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Analysis

Fiscal Law Shakes the Manufacturing Sector

Mon, 09/01/2014 - 10:25

In November 2006, the federal government issued the Decree for the Promotion of the Manufacturing, Maquiladora, and Exportation Services Industry (IMMEX) to strengthen the competiveness of the Mexican exportation sector. IMMEX’s main objective was to promote exports and enable Mexican companies to access international markets, in addition to fostering the modernization of manufacturing infrastructure by bringing in specialized technology and enabling the transfer of knowledge to the domestic industry. According to the Ministry of Economy, IMMEX grants title holders the possibility of temporarily importing required goods for industrial processes destined to the manufacturing, transformation, or repair of foreign merchandise that has been brought to Mexico for later exportation. This program’s most attractive feature is that it spares companies from paying taxes, such as VAT, the general importation tax, or compensatory fees, on goods that are temporarily imported into Mexico. The decree is meant to lower logistical and administrative costs, while speeding up bureaucratic procedures in order to increase fiscal capacity in an environment that both attracts and retains investments in Mexico. Many US companies benefited from the duty-free basis and low labor costs provided by the IMMEX scheme. The enterprises that participate in these programs are responsible for 85% of Mexico’s manufacturing exports, with automotive products chief among these.

The 2013 Fiscal Reform brought about changes that affect maquiladoras and entities operating under the IMMEX scheme. For instance, the Reform eliminates VAT exemptions for companies operating under the IMMEX program, and companies in the automotive industry manufacturing vehicles or auto parts on the temporary import of goods. In addition, VAT will be homogenized throughout Mexico, which means this tax will increase from 11% to 16% in border states. This will surely have an effect on the regional economies and its impact on imports and exports is yet to be seen. A report by Baker McKenzie indicates that these fiscal changes will increase both costs and uncertainty by altering supply chains in the Mexican manufacturing sector, and commercial relationships with the US might be disturbed. The modified Law on the Value Added Tax mentions that importers who can prove adequate control of their operation can obtain a certificate that will entitle them to a credit of 100% of VAT. Changes in the law that regulates VAT will result in a considerable deviation from the fiscal and commercial policies that Mexico has so far implemented in order to remove operational barriers in cross-border operations involving manufacturing and exports. These policies have revolved around the IMMEX and the automotive fiscal deposit, which allowed manufacturers to hold VAT payments until their products were in the Mexican market.