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Mexican Fiscal Reform – Sounding the Alarm

With very good reason, businesses and individuals, both domestic and international, are concerned by some of the more contentious provisions of the Mexican Fiscal Reform package that has recently been submitted to the government’s legislative branch by the the President of the Republic, Enrique Peña Nieto.

The implications of the Mexican Fiscal Reform, in its present iteration, for manufacturers, both in and out of Mexico, as well as for individuals that depend upon it for their financial health and material sustenance are potentially very damaging.

The Reform which will first be considered by Mexico’s House of Representatives, then followed by its Senate, carries with it some provisions that, if implemented as written, will have a damaging effect upon one of the nation’s top job and income generators: the maquiladora industry.

Since the inception of this production sharing regime in the 1960s, firms manufacturing in Mexico for subsequent export (commonly known as maquiladoras) have been exempt from paying IVA, or a value-added tax (VAT), on items that have been imported for incorporation into manufactured goods destined for foreign markets. Should the fiscal reform be passed, as is, the results on the industry, on future investment , employment and job creation in it, as well as Mexico’s continued ability to be a magnet for foreign direct investment (FDI) will be seriously compromised.

Juarez Now, a U.S.- Mexico border business publication, reports that “according to Carlos Angulo, a congressional member of Mexico’s conservative PAN party, as well as a member of the Maquiladora Committee and Secretary of the Constitutional Reform Committee of the House of Representatives,” the enactment of the legislation, as it presently stands, would produce dire consequences for the maquiladora industry. Angulo asserts that an elimination of the VAT exemption for the temporary importation of materials used in manufacturing for export in Mexico would create the need for the maquiladora industry “as a whole to increase its working capital by US$17.5 billion at an annual cost of about US$750 million to keep up with IVA , or, in English, value-added tax requirements,” that the proposed Mexican Fiscal Reform would impose.

In addition to the aforementioned, supply chain transfers between plants in Mexico would also be subject to Mexican IVA, as well. This would be a new and additional burden on manufacturers and their suppliers. Manufacturers on the border would be subject to an increase in value-added tax from its current 11% to the 16% that is imposed upon the rest of the country.

As might be assumed, organizations that lobby on behalf of the maquiladora industry and its interests have taken a position in opposition to any change in the value-added tax regime that has played a large role in making Mexico a preeminent manufacturing power among emerging nations. The principal advocate for the industry is the National Council of the Maquiladora and Export Manufacturing Industry, also known by its Spanish acronym INDEX.

Another thorny issue included in the Mexican Fiscal Reform in its current draft is a provision that raises the corporate income tax rate. Again, Carlos Angulo, quoted in a recent edition of Juarez Now, puts the impact of this change into perspective. According to him, “the annual income tax bill of a typical 500 worker maquiladora operation’s income tax bill would rise from a current levy of approximately $24 million Mexican Pesos to in excess of MX$230 million.

The National Council of the Maquiladora and Export Manufacturing Industry (INDEX) has written position papers on both the proposed changes to the current value-added tax exemption for export maquiladoras, and the current draft initiative to hike corporate income taxes on maquiladora industry manufacturers.

It is expected the Mexican Fiscal Reform in some form, hopefully a diluted one, will be announced during the week of October 20th. It is, however, necessary between now and then, to make elected officials, industry workers and the public at large aware of the economic risks associated with getting the Mexican Fiscal Reform wrong.

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