The VAT and Excise Certification was implemented in 2015. The main objective of the VAT and Excise Certification is to continue not paying VAT on temporary imports. Entities that will benefit the most are those with VAT credits granted with the IMMEX (manufacturing industry, maquiladora, and export services) programme.
The Mexican Tax Administration Service (SAT) also implemented a system for monitoring and controlling the balances of VAT credit applied within those temporary imports (known as Annex 31).
Annex 31 works with the most basic control of debits and credits by applying a strict FIFO (first-in, first-out) method and is linked to the tariff code declared for raw materials; thus, a credit is obtained when an IMMEX temporary import is performed and a debit is applied when those goods are exported.
Consequently, importers that apply credit on temporary imports are obligated to transmit a detailed deployment report on a monthly or bimonthly basis resulting in an additional administrative burden. Before the introduction of the VAT and Excise Certification, these activities were administered internally by IMMEX companies, so it was not necessary to inform any deployment report to the authority unless it exercised powers of verification in customs matters.
Challenges of Annex 31 administration
Since July 2020 some challenges have been identified in the management and updating of Annex 31. Due to the lack of exports and some changes to the legislation, because of the COVID-19 pandemic, there has been some deviation within the transmission of the deployment reports, obtaining results such as a non-identified tariff code, no open balances or the ‘non-valid’ status reflected in the system (which may result in a potential suspension of the VAT certification benefit).
In February 2021, Annex 31 balances were updated, however, many issues were identified by taxpayers, the most notable one reports that the initial inventory was not affected which means that some over discharges were produced. This information was updated taking into consideration the previous six years of operation so importers must be ready to clarify any potential requirements from the customs authorities.
Additional changes were applied recently in all these systems, such as the reduction on legal temporality from 36 months to 18 or six months, thus, customs compliance teams should now be aware and working in the correct application of all adjustments to comply with customs obligations to avoid additional requirements and/or audits in regards to the correct management of VAT credit and IMMEX programme.
Recommended analysis
The best practices in Annex 31 management dictates a frequent conciliation with the Inventory Control System for Customs purposes (ICS or Annex 24) which can also reach the physical inventory.
The administration burden of the recent changes made to the Law of General Taxation regarding Imports and Exports (LIGIE) means that a review of the update on tariff codes for Annex 24 and Annex 31 must be considered to avoid any potential impact on the continuity of the debits application resulting in an incorrect interpretation of the open balances which, in turn, influences the amount of VAT being paid.
The execution of such analysis will enable certified entities to comply with their customs and tax obligations and allow them to identify, for example, important deviations in the correct application of the deployment, as well as identify missing operations to be reported, trend consumptions in order to establish different KPI in the management of Annex 24 and Annex 31 or to prepare clear answers when the authority challenges the payment of certain VAT credits.
Also, the active verification of the publications of the customs authorities will provide certainty in the updating of different databases which will avoid additional risk in the inaccurate management of all information.
Tere González
Associate partner, EY México
