The recurring noncompliance of Mexico's taxation law regarding IVA tax (the local VAT) is boosting aluminum scrap prices in the country, according to sources on both the buying and selling sides.
Mexican law requires the 16% VAT to the net value of all domestic scrap negotiations be retained by the local government, but many companies are skipping the charge and leaving the tax amount in the hands of the sellers, sources said. In some cases, buyers and sellers could be sharing the benefit, they said.
Moving the 16% of the value is only possible because some smelters accept buying without an invoice or with a fake invoice in which the scrap is mentioned as an aluminum alloy exempt of VAT charge.
It is also possible to recover "IVA credits" from the government, which are credits to the VAT payed in other negotiations, providing profit not only to the scrap dealer, but also to the smelters which adopt this practice.
"This is like money washing," said a scrap dealer, who is struggling to expand his clients' portfolio because of his refusal to sell without the VAT retention. "Many smelters offer good prices, but without issuing an invoice. It's too risky; it's illegal and it drives the industry to informality," he added.
According to numerous smelters, however, this is the only way to guarantee enough supply -- something key in the current Mexican aluminum scrap market.
"100% of Mexican scrap dealers, with no exception, do the IVA gaming; it's impossible to buy scrap in a different way," said a source from a smelter in Central Mexico, where some sources said the practice was more usual due to lower access to imports, free of VAT.
Central Mexico, especially the region known as El Bajio, houses a big portion of Mexican secondary alloys production -- and, therefore, of scrap demand. The other key location is the Northeast, in which states, such as Nuevo Leon and Cohauilla, are on the border with the US, allowing some companies to eventually import material from north of the border.
"Skipping VAT is the only thing guaranteeing profitability to the scrap business," said a second smelter source who pays the tax to suppliers. He recovers the 16% when selling the alloys, since VAT is not retained in the case of products, including aluminum alloys, he added.
Another source close to the matter added that some smelters would also be illegally getting a portion of the VAT paid by their customers, instead of returning it to the Mexican tax authority. "They can buy a fake invoice, which is an illegal activity, for 4%-6% of the invoice's value, enabling them to keep 12%-10% of the IVA tax [as a benefit]," he said.
A second scrap dealer said: "These [fiscal maneuvers] have been done for many years, but it has worsened because smelters started to participate in the game. Not all scrap suppliers do these fiscal tricks [which generates a price] distortion in the market."
Several sources agreed that these practices regarding IVA end up inflating scrap prices, and this has been reflected in Platts' domestic scrap assessments, which started to be published in February.
Several scrap dealers have said in interviews, on condition of anonymity, that they collect the VAT without paying it to the government.
Usually the prices reported as "plus IVA" are Peso 1-2/kg lower than the assessed net prices, which meet the retention law -- but adding the 16% extra cost for the buyer, the "plus IVA" prices get a lot higher: old cast, for example, is currently at a net price of around Peso 25.5/kg delivered Northeastern Mexico with retained VAT; negotiations for old cast without retention are usually reported at around Peso 24/kg, plus 16% VAT, which equals to a net price of Peso 27.84/kg -- a 9.17% difference from the Peso 25/kg net price with retained VAT.
Of the smelters which reportedly pay VAT to their suppliers, only one located in the Central region pays prices which equal to the standard net prices, which could be verified through the checking of sent invoices.
Since not all buyers are able to import scrap, they have to pay whatever the domestic price is, which also favors higher prices. The Peso 25.5/kg net price for old cast, for example, equals to around 63.8 cents/lb -- Platts' old cast delivered US Midwest assessment is currently at 57-59 cents/lb.
