
Finally, it is important to distinguish between the industry itself
and the program under which it currently operates. While many
companies currently operating under the maquiladora program may
no longer receive a full waiver of Mexican import duties on non-NAFTA
origin materials imported under the maquiladora program, maquiladoras
manufacturing goods which qualify as originating under NAFTA will
be able to export their products to the United States and Canada
at preferential duty rates, with all products eventually entering
those countries duty free. Therefore, there will continue to be
a strong "maquiladora" or assembly and manufacturing
industry in México even though the rules of the game may
have changed. Instead of investing in Mexican maquiladora operations
to take advantage of the relatively inexpensive Mexican labor
and the benefits of the maquiladora program, companies will invest
to take advantage of inexpensive Mexican labor and the benefits
of NAFTA. It should further be noted that there is nothing in
NAFTA to prevent the Mexican Government from reducing or eliminating
the MFN duty rates on materials if the existence of such duties
is a deterrent to foreign manufacturers assembling or manufacturing
their products in México under the maquiladora program.