Braumiller Law was recently honored to conduct a special training session on Mexico Customs Regulations, IMMEX, and North American Free Trade Agreement (NAFTA) Article 303. This article discusses key information presented by our Mexico Attorney Brenda Cordova and Francisco De La Cruz Garcia with Mexico Customs (Administracion General de Auditoria de Comercio Exterior).

Background

Mexico, one of America’s largest trade partners, may just be the most misunderstood country by the United States. In spite of drug-related violence in certain regions of Mexico, the country has still managed to have the second largest economy in Latin America – often surpassing larger countries such as Brazil. Many free trade proponents argue that NAFTA signed by Mexico, Canada, and the United States (this treaty became effective in 1994) has something to do with Mexico’s economic strength. Mexico has the 14th largest economy in the world in nominal terms, and the 10th largest via purchasing power parity, according to the World Bank. Furthermore, Mexico’s recent liberalization of the energy sector is expected to boost Mexico’s economic growth performance, and has subsequently created enthusiasm in the investor community.

Though largely controversial, NAFTA created the world’s largest free trade area, which now links 450 million people producing $17 trillion worth of goods and services. Mexico is currently our 3rd largest goods trading partner with $507 billion in total (two ways) goods traded during 2013. Exports totaled $226 billion; and imports totaled $280 billion. The U.S. trade deficit with Mexico was $54 billion in 2013.

In order to encourage companies to trade NAFTA goods amongst themselves and to avoid having Mexico be used as a platform to export non-NAFTA originating goods into the United States or Canada, the Governments of these three countries must routinely conduct NAFTA audits. Additionally, according to Mr. De La Cruz, his office will now also begin conducting NAFTA Article 303 audits.

Audits of American Companies by Mexico’s Customs

  1. Country of Origin Audits:

Mexico has an export-oriented economy, as more than 90% of Mexican trade is under free trade agreements with more than 40 countries. Given this fact, it isn’t surprising that Mexico has the most free trade agreements of any country in the world, and its most influential FTA is NAFTA. Mr. Francisco De La Cruz heads up Mexico’s FTA audit department, which is also the largest department of its kind in the world, with over 170 employees exclusively dedicated to conducting country of origin audits to determine FTA eligibility. Last year Mr. De La Cruz’s audit team conducted 1000 NAFTA audits and 99% of these audits involved American companies. Of these 1000 NAFTA audits, 98% failed to provide adequate evidence of NAFTA eligibility. Most of these audits resulted in the Mexican government invalidating the NAFTA certificates due to deficient recordkeeping by the American companies. Some of these companies, however, simply neglected to respond to the Mexican Government’s requests for information and documentation, thus resulting in an automatic NAFTA certificate invalidation.

The NAFTA audits conducted by the Mexican Government typically focus on three areas: valuation, harmonized tariff schedule code classification, and country of origin. According to Mr. De La Cruz, the future of audits is in “country of origin” verifications since within the next few years most duties will be at zero or near zero for most products traded between the United States and Mexico. The country of origin audits verify that items claiming NAFTA-preferential treatment in fact are NAFTA-qualifying. That is, a company cannot import products from China into Mexico and claim NAFTA-preferential treatment. For NAFTA preferential treatment to apply, the finished good must meet the NAFTA country of origin rules, which are highly complex and technical.

Note that the Mexican Government now accepts electronic records, thus making it a lot easier for American companies to provide the required documentation in support of their NAFTA claim. In most of the NAFTA verification audits, Mexican Customs goes directly to the producer of the good since this is the party that understands the production process and is in the best position to demonstrate the origin of the product. If a U.S. producer fails to demonstrate NAFTA-originating status, Mexican Customs will in turn invalidate all NAFTA certificates provided by the U.S. producer to its Mexican customers (i.e., Mexican importers). These Mexican importers would then be required to pay penalties, and duties, plus interest, resulting in millions lost for these companies. Note that if your company’s recordkeeping is not adequate, you may request that Mexican Customs audits your facility in person. You may still be able to prove origin this way.

To facilitate the audit process, the Mexican NAFTA-origin audit team also accepts “sample” testing. If the representative sample is 100% correct the audit process would be complete; however, even if there is only one transaction shown to be inaccurate in the sample then the audit team will conduct a review of 100% of the transactions.

  1. NAFTA Article 303 Audits

In addition to country of origin audits, Mexican Customs will also begin conducting NAFTA Article 303 audits. The objective of these audits is to verify that duties are paid on non-NAFTA originating goods imported into Mexico and incorporated into a NAFTA-originated finished product. For example, if company ABC imports chips from China and these are used in the manufacture of a computer in Mexico –although the computer may be a Mexico origin good and thus NAFTA-qualifying, the importer must still pay duties on the chips imported from China. Mexico has not yet begun conducting these audits, but will likely begin this year. To avoid an Article 303 audit, companies should pay duties on non-originating goods at the time of entry into Mexico.

There are two ways in which Mexican Customs conducts NAFTA audits:

  1. Written Questionnaires: This is the most common method (95 percent or higher). After receipt of questionnaire, your company will have 30 days to provide documentation and information requested by the Mexican Government. There are no formal extension procedures, but they may be granted if good cause is shown.
  2. Company visits: These visits are less frequent. If the Mexican Government decides to visit your company, the odds are against you as most likely Mexican Customs selected you because they believe you will not be able to prove origin. When Mexican Customs visits your company, they are required to notify U.S. Customs and Border Protection (CBP), and CBP may decide to also visit your company while Mexican Customs conducts the audit (CBP usually does not attend, however.).

In short, based on the economic prosperity and integration that NAFTA has brought to its member countries, NAFTA remains strong and its future bright. However, your company must be prepared to provide convincing proof that its NAFTA products are truly originating from the designated country. This may be a daunting task if recordkeeping is poor and internal communications are lacking. In addition, if your company has IMMEX operations in Mexico you should be prepared to undergo NAFTA Article 303 audits.