On occasion, global investors considering the potential
acquisition of Mexican import/export companies will conduct
corporate audits of the target companies, and their audit
procedures will be primarily focused on a detailed review of the
corporate documents that support the targets' commercial
relationships with their shareholders, creditors, customers, and
suppliers. These global investors should be aware of the need to
analyze the documentation relating to the companies' foreign
trade transactions and, in particular, the areas concerned with the
day-to-day conduct of said transactions.
A dramatic example of the potential risks and serious consequences
that can result from failing to review the daily foreign trade
activities of companies with cross-border commercial activities,
particularly maquila (in-bond) companies involved in
global corporate restructuring processes, is the case1
of a maquila company located in the border region between
the United States and Mexico. In this case, the new investors
realized only after the acquisition of the maquila company
that it was being used as a warehouse for illegal substances.
Although this case reflects an extreme and unusual situation, it
reinforces that investors should always have a more in-depth
knowledge of the foreign trade transactions of the Mexican
companies that they intend to acquire, for the following
reasons:
- The penalties in Mexican customs matters are much higher than the tax penalties applicable to equivalent conduct (for instance, fines of 130 percent of the allegedly omitted foreign trade contributions, compared to fines of 55 percent of the value of other unpaid taxes).
- In addition to the payment of fines, there is a risk of seizure of machinery or raw materials that do not meet the documentary formalities pertaining to their importation.
- The description of the conduct considered to be administrative wrongdoing in Mexican Customs Law is similar, and in some cases identical, to the description of the criminal conduct in customs matters set forth in the Federal Tax Code in force in Mexico, which unfortunately, allows the authorities significant discretion with regard to the type of penalty to impose.
During a due diligence procedure to acquire a Mexican company with significant foreign trade transactions, investors should be aware when reviewing the target's audited financial statements that such financial statements may not properly reflect the company's foreign trade activities. The reasons include the following:
- The internal tax department most likely does not review foreign trade transactions due to the special nature of the subject, notwithstanding their potential adverse tax consequences.
- The auditors who prepared the audited financial statements were not obligated to analyze the company's foreign trade activities, because such review is not required by the Mexican Federal Tax Code and its Regulations, even though these activities are within the sole regulatory authority of the Mexican Tax Administration Service. In fact, Mexican auditors often do not consider foreign trade activities important to the scope of their review because they know it is highly unlikely that they will be questioned on such matters by the tax authorities.
In accordance with Mexican Customs Law, importers must retain the
documents supporting the lawful introduction of foreign-origin
assets for as long as they have such assets in their possession. If
they do not do so, these assets can be seized by the authorities
even after a five-year period, which is the mandatory maintenance
period for accounting records relative to domestic
transactions.
It is therefore advisable, during the course of a legal review of
Mexican companies with cross-border trade activities, to establish
a specific procedure for the review of their activities. Such
procedures could include requiring the disclosure of the
representative documentation supporting the lawfulness of these
activities and even requesting the opportunity to pose specific
questions to employees tasked with the traffic areas, to detect the
risks that could arise from these transactions for future
shareholders.
Finally, it bears mentioning that due to the high percentage of
errors and discrepancies in foreign trade transactions of Mexican
companies, the Mexican Tax Administration Service created in its
organization chart a specialized office for the audit of foreign
trade transactions in the year 2012. The purpose of this office,
which shows the focus being given to the area, is to increase
taxation in these areas and avoid, to the fullest extent possible,
the evasion of payment of foreign trade taxes and the noncompliance
with non-tariff permits.
Footnotes
1.The lawsuit was filed in California by two companies that had purchased an industrial plant in the State of Tamaulipas, México against the former owner, a conglomerate whose Mexican plant built specialized furniture. According to the complaint, the seller focused on providing information on the profitability of the plant but hid regular incursions of a Mexican drug cartel to the facilities. See www.themonitor.com, May 18, 2013.
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