/
Analysis

Impact of Tax Reforms on Automotive Investment

Mon, 09/01/2014 - 10:25

The main concerns of the automotive industry with Mexico’s tax reforms lie in two main areas. Most manufacturing industries in Mexico work using the IMMEX export program. In the past, such maquiladoras were entitled to tax benefits, which had been supported by past administrations, but these disappeared on January 1, 2014. The other issue is connected to VAT. Automotive entities import goods on a temporary basis and through the supply chain they transfer the goods from one entity to the next. This is done without triggering VAT, under the understanding that the goods are imported temporarily and will be exported abroad, either directly or indirectly. However, with the recently approved proposal, the temporary import of goods will be taxable for value added purposes. There are only three options for deferrals to this process. The first will be to obtain a certification from the government as, when obtained, it will allow them to import goods on a temporary basis. They will trigger the VAT tax but will also entitle companies to a credit equal to the tax. This is the best option available to companies and they will have one year after the publishing of the rules to obtain this certification. The second option would be to put up a bond and warranty for the tax to be triggered. Naturally, this option could be costly and could potentially end up being a financial nightmare. The third option would be to pay and request a refund from the Mexican tax authorities, but this could take months or even years in some cases. Ultimately, if these entities are not able to obtain certification, they will face cash flow issues because they will have to pay the VAT and then ask for a refund. These approved changes affect the IMMEX and any entity using a bonded warehouse to import goods on a temporary basis that will be incorporated into the manufacturing process. “KPMG hopes the rules and justifications will be simple and easy to comply with, and that the Mexican tax authorities recognize why clear rules are needed in order for automotive companies to continue operating competitively in Mexico. However, for the moment, there is no suggestion that maquiladoras will lose out to production moving back to the US. Indeed, some investment may have been suspended as companies wait for the final rules to be established,” says Mario Hernández, Tax Partner at KPMG. If the tax regimen is not resolved, companies will not necessarily move away but there will be less and less projects entering Mexico. Because other countries are establishing similar regimens like Costa Rica, Guatemala and Honduras, companies will move projects over there. After all, US entities are looking to have their suppliers closer to the final destination of the goods and Central America is a good place to be if taxation in Mexico is unresolved. Mexico is looking to increase foreign investment, generate more cash and jobs. Central states like Queretaro and Guanajuato are key to these goals, due to the strength of the automotive and aerospace industries. “The reality is that the tax reforms threaten to affect the strength of such industries,” says Hernández.