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Mexican value-added tax and the proposed fiscal reform of 2014

Several weeks ago, President Enrique Nieto, sent proposal for fiscal reform for 2014 to Mexico’s legislators. Some of the items included would, if implemented, have a significant effect upon companies manufacturing in Mexico as maquiladoras. The most polemic item included in the proposed reform package has to do with the country’s value-added tax. If implemented, new rules will oblige maquiladora operations to pay a sixteen percent Mexican value-added tax on the material inputs, machinery and equipment that is used to produce their products in the country. Presently, companies manufacturing in Mexico for export have been exempt from paying this levy. Although if the fiscal reform is passed as is companies producing for export will have to pay the Mexican value-added tax, they will be able too apply for a refund of the monies once goods have been sent to markets outside of the country. Even though this is the case, however, maquiladora firms will be affected in several important ways. Carlos Angulo, who was an analyst of the maquiladora industry for Chicago-based Baker & McKenzie and is now an elected member of Mexico’s congress, believes that this provision of the tax reform, if passed, will generate an “an exponential rise in costs.”

Other effects on the maquiladora regime that may be felt if the Mexican fiscal reform is proposed in its current form include

  • A rise in the effective income tax rate.
  • Increased financial operating costs
  • A negative effect on the maquiladora industry supply chain

In response to these circumstances, Mexico’s Ministry of Economics has proposed that the federal government exempt large companies from paying the Mexican value-added tax on their temporary imports. According to the Minister of Economics, Ildefonso Guajardo two hundred companies operating in Mexico for export temporarily import eighty-five percent of the material inputs, machinery and equipment) that is used in the production of goods that are consumed outside the borders of Mexico. Among these companies are:

  • GM de Mexico
  • Volkswagen de Mexico
  • Chrysler de Mexico
  • Ford Motor Company
  • Samsung Mexicana
  • Nissan Mexicana

It is the contention of some members of Mexico’s Congress that exempting maquiladoras from the payment of Mexican value-added taxes is a disincentive to the development of a deeper domestic supply chain.

As might be expected, at the moment, there is a determined effort being made by the National Maquiladora Industry Association (INDEX), as well as by some of the largest maquiladora manufacturers in the country to prevent the future levy of Mexican value-added tax on their temporary imports. Although the reform package was passed on September 8th by the Mexican House of Deputies , it has yet to be considered by the country’s Senate.

The full article can be read  translated from its original Spanish at El Economista.

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