The Mexican government is dropping its preferential tax treatment of maquiladoras, or foreign-owned factories, as part of its push to increase revenues and straighten out a battered economy. The changes in the tax law, scheduled to take effect Jan. 1, should force U.S. and other non-Mexican companies to operate their maquiladoras more like stand-alone businesses rather than duty-free manufacturing sites, said Richard Sinkin, managing director of InterAmerican Holdings Co. in San Diego. InterAmerican advises companies on setting up businesses in Mexico.
``People need to rethink this whole maquiladora business because you just can't go down there and open up a cost center anymore,'' he said.
The new measure, announced March 31 by Hacienda, Mexico's finance ministry, amounts to an elimination of a significant tax waiver for maquiladoras.
As explained by Sinkin, the law allowed a maquiladora operator to receive an initial three-year exemption from Mexico's alternative minimum tax, a 2 percent tax on assets. In practice, however, the asset tax exemption was extended indefinitely for maquiladoras.
The latest ruling by Hacienda allows a four-year exemption for new maquiladoras and an asset tax of 1.8 percent for factories operating under the system, Sinkin said. The asset tax remains 2 percent for Mexican companies outside the maquiladora system.
The 2,200 maquiladora plants in Mexico, most of them clustered along the U.S.-Mexico border, also may have appeared to tax collectors as a ripe target. The devaluation of the peso in December reduced labor costs, in dollar terms, by more than 40 percent for maquiladora operators.
``This shouldn't be a surprise to anybody,'' Sinkin said.
Since the mid-1960s, U.S. and other companies began building factories in Mexico under the maquiladora program, which allows them to import raw materials and components from the United States for assembly by low-cost Mexican labor. The company then imports the goods back into the United States, paying duty only on the value-added part of the finished product.
In 1989, the Mexican government disclosed its intention to place a 2 percent tax on inventory, equipment and property for companies operating under the maquiladora program. As cost centers for foreign owners, maquiladoras do not accumulate taxable profits and, as such, have rarely paid Mexican corporate income taxes.
The maquiladora industry succeeded in deferring the tax's implementation through lobbying efforts, noting the initial reason for maquiladoras was to create jobs. Maquiladora industry leaders fear companies will leave Mexico, and others will be discouraged from opening operations if the tax is implemented.
In its current form, the tax may have more of an impact on Japanese companies that, in general, purchase factories rather than lease them, said Patrick Osio, chief executive officer of
Cohen, Osio & Associates Inc., San Diego-based consultants on U.S.-Mexico issues.
``While it is too early to tell the impact, the first reaction from business is negative,'' he said. ``Businesses hate taxes in whatever form or whatever the reason.''
For Osio, the ultimate question is whether this tax will negate the economic benefit of a Mexican operation.
The tax will discourage companies from entering Mexico ``at least for a while'' because the introduction of a new tax often is followed by other taxes, he predicted.
``Companies need reassurance that this new tax is not the first of many,'' Osio said.
To avoid the asset tax, which is not deductible on income taxes for U.S. corporations, companies can set up what is called a transfer pricing system. Under this plan, companies treat transactions with a maquiladora on an ``arm's length'' basis, forcing the plant to operate at a profit, rather than simply as a manufacturing cost center.
Sinkin said setting up a transfer pricing plan, which must be acceptable to both Hacienda and the Internal Revenue Service, would obligate a profitable maquiladora to pay Mexican income taxes.
These taxes are deductible for U.S. companies on their corporate income taxes, he said.