Tax incentives for the Mexican auto industry: the benefits outweigh the costs
Given the different nations’ circumstances, it is necessary to consider a comparison of what happens in other countries. It is also important to examine the reasons why fiscal incentives are different in each case, their cost-benefit, and possible future proposals for tax incentives for the Mexican auto industry.
Recently, an old question has resurfaced among economic leaders in Mexico: Does the automotive industry have too many tax incentives? Some parties believe that the answer to this question is “yes,” while others respond to it in the negative.
This tug of war from outside of the political sphere puts stress on the automotive sector not only in Mexico but in many countries around the world. This debate is occurring just as the industry struggles to overcome the huge drop in production and sales caused by the pandemic and its effects. Reduced dynamism in the sector can be attributed to the global shortage of semiconductors or the huge investment costs in manufacturing and development that the transition to electric and autonomous vehicles implies.
Understanding fiscal stimulus
To begin to break down the situation as it applies to tax incentives for the Mexican automotive industry, we must understand its context. It is important to keep in mind that investment tax incentives for the industry are in place for a purpose and that they have benefits as well as costs. Quoting the Economic Commission for Latin America and the Caribbean (ECLAC) / Oxfam International in its document “Tax incentives for companies in Latin America and the Caribbean:” “an incentive policy will be cost-effective if the benefits it produces, i.e., economic, social and environmental outweigh the costs it generates. ‘
According to the ECLAC study, Chile and Mexico are the most advanced countries in the use of cost-effective tax incentives. In the case of the former country, this is particularly true as it relates to tax incentives for the Mexican auto industry. These benefits include instruments such as deductions, tax credits, and tax deferrals that are more related to investment and have a greater share in the total fiscal cost of the incentives.
It is very important to recognize that, although tax incentives can become tax expenditures (loss of collection), not all expenditures correspond to incentives, as some may simply be tax benefits. Explained in another way, every incentive implies a benefit, but not every benefit constitutes an incentive. The main objective of an incentive is to promote a change in the behavior of economic agents. For example, that of changing the composition of the GDP of a state like Guanajuato, from a predominantly agricultural to a manufacturing one. This is now a reality, in part, due to the application of tax incentives for the Mexican automotive industry.
In general terms, Latin America still has a long way to go to improve the governance of tax incentives. They must define deadlines for preferential regimes and conduct periodic evaluations on the cost and effectiveness of preferential tax treatments.
The case of tax incentives for the Mexican auto industry
The SAT, Mexico’s federal tax authority, through Raquel Buenrostro Sánchez, the organization’s titular head, told El Economista that the country’s automotive industry “has many tax benefits compared to those offered by other nations.”
Compare this with what Federico Ovejero, GM Vice President for Argentina, Paraguay, and Uruguay told Infobae: ‘We did a study three years ago with an international consulting firm to determine the competitiveness of vehicles in Brazil, Mexico, and Argentina. Brazil is 30% more expensive than Mexico to build a car, and Argentina is 60% more expensive than Mexico to build a car.’ One of the main reasons for the country’s advantageous competitive position is the availability of tax incentives for the Mexican auto industry.
In Mexico, there is a 25% income tax deduction for investment in the automotive sector and a 30% credit for R&D projects. In addition, automotive manufacturers in Mexico are exempt from indirect taxes/tariffs for IMMEX maquiladora manufacturers.
Some parties ask the question: Are there too many tax incentives in Mexico for the automotive industry? In response to this query, we can assume that there are more tax incentives for the Mexican auto industry than in other countries, but not so many as to represent excessive tax spending.
Daniel Romo, Director of Intelligence at the Automotive Directory, delves into the true magnitude of the support and its results: ‘In general terms, the incentives have not only been fiscal but key infrastructure is often negotiated (such as land, connection to railways or roads, urbanization, etc.) or economic (help in the training and qualification of personnel, cover some bureaucratic procedures, etc.). Incentives, in the vast majority of cases, are a package of different aspects negotiated tailored to each case and are not always significant. They can prove to be very positive in terms of a cost-benefit analysis.”
A delicate balance exists
Mexico cannot afford to be one of the most prolific automotive producing countries while becoming one in which manufacturing is too expensive for the industry. Finding a balance in this situation will be a challenge, especially when the successes of having tax incentives have translated into hundreds of thousands of jobs and tens of billions of dollars in investments. These circumstances have transformed entire regions such as Mexico’s Bajío region into one of the most dynamic automotive production areas on the continent and in the world.
The key to striking the right balance seems to lie, once again, in the governance and transparency of the automotive industry, as well as in the responsible utilization of tax incentives for the Mexican auto industry.