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Proposal would boost taxes on maquiladora plants

By: Stephen Downer

October 8, 2013

QUERÉTARO, MEXICO — Critics fear a controversial tax reform bill being debated in Mexico's Congress will make Mexican export manufacturing and assembly less competitive and discourage future foreign direct investment, if passed.

"It could spell the end of the maquiladora culture," in which dozens of plastics processors participate, Carlos Palencia, general manager of the National Council of Maquiladora & Export Manufacturing Industry, of Mexico City, told Plastics News.

The Mexican government established the low-wage maquiladora program in 1965, reportedly to solve the problem of rising unemployment along the border with the United States.

Taking advantage of generous tax exemptions, companies send parts across the border for assembly in Mexico and export them back to the U.S. But the government claims the system has been abused and says goods assembled in Mexico are often not re-exported.

Maquiladoras operate in at least 17 states today, some in Mexico City, 620 miles from the nearest U.S. border crossing, in Matamoros.

The program employed 2.07 million at 5,111 companies in June, according to the government-run National Institute for Statistics and Geography (Inegi). Baja California has the most maquiladoras, 913.

President Enrique Peña Nieto sent the Reforma Hacendaria to Congress on Sept. 8. His proposals include increasing income tax for the maquiladoras from 17 to 37 percent.

In addition, for the first time they would be liable to a 17 percent value added tax on materials and machinery imported temporarily, which would be refunded once such items had left the country.

However, delegates at MexicoNow's aerospace industry conference in Querétaro in late September pointed out that it could take months or even years for companies to be reimbursed.

In the maquiladora council's economic report for September, Palencia writes that the sector would be required to pay $25 billion in VAT for temporarily importing raw materials and machinery, causing manufacturers large cash flow problems. In 2012, maquiladora program companies imported supplies and machinery valued at $156.3 billion.

Statistics supplied by Palencia show that border towns like Matamoros and Reynosa account for 43.9 and 46.52 percent, respectively, of the plastic and rubber processing activities in the state of Tamaulipas. Most supply the US automotive industry.

According to Luis Carbajo-Martínez, a principal at law firm Baker & McKenzie in the border city of Ciudad Juárez, under the Mexican constitution the law must be voted on by October 20. "We feel it will go through," he said. in another interview.

Manuel Padrón-Castillo, a fellow principal in the same Baker & McKenzie office, said in another interview that "it's as though the government sent out invitations to a party and, once the party starts, it tells people that the party's off."

The legislation "has not been well thought out," Mexico Now Editor Sergio Ornelas said. "The problem right now is that the government is trying to do too much. They have too much on their plate and will get a big case of indigestion."

K. Alan Russell, president of the El Paso, Texas-based Tecma Group, which, since 1986, has helped 100-plus companies establish manufacturing operations in Mexico, said his organization has "probably $1 billion worth of material coming into Mexico every year."

The proposed legislation "goes against all the principles of the maquiladora industry," he said.