Mexico: Country of origin rules are a key requirement for preferential tariff treatment and verification processes

One of the main advantages and benefits derived from the free trade agreements signed by Mexico is the applicability of preferential rates or tariffs on the import of goods "originating" in one of the member countries of said agreement to another.

When a good is considered as originating in a country that is a member of a free trade agreement, it will be subject to lower or even exempt from tariffs when imported into another country that is also a member of such agreement.

In the specific case of Mexico, one of the main challenges facing both manufacturers, exporters and importers of goods is having the documentation and support that can evidence that the goods these certificates cover correctly comply with the applicable rules of origin.

In the case of imports to Mexico that are stated as originating in the country of export or manufacture, the lack of elements or evidence regarding compliance with these rules may entail the imposition of prior operations import taxes, which would not only entail the payment of said taxes but also their accessories such as updates, surcharges, fines and penalties and, in some cases, even the refusal to accept the certificates of origin for said goods in subsequent operations.

Failure to provide the necessary information or documentation to prove the origin of imported goods has a direct economic impact on the importer of said goods, even when the declaration or certification of origin was made by the exporter or producer abroad. This poses a challenge for importers (as those obligated to pay foreign trade contributions) to have the necessary elements to evidence their origin.

Similarly, it is important to consider that not all free trade agreements have the same rules of origin, nor can they be applied with the same criteria for their determination in general. It is necessary to have the necessary documents and information based on each of the free trade agreements for which compliance with the rules of origin is certified or declared.

Having clear and prompt supporting information is critical for companies that carry out operations demonstrating compliance with these rules.

In the case of the USMCA and the EUFTA, the main documents used to prove the origin of goods are the USMCA Certificate of Origin and the EUR1 Certificate, as well as the invoice declaration. Although these present significant differences, these ultimately serve the same purpose in determining the applicability of preferential tariff treatment.

While having this document is the first step to accessing the Preferential Tariff Treatment (PTT), it is also necessary to have the documentation and information that proves compliance with the corresponding rules.

This includes, among others, information related to the purchase of raw materials, parts and components, technical specifications and bills of materials, production diagrams, production times and costs, labor, and commercial contracts and contracts specifying due compliance with these rules in international commercial operations.

Likewise, it is essential that issuers of certificates of origin also have information regarding the suppliers of raw materials, parts and components, their origin and traceability, tariff classification, origin criteria, and dates of said information based on those who manufacture the finished products which origin is being certified.

This information must be reviewed periodically to ensure that changes in the supply chain do not affect compliance with these rules.

It's important to note that while the ultimate purpose of the USMCA and EUR1 certificates of origin is the same, there are significant differences between the two, including:

USMCA:

• Greater flexibility for issuing certificates and the possibility for the importer to issue the certificate directly.
• Free formats that allow for the option of not necessarily using the traditional certificate of origin format.
• Highly regulated industries with specific rules, such as steel, aluminum, and automotive.
• Responsibility for issuance by the exporter, manufacturer or importer directly.

EUFTA:

• Use of rigid and pre-established formats (declaration on invoice and EUR1).
• Accumulation of origin.

Other treaties, such as the CPTPP or the Pacific Alliance, also establish specific requirements that, while they may be more lax in some respects by establishing digitalized information accessible to the authorities of the parties, also establish stricter traceability requirements for production processes.

Generally speaking, Mexican authorities have placed greater emphasis on verifying compliance with the origin of products originating in the USMCA. This is because the processes are more flexible and do not always include certifications or verifications from the authorities of the goods' country of origin, making them more susceptible to noncompliance with the corresponding requirements.

These origin verification processes not only represent potential risks of import tax assessments, VAT, and the imposition of penalties, but also pose a risk to commercial relations between exporters and importers, since a potential error by the exporter/manufacturer can result in direct economic consequences for the importer.

This situation makes it extremely important for manufacturers/exporters to be prepared for a possible verification of the compliance of products exported to Mexico under a USMCA or other kind of certificate of origin. This verification may be conducted through a request for responses to questionnaires or even a visit to the company's facilities by Mexican officials.

In general, the main aspect to consider for proper evidence of compliance with the rules of origin is traceability in the supply chain of components and in the processes for final products.

Among the concepts that should be included in the traceability of production processes and the logistics chain, we can mention:

• Corporate identity of the certificate issuer (exporter/manufacturer). It should be noted that for Mexican purposes, there may be differences in matters such as the trade name of specific manufacturing or marketing divisions, or parts of the same corporate group.
• Identification and powers of the person signing the certificates of origin.
• Clear and complete contact information for the individuals with whom Mexican authorities can conduct an origin verification.
• If the manufacturer and exporter are different companies, the relevant information must be provided, as well as clearly establishing which company will be responsible for the corresponding information and documentation.
• Clear information about the recipients and users as importers of the certificates of origin issued by the manufacturer/exporter.
• Information regarding the tariff classification of exported products, as well as clear information in case there are differences in the tariff classification criteria between the exporting and importing countries.
• Information relating to the criteria and rules used to determine origin.
• Period covered by the certificates of origin and the powers of the officials who sign them during their validity period.
• Have updated bills of materials and specific information in case of changes in suppliers or the origin of updated raw materials, parts and components.
• Have accounting information that can demonstrate the traceability of the corresponding raw materials, parts and components and manufacturing processes, which must be maintained for a minimum period of five years.
• Designate officials who have the necessary information and understanding of the requirements and processes related to the determination of origin, as well as internal processes for preparing and presenting such information in the event of an audit.
• Carry out preventive audit and verification processes from time to time.

One of the main practical problems faced in terms of origin verifications is foreign suppliers' lack of awareness of the steps to follow and the formal processes by which these audits are carried out by Mexican authorities. It is important to know how to act in case a visit of this nature is received, which can be summarized in the following steps:

• Immediately respond to requests for information and documentation, and determine the specific periods and assets for which they are being requested.
• Identify the person within the company who will handle the request, preferably someone who is fluent in Spanish.
• Gather the requested information and establish its quantity or extent.
• Consult with a Mexican specialist about how to handle this request, as Mexican legal processes tend to be extremely formal in terms of deadlines and the way information is presented.

It is common for errors in the form or manner in which requests are responded to to be the reason why the information submitted is not known, resulting in a refusal to determine the origin.

This situation can result not only in importers being subject to pay omitted taxes, adjustments, surcharges, and fines, but also in potential trade problems with suppliers and damage to commercial relationships.

Therefore, it is also advisable to formally establish with exporters and manufacturers issuing certificates of origin the obligation to respond with due diligence to any type of request for information or verification of origin from Mexican authorities.