Download Manufacturing sector Nordic Investment in Mexico Manufacturing

Manufacturing
Nordic Investment
in Mexico
Manufacturing sector
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Overview
As a response to an increase in the overall labour cost in highly developed countries such as the US
and as a means of creating employment opportunities for the once underdeveloped area just south of
the border with the US, back in the late 60’s, the Mexican government adopted policies favouring the
establishment (along the border area) of foreign-owned companies to process and/or assemble
temporarily imported materials and parts for re-export to the US or other parts of the world. These
companies have been commonly known since then as “Maquiladoras” (now “IMMEX Maquiladoras”
and have become an important factor in the Mexican economy. According to the IMMEX Maquiladora
National Association (known as Index) as of 2013, this industry: i) accounts for 65% of manufactured
exports; ii) employs 80% of the manufacturing labour force; iii) holds 14% of the workers registered
at the Mexican Social Security Institute (known as the IMSS), and iv) exports over $178 billion US
dollars annually.
IMMEX Maquiladoras may now be established anywhere in the country and are allowed to sell part of
their production domestically, as long as customs duties are paid on the imported content of the
products sold in Mexico and other corporate tax obligations are complied with. Moreover, although
the leading states with this type of industry are Baja California, Chihuahua, Nuevo Leon, Tamaulipas
and Coahuila (all located along the US border), interesting growth has occurred in states such as
Jalisco, Queretaro, Guanajuato and Yucatan. It should be recognised that the sustained growth of the
maquiladora industry has been significantly influenced by factors such as the 45-year old official
Programme for the Promotion of Exports, which has developed into what is currently known as the
IMMEX Programme.
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What is a maquiladora?
A maquiladora is an economic unit with a maquila (in-bond manufacturing) programme approved by
the Ministry of Economy, engaged in processing temporarily imported goods with foreign owned
machinery or equipment for direct or indirect exportation.
Most common legal structure
One of the initial points for an investor to evaluate is the nature of the entity to be set up in Mexico in
order to be in a position to obtain an IMMEX Maquiladora permit (also referred to simply as a
maquiladora permit).
The most common types of entity under which IMMEX Maquiladoras are incorporated are the following:
•Sociedad Anonima de Capital Variable or S. A. de C. V. (a variable capital stock corporation) and
•Sociedad de Responsabilidad Limitada de Capital Variable or S. de R. L. de C. V. (a variable capital
limited liability corporation)
It is commonly recommended for a new company to be set up as a variable capital entity, since capital
increases and capital distributions from capital reductions are subject to fewer legal formalities.
The decision to incorporate one type of entity or another is driven more by foreign corporate tax
efficiencies than by advantages from a Mexican corporate legal or tax perspective (as their obligations
are basically very similar). An example is the “check-the-box” tax election in the US that has driven a
tendency towards incorporating more limited liability corporations (S. de R. L. de C. V.).
Number of shareholders
A foreign investor may own 100% of the stock of any given entity operating as an IMMEX
Maquiladora, although a minimum of two shareholders is required, who/which must hold at least one
share or equity unit. As mentioned, although as a general rule, foreign investment may hold up to
100% of the capital of Mexican entities, there are restrictions for certain types of operations and in
certain cases, foreign investment is limited. In any case, it is advisable to analyse the sector in which
the Mexican company is to operate in order to determine whether or not it requires approval from the
National Foreign Investment Commission.
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Minimum capital contribution requirements
The minimum paid-in capital required is specified in the charter of incorporation or bylaws. Formerly,
there was a minimum capital requirement of$50,000MXN per S. A. de C. V. and $3,000MXN per S. de
R. L. de C. V. No taxes are currently imposed on domestic or foreign capital contributions. Public
registration fees could be affected by the amount of contributed capital.
Other corporate/legal procedures and considerations
Prior consent is required from the Ministry of Economy to establish a stock corporation in Mexico. No
permit is needed to modify its bylaws, unless the amendment involves either a change in its corporate
name or replacement of a provision prohibiting foreigners where previously allowed. The
authorisation is set down in a public document representing the combined charter and bylaws.
Under the “the Calvo Clause”, foreign shareholders or partners must consider themselves to be
Mexican nationals with respect to their shares or equity units and agree not to request the protection
of their governments in matters having to do with that ownership, under penalty of forfeiting their
right to the benefits conveyed by ownership of the equity units held by them.
To incorporate a Mexican company, approval must be requested from the Ministry of Economy, which
authorises the corporate name and the type of business organisation to be incorporated. This
corporate name approval must be included in the charter of incorporation, the bylaws and the
transitory clauses of the new Mexican company. Additionally, the charter must be certified by a Public
Attestor and recorded at the Public Commerce Registry corresponding to its corporate domicile. The
new company must also register at the tax office of the Ministry of Finance.
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The importance of IMMEX companies
Investment in the Mexican Market
IMMEX Maquiladora industry is one of the most important and productive value chains in the
Mexican economy and although it has suffered the impact of the worldwide economic crisis over the
last few years, its recovery since 2010 has been remarkable. Special attention should be paid to the
following points and recommendations so as to take full advantage of the many business
opportunities offered by this sector and minimise the risks arising from the current regional and
worldwide economic situation.
•The maquiladora industry has evolved into a mainstay of the national economy, now accounting for
44% of the overall value of Mexican exports.
•Maquiladoras contribute an estimated 1.8% of GDP
•There are currently (in 2014) around 3,000 maquiladoras in Mexico
Maquiladoras employ more than 1,250,000 employees, of which
•78% are workers
•14% are technical production personnel
•8% are administrative personnel
(Foro de Desarrollo Economico de la Frontera Norte, Consejo Nacional de la Industria Maquiladora
de Exportación, AC)
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Competing globally
The Mexican maquiladora industry competes against several countries:
•China, with vast resources, skilled and cheap labour, incentives and subsidies
•Emerging economies in Asia, such as Thailand and Malaysia
•Bidders in Latin America, mainly Central America
In this context, the maquiladora industry in Mexico is facing a number of problems and challenges
from the international market, mainly:
•The loss of competitiveness, particularly along the northern border
•The deterioration of the dynamics of investment in industry, due to the lack of legal certainty
•Tax uncertainty
•Industry regulation
•The lack of certified domestic suppliers
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Export programmes
Export programmes are designed to promote productivity and the quality of the processes. That
increase competitiveness and opens the door for companies to enter the world market, given the
reduction in export tariffs and simplification of administrative procedures by the federal government.
The following programmes are administered by the Ministry of Economy’s General Foreign Trade
Service Office:
•IMMEX (previously Pitex and Maquiladora)
•DRAW BACK
•PROSEC
•REGLA OCTAVA
STEPS FOR ADQUIRING AN IMMEX PROGRAMME (art. 11 of the IMMEX Decree)
I. The application must specify the following:
a) Company details
b) Raw materials, a description of the production process, including installed service capacity
and the percentage of that capacity actually used.
c) The tariff classification for goods temporary imported (raw materials, parts and components)
and the end product to be exported.
d) A business description of fixed capital and containers to be temporarily imported.
e) A commitment to annual foreign sales exceeding $500,000 dollars, or exportation of a minimum
of 10% of overall billing.
• For purposes of the new Income Tax Law: That all of their income come from their productive activity, exclusively from its maquila operation.
f) Any additional information specified in the application
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Nordic investment in Mexico
The impact of the 2014 tax reform
on maquiladoras
The new law modifies the definition of ‘maquila operation’. Revenues associated with production
operations must now arise solely from maquila operations, as provided under the IMMEX decree. The
new law also includes rules on machinery and equipment ownership which are consistent with the
current IMMEX decree definition. Repealing the Income Tax Law and the Flat Tax Law eliminates the
tax reduction benefits granted in Presidential decrees. This increases the effective income tax rate on
maquila profits from 17.5% to 30%.
Two transfer-pricing methods currently applicable to maquilas are eliminated in 2014, leaving only
the safe-harbour and APA alternatives in place. Temporary imports under IMMEX and similar
programmes will qualify for VAT relief when special certification is issued by the tax authorities
concerning proper control of said imports. The new law defers the 16% VAT on such imports for one
year from the date on which the certification process rules are made known (to be in force in 2015).
The new law taxes the sale of goods located in Mexico by a foreign resident to a maquiladora at the
regular 16% VAT rate (currently exempt). Maquiladoras will no longer withhold VAT from domestic
suppliers. This could have a negative impact on their cash flow. Parties resident abroad with ‘shelter
maquiladora’ operations in Mexico will continue to have permanent establishment protection, but this
protection is limited to four years.
Maquiladoras will not qualify for the new simplified tax consolidation regime.
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Main changes:
•VAT on “temporary imports”
•Tax breaks cancelled
•New “maquila” definition
•Changes to the transfer-pricing framework
VAT on temporary imports
•Certification programme. Certified maquilas will be granted a VAT tax credit
•Non-certified maquilas must guarantee tax debts.
Tax breaks cancelled
•The tax rate goes back to 30%
•2003 decree : partial income tax exemption
•2007 decree : limits the effective tax rate to 17.5%
New Maquila definition
•100% of revenue must arise from maquila operations
•Virtual exports qualify
•30% of PP&E must be owned by the principal entity located abroad
•The processing of goods to be sold in Mexico lacking a customs declaration does not qualify as a
maquila operation.
Limited deductibility of exempt salaries and perks
•47% deductibility of payments that are also considered as exempted tax revenue for employees. In
case that perks kept the same level in relation of next to last fiscal year, the fee will be of 53%.
Certification for circumventing the payment of VAT and ET under the temporary importation, in-bond
warehouse, bonded warehouse and strategic bonded warehouse regimes.
On January 1, 2014, the Ministry of Finance published the Sixth Resolution of Modifications to the
2013 General Foreign Trade Rules in the Mexican Official Gazette, listing the requirements for
securing certification and a credit for Value Added Tax (VAT) and Excise Tax (ET) payable under the
temporary import regime, the in-bond warehouse regime, the bonded warehouse regime or the
strategic bonded warehouse regime1.
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PwC Mexico “ Tax reform maquila industry” 2014, Ivan Diaz-Barreiro.
Conclusion
Since 2008 the financial and economic turmoil has been the common denominator of economic
behavior of virtually all of the world’s economies , particularly emerging ones such as China, Brazil
and of course Mexico. The IMMEX industry, being a highly globalised one, has been confronted with
the vagaries of the world market, generated both by the economic crisis that began in 2008, and by
extraordinary factors such as the earthquake in Japan in 2011.
Even as the maquiladora industry is one of the leading sectors in Mexican foreign trade, its specific
importance is not only measured in volume of exports, but also in foreign exchange, generating
employment and income. However, the vulnerability of the industry comes mainly from a high
dependence on the export sector, as well as the lack of diversification of markets. In Mexico, this
dependence is practically the USA.
Nevertheless, the IMMEX has become a strategic industry on which the dynamics of the Mexican
manufacturing sector rests. Its strategic value is determined by its degree of contribution to the
generation of productive formal employment, the number of establishments and its foreign trade
operations. Because of this, it is necessary to quickly summarise its important contribution to the
dynamism of the national economy which requires an enabling environment to attract investment and
provide certainty and legal security.
It is noteworthy that improvements in Mexican manufacturing productivity and the comparative
advantage of the proximity to the world’s largest market, remain the most important factors to the
competitive position of the Mexican industrial sector.
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