WASHINGTON — Mexico’s tax and customs authority has been subjecting U.S. textile and apparel producers to burdensome audits, forcing companies to provide thousands of documents and hire lawyers in Mexico at a huge financial cost, all to prove their goods were made in America.

This story first appeared in the April 10, 2012 issue of WWD. Subscribe Today.

Many companies that have tried to comply with the audits remain in legal limbo and are waiting for the Mexican tax and customs authority to notify them and clear them. U.S. trade officials said they have worked diligently to find a resolution with Mexican authorities. The audits are impacting companies that have long done business in Mexico under the North American Free Trade Agreement.

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Jose Garcia, the Mexican tax and customs administration representative at the Mexican embassy here, said in a phone interview that the Mexican government, recognizing the burden to some large U.S. companies, recently modified its internal procedures to allow auditors to take a sample of shipments to prove verification of the origin of the goods.

“We met with [the U.S. Trade Representative’s office] and [Department of] Commerce because we recognize and acknowledge that some of these [audits] may be burdensome,” Garcia said. “We have to stick to the letter of the [NAFTA] agreement and at the same time do something to facilitate the process. We had to internally amend our internal procedures to allow for a sampling approach. It is not because USTR or DOC came to us; it is because it is a practical approach. Sometimes you find a company with 400 or 500 certificates of origin and you have to have a more practical approach.”

Garcia said the embassy will host a Webinar with U.S. companies and government agencies in the next 30 to 60 days to educate people about the new sampling mechanism.

Even with a solution in the works, much damage has already been done. Many textile and apparel companies that have spent thousands of dollars to comply might see no relief. Garcia acknowledged there are pending U.S. cases that have been appealed to the Mexican court.

“What they have asked for is just enormous,” said Cass Johnson, president of the National Council of Textile Organizations. “These are huge textile companies that are being asked to get all of their data for shipments over a two-year time period and turn it in 30 days and if they don’t, they are threatened with potentially very large penalties.”

Stephen Lamar, executive vice president of the American Apparel & Footwear Association, said, “It has become a very big problem because your profit base is completely undermined if you have to spend a lot of money doing these audits. It is creating a bottleneck and uncertainty and it adds a huge cost.”

USTR recently listed the Mexican audits as a trade barrier in its annual report to Congress. Mexico has been cracking down on textile fraud, but executives said its tax authority became overzealous in its document requests as it put pressure on U.S. companies to prove their goods were made in America in order to receive benefits under NAFTA.

Unifi Inc., a U.S. producer of multifilament polyester and nylon textured yarns that exports to Mexico, received a letter from the Mexican tax authority in October, requesting two years’ worth of export data from 2007-2008, within 30 days, according to Jane Johnson, manager of governmental relations. She said the request covered 2,020 shipments to 50 customers in 2007 and more than 65 customers in 2008.

Unifi was ultimately required to gather 10,000 documents at a cost of $20,000 and another $25,000 in legal fees to a lawyer in Mexico, Johnson said.

“I know under NAFTA protocol there are regulations that allow Canada and Mexico to audit U.S. companies, but we felt like this was a particularly onerous way to go about getting this information,” she said.

Bill Jasper, president and chief executive officer at Unifi, which exports thread and polyester and nylon yarn to Mexico, said the rationale of the Mexican tax authority for doing the audits is “legitimate.”

“It’s something we want to see Mexico, Canada and the U.S. doing to assure no cheating is going on in NAFTA, but the volume of information they asked for seems to me to be excessive,” Jasper said. “They could easily do a random sampling of everything we shipped down there.”

The Unifi audit is still pending and executives have not heard from the Mexican tax authority.

“I do believe cooler heads will prevail and we will end up with something less onerous, but it is still important to me for them to be rigorous enough to catch people cheating,” Jasper added.

Kim Glas, deputy assistant secretary for textiles and apparel at the Department of Commerce, said that while Mexican officials have indicated they are ready to take a new approach, there are unresolved audits that will still likely have to comply with the old rules. She said about 20 U.S. textile and apparel companies contacted her office from September through January expressing concern about “overly burdensome NAFTA verification origin audits conducted by Mexico’s tax authority.”

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